    [Senate Hearing 107-195]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 107-195

                       THE BANKRUPTCY REFORM ACT OF 2001

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

                                    HEARING

                                   before the

                           COMMITTEE ON THE JUDICIARY
                              UNITED STATES SENATE

                          ONE HUNDRED SEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                FEBRUARY 8, 2001

                                   __________

                               Serial No. J-107-2

                                   __________

             Printed for the use of the Committee on the Judiciary

                                    _______

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                           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, Jr., Delaware
    JON KYL, Arizona                     HERBERT KOHL, Wisconsin
    MIKE DeWINE, Ohio                    DIANNE FEINSTEIN, California
    JEFF SESSIONS, Alabama               RUSSELL D. FEINGOLD, Wisconsin
    SAM BROWNBACK, Kansas                CHARLES E. SCHUMER, New York
    MITCH McCONNELL, Kentucky            RICHARD J. DURBIN, Illinois
                                         MARIA CANTWELL, Washington
                          Sharon Prost, Chief Counsel
                         Makan Delrahim, Staff Director
             Bruce Cohen, Minority Chief Counsel and Staff Director

                                C O N T E N T S

                                  ----------

                        STATEMENTS OF COMMITTEE MEMBERS

                                                                       Page

    Durbin, Hon. Richard J., a U.S. Senator from the State of
      Illinois.......................................................   123
    Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa.   120
    Hatch, Hon. Orrin, a U.S. Senator from the State of Utah.........     2
    Kennedy, Hon. Edward M., a U.S. Senator from the State of
      Massachusetts..................................................   121
    Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.     4
    Schumer, Hon. Charles E., a U.S. Senator from the State of New
      York...........................................................   109
    Specter, Hon. Arlen, a U.S. Senator from the State of
      Pennsylvania...................................................     1
    Thurmond, Hon. Strom, a U.S. Senator from the State of South
      Carolina.......................................................   129

                                   WITNESSES

    Becker, Hon. Edward R., Chief Judge, United States Court of
      Appeals for the Third Circuit, Philadelphia, PA................     9
    Beine, Kenneth H., President, Shoreline Credit Union, Two Rivers,
      WI.............................................................    49
    Manning, Robert D., Senior Research Fellow, Institute for Higher
      Education, Law, and Governance, University of Houston Law
      Center, Houston, TX............................................    57
    Newsome, Hon. Randall J., Judge, United States Bankruptcy Court,
      Northern District of California, Oakland, CA...................    19
    Sheaffer, Dean, Vice President, Director of Credit, Boscov's
      Department Stores, Inc., Laureldale, PA........................    76
    Strauss, Philip L., Principal Attorney, San Francisco Department
      of Child Support Services, San Francisco, CA...................    37
    Vullo, Maria T., Partner, Paul, Weiss, Rifkind, Wharton and
      Garrison, New York, NY.........................................    81
    Williamson, Brady C., Attorney, LaFollett, Godfry and Kahn, and
      former Chair, National Bankruptcy Review Commission, Madison,
      WI.............................................................    43
    Zywicki, Todd J., Assistant Professor of Law, George Mason
      University School of Law, Arlington, VA........................    87

                             QUESTIONS AND ANSWERS

    Responses of Philip L. Strauss to Questions from Senator Biden...   130
    Responses of K.H. Beine to Questions submitted by Senator
      Feingold.......................................................   132
    Responses of Randall J. Newsome to Questions submitted by Senator
      Feingold.......................................................   134
    Responses of Philip L. Strauss to Questions submitted by Senator
      Feingold.......................................................   135
    Responses of Todd I. Zywicki to Questions submitted by Senator
      Feingold.......................................................   137
    Responses of Dean Sheaffer to Questions submitted by Senator
      Feingold.......................................................   138
    Responses of Brady C. Williamson to Written Questions............   139
    Responses of the Administrative Office of the Courts to Questions
      submitted by Senator Leahy.....................................   140
    Responses of Robert D. Manning to Questions submitted by Senator
      Leahy..........................................................   142
    Responses of Todd Zywicki to Questions submitted by Senator Leahy   147

                           SUBMISSIONS FOR THE RECORD

    American Bar Association, Governmental Affairs Office,
      Washington, DC, statement......................................   150
    Arnold, Hon. Richard S., U.S. Circuit Judge for the Eighth
      Circuit, statement.............................................   152
    Association of Financial Guaranty Insurors, statement............   153
    Block-Lieb, Susan, Professor of Law, Fordham University, New
      York, NY, statement............................................   155
    Bond Market Association, Washington, DC, statement...............   157
    Commercial Law League of America, Chicago, IL, statement and
      attachment.....................................................   163
    Consumer Mortgage Coalition, statement...........................   166
    International Council of Shopping Centers, Alexandria, VA,
      statement......................................................   169
    Jones, Hon. Edith H., United States Court of Appeals, Fifth
      Circuit, Houston, TX, statement................................   173
    United States Department of Justice, Office of Legislative
      Affairs, Jon P. Jennings, Acting Assistant Attorney General,
      statement......................................................   175
    Wallace, George J., Eckert Seamans Cherlin & Mellott LLC,
      Washington, DC, statement......................................   176

                       THE BANKRUPTCY REFORM ACT OF 2001

                                  ----------

                           THURSDAY, FEBRUARY 8, 2001

                                           U.S. Senate,
                                    Committee on the Judiciary,
                                                        Washington, DC.
        The committee met, pursuant to notice, at 10:10 a.m., in
    room SD-226, Dirksen Senate Office Building, Hon. Orrin G.
    Hatch, Chairman of the Committee, presiding.
        Present: Senators Hatch, Grassley, Specter, Kyl, Sessions,
    Leahy, Kennedy, Biden, Feinstein, Feingold, and Schumer.
        Chairman Hatch. We are happy to welcome you all out to the
    committee this morning. I will give my remarks immediately
    after Senator Specter, who wants to introduce Judge Becker from
    the Third Circuit Court of Appeals, and then we will move on
    from there with the Ranking Member and then to Judge Becker.

    STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM THE STATE
                            OF PENNSYLVANIA

        Senator Specter. Thank you very much, Mr. Chairman, for
    your courtesy in permitting me to start. I have another
    commitment which I have to attend to.
        It is a great pleasure for me to present Chief Judge Edward
    Roy Becker from the Court of Appeals for the Third Circuit to
    this committee. I haven't known Judge Becker very long, only 51
    years. We rode the elevated train from northeast Philadelphia
    to the University of Pennsylvania.
        I am substantially older than Judge Becker. He was a
    freshman when I was a senior. He started at the University of
    Pennsylvania in the fall of 1950, and I had the opportunity to
    coach the University of Pennsylvania debating team when Judge
    Becker was a senior.
        We went to Boston to debate the Norfolk State prisoners,
    Senator Kennedy, and the subject was resolved that the
    communist party should be outlawed. The five chief editors from
    the newspapers--Irwin Cannon was one of the judges of that
    debate, and I am not pleased to tell you that Judge Becker and
    I lost to the Norfolk State prisoners. We had a very large
    audience, about 1,000 inmates.
        Senator Kennedy. Which side were you on, Senator?
        [Laughter.]
        Senator Specter. They had to take the side of law and order
    to urge outlawing the communist party. We had 1,000 people.
    That is what you call a real captive audience, the
    quintessential.
        Judge Becker graduated Phi Beta Kappa from the University
    of Pennsylvania and the Yale Law School, where again we were
    together in the law school. He graduated in the class of 1957
    and he had a very unusual career as an active lawyer, a
    business lawyer, a trial lawyer, and a Republican committeeman.
        I would say that Judge Becker is one of the few, if not the
    only Federal judges to have earned his judgeship both ways, by
    merit and by politics. It was a confluence of factors. He was
    on the United States District Court for the Eastern District of
    Pennsylvania at the age of 37, and he was elevated to the Third
    Circuit in 1970 and he is now the Chief Judge, bringing an
    enormous number of innovative ideas, one of the real leaders of
    the American bar and the American judiciary. If there should
    ever be another vacancy on the Supreme Court of the United
    States, we could start the confirmation hearing this morning.
        As you can tell, Mr. Chairman, it is a long, very intimate
    friendship with Chief Judge Becker, and I know that he has some
    words of wisdom for the committee.
        Thank you very much, Senator Hatch, for permitting me to go
    out of order.
        Chairman Hatch. Thank you for your kind introduction,
    Senator Specter.
        That is high praise Judge Becker, and, of course, I am very
    familiar and aware of you, as well, and have equally high
    esteem for you.

     OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM
                           THE STATE OF UTAH

        Chairman Hatch. I would just say good morning to everybody.
    We welcome you to today's hearing on bankruptcy reform. We
    would first like to thank all of our witnesses for their time
    and cooperation, and I hope that this hearing will serve to
    reinforce for all of us, especially the new members of the
    committee, the pressing need for bankruptcy reform.
        Of course, bankruptcy reform is by no means a new issue to
    this committee or to the Congress. In fact, the Senate
    literally has been engaged in the process of deliberating on
    this issue for years, with numerous hearings, markups, and
    votes. And we should have these real and needed reforms and
    compromises that we have made to this product, one that has
    been supported by both Houses of Congress with overwhelming
    bipartisan and veto-proof margins.
        Following extensive studies by the National Bankruptcy
    Review Commission, the comprehensive bankruptcy reform bill was
    developed by Senators Grassley and Durbin in the Subcommittee
    on Administrative Oversight and the Courts in 1997. We marked
    up and reported that bill out of committee in May 1998.
        In September 1998, the Senate passed bankruptcy reform by a
    vote of 97 to 1. This overwhelming Senate vote in favor of
    bankruptcy reform was followed by the appointment of conferees,
    negotiation with the House and, in October 1998, a 300-125
    House vote for the conference report.
        Although the motion to proceed to consideration of the
    conference report was agreed to in the Senate by a strong vote
    of 94 to 2, the Senate ran out of time for a vote on final
    passage before the end of that Congress. So in February 1999,
    Representative George Gekas, in the House, introduced
    bankruptcy reform again, which passed out of the House in May
    1999 by another overwhelming vote of 313 to 108.
        Meanwhile, in the Senate, Senator Grassley worked together
    with Senator Torricelli, and in March 1999 once again
    introduced bankruptcy reform legislation which was again
    referred to the Judiciary Committee. The Judiciary Committee
    again marked up the bill, and in May 1999 we favorably reported
    it out of the committee to the floor.
        In February of last year, the reform legislation passed the
    Senate by another impressive margin of 83 to 14. The Senate
    requested a conference, but the objection of a single member
    from the other side of the aisle blocked the appointment of
    conferees. As a result, we had to turn to an informal
    conference process with the House of Representatives, but
    fortunately this process was bipartisan. With a great deal of
    dedication of members on both sides of the aisle, we reached a
    compromise agreement on well over 400 pages of bankruptcy
    reform legislation and on all but two issues among the informal
    conferees.
        In October of 2000, the House passed the bankruptcy reform
    conference report, and in December the Senate passed it by yet
    another overwhelming vote of 70 to 28. Later that month, the
    President pocket-vetoed the bankruptcy reform legislation.
        Now, I provide this elaborate procedural history to make
    two points. First, the issue of bankruptcy reform is not a new
    one; it is quite familiar to all of us. Many of our witnesses
    today have testified before Congress on this issue. We have
    studied it, held hearings on it, compromised on it, and come to
    a resolution on it with veto-proof margins in both Houses time
    and again. An elaborate record sets out the issues, documents
    the debate, and makes the compelling case for reform that is
    available to anyone who has an interest in giving it their
    attention.
        This leads me to my second point. Eventually, the process
    of deliberation needs to come to a close and the will of the
    Congress needs to be exercised. As history has demonstrated
    repeatedly, bankruptcy reform is clearly the will of the
    Congress and much needed for all American consumers.
        I would like to take a moment to thank Senators Grassley
    and Sessions for their hard work and dedication to this
    important reform legislation over the past years. I also would
    like to thank the committee's ranking Democrat member, Senator
    Leahy, along with Senators Biden and Durbin, and Senator
    Torricelli, for their leadership in the area of consumer
    bankruptcy reform, as well as other members of the committee,
    both current and former, who have worked so hard on this very
    important set of issues.
        I am feeling somewhat like a broken record, but I feel
    compelled to state once again that we cannot afford to continue
    down the harmful path provided by current law, because abusive
    bankruptcy filings are harmful to all of us. Bankruptcy ends up
    costing all Americans in an amount that has been conservatively
    estimated at anywhere from $400 to $550 per household, per
    year.
        Contrary to what critics of reform would like us to
    believe, when someone files for bankruptcy the negative
    repercussions go far beyond the credit card companies and big
    businesses to whom money is owned but is not paid. The costs
    are passed on to all honest consumers who honor their
    commitments and who pay their bills. This is an issue that
    profoundly impacts the average American. Bankruptcies end up
    hurting people who own or work in small businesses, who are
    members of credit unions, and spouses and children who are
    entitled to child support.
        We should preserve bankruptcy to provide a fresh start, but
    only for those who truly don't have the means to pay some of
    their debts as promised. I look forward to the testimony today
    because I believe it will highlight some of the abuses that the
    current system allows to take place and will address one more
    time the pressing need for this consumer bankruptcy reform
    which more importantly provides many new consumer protections.
        We are fortunate to be hearing testimony from Judge Edward
    Becker, Chief Judge of the United States Court of Appeals for
    the Third Circuit, who has some concerns about the bill, some
    suggestions for us, and who we decided to put on at the last
    minute at the request of other members of the Federal judiciary
    and Judge Becker.
        We are happy to welcome you here, Judge.
        We have Judge Randall Newsome, of the United States
    Bankruptcy Court for the Northern District of California;
    Philip Strauss, Principal Attorney from the San Francisco
    Department of Child Support Services; Brady Williamson, the
    former Chair of the National Bankruptcy Review Commission.
        We are also fortunate to be hearing from Ken Beine,
    President of Shoreline Credit Union, in Two Rivers, Wisconsin;
    Dr. Robert Manning, Senior Research Fellow from the University
    of Houston Law Center; Dean Shaeffer, Vice President and
    Director of Credit for Boscov's Department Stores, in
    Pennsylvania; Maria Vullo, an attorney with the firm of Paul
    Weiss; and Todd Zywicki, Assistant Professor Law at George
    Mason University.
        We appreciate all of you appearing today and we look
    forward to your testimony.
        I will now turn to our Ranking Member, Senator Leahy, for
    his opening statement.

    OPENING STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM
                          THE STATE OF VERMONT

        Senator Leahy. Thank you, Mr. Chairman. I know others
    perhaps have things to say, but I am pleased that we are having
    this.
        There are so many competing public policy interests between
    debtors and creditors and among competing creditors. Judge
    Becker has seen those competing interests probably more than
    any one of us around this panel. But we also have a number of
    Senators around this committee who have developed expertise in
    this area and I do want to hear from them, too, because they
    are going to have to help us develop a consensus.
        We have tried for 4 years to pass bankruptcy reform
    legislation. We all agree that we need some changes in the
    bankruptcy laws, but it has failed, I think, each time in the
    last two Congresses when we went from bipartisanship to
    partisanship.
        In the last two Congresses, the final decisions were made
    by the Republican majority behind closed doors and did not get
    too much of a say in it. There are complex and competing
    interests in this that say we have to work in a bipartisan
    fashion throughout this process.
        I would think that what we should do is look at some of the
    mistakes in the past and why we didn't get legislation through.
    I think we can avoid those mistakes. Mr. Chairman, I think you
    and I can work very closely together with other members of the
    committee to have both sides heard.
        I think the last two times, we saw that there is a great
    deal of bipartisan consensus, and we can follow up on that. So
    I hope we do this and craft a balanced and fair bankruptcy
    reform law, one that addresses and corrects abuses by both
    debtors and creditors. For example, we should provide for more
    disclosure of information so that consumers may better manager
    their debts and avoid bankruptcy altogether.
        I know that Senator Grassley and Senator Durbin, who is
    unable to be here today because of a death in the family, and
    Senator Schumer and others share a commitment to include credit
    industry reforms in a fair and balanced bankruptcy bill.
        The millions of credit card solicitations made to American
    consumers the past few years have contributed to the rise in
    consumer debt and bankruptcies. When we see people who work
    here, their 3-year-old and 4-year-old children getting credit
    card solicitations, you know that something is wrong.
        In addition, many of the most controversial proposals for
    change are to benefit the credit card industry and to use
    taxpayer-supported bankruptcy courts and the authority of
    Federal law to augment and support the credit card industry's
    debt collection. Well, if we are going to have the taxpayers
    help with their debt collection, it is only fair that the
    credit card industry be involved in bankruptcy reform and that
    they be asked to show how those changes they seek are going to
    benefit consumers through lower interest rates or lower fees.
    If we are going to help them collect their debt, if we are
    going to have the taxpayers pay to help them collect their
    debts, what are they going to do to help the users of their
    cards?
        President Bush underlined the importance of examining
    credit industry practices. He said this week, to quote
    President Bush, ``The debt I am most concerned about, however,
    is the consumer debt, credit card debt, the debt that burdens
    thousands of Americans. And we'd better be really careful about
    not recognizing the combination of an economic slow-down, high
    energy prices, and debt overhang--what that means to working
    people.'' As usual, I agree with President Bush.
        I am pleased that Professor Robert Manning is here today to
    discuss his recent research and analysis of credit industry
    practices and consumer debt. We should also talk about wealthy
    debtors who use the overly broad homestead exemption to shield
    assets from their creditors. Senator Kohl has been a leader on
    this issue and on closing this loophole.
        In some States, wealthy debtors have used their State laws
    to protect million-dollar mansions from creditors, and it has
    been a major problem. In the last Congress, by a vote of 76 to
    22, the Senate adopted a bipartisan amendment offered by
    Senator Sessions and Senator Kohl to cap any homestead
    exemption at $100,000. But, of course, in the final bill that
    was gutted. Brady Williamson, the former Chair of the National
    Bankruptcy Review Commission, is here to tell us about this
    consensus reform and others like it that the Bankruptcy Review
    Commission recommended to Congress.
        A year ago, the Senate passed the Schumer-Leahy amendment
    to prevent the abuse of the bankruptcy system whereby you could
    discharge penalties for violence against family planning
    clinics.
        As I recall, Senator Schumer, that was a vote of 80 to 17,
    overwhelming. It was given support this past month by Senator
    Ashcroft, who had voted in favor of the amendment. He said he
    supported this. Yet, even though it was an overwhelmingly
    bipartisan endorsement, in the so-called conference report at
    the end of the year there wasn't a single word of it. As a
    result, perpetrators of clinic violence can continue to seek
    shelter in the Nation's bankruptcy courts. That would be wrong.
        Attorney General Ashcroft pledged his support for the
    Schumer-Leahy amendment during his confirmation hearing. As
    usual, I agree with Attorney General Ashcroft.
        I want you to notice my close agreement with President Bush
    and Attorney General Ashcroft in these matters, Senator Hatch,
    and I hope you will follow the example of the leaders of your
    party.
        Maria Vullo, a top-rated attorney, will testify about the
    need to amend the Bankruptcy Code to stop wasteful litigation
    and abuse of bankruptcy filings used to avoid the legal
    consequences of violence and vandalism and harassment and to
    deny access to legal health services. So we should remember
    those things we passed in the past and look back at them.
        We should also remember those who use bankruptcy are
    usually the most vulnerable of the American class. They are
    older Americans who have lost their jobs or are unable to pay
    their medical debts. They are women attempting to raise their
    families or secure alimony and child support after a divorce.
    They are individuals struggling to recover from unemployment.
    We need to remember that people use the system, both the debtor
    and the creditor.
        Judge Becker and Judge Newsome are here today to testify
    about how reform legislation will impact on the real people who
    use our courts each day, and I think that is very helpful to
    us. We need to balance the interests of creditors with those of
    middle-class Americans who need the opportunity to resolve
    overwhelming financial burdens.
        Even though this was put together on very, very short
    notice, the minimum notice, I am glad that the witnesses were
    able to come here today. I know the House is going to hold 2
    days of meetings and amendments. I hope that we will work as
    hard as they do, but I would also hope that we would look at
    those things that were developed through bipartisan consensus
    in the last couple of years and go back to those things as a
    beginning point.
        Thank you, Mr. Chairman.
        Chairman Hatch. Thank you, Senator Leahy.
        [The prepared statement of Senator Leahy follows:]

     Statement of Hon. Patrick J. Leahy, a U.S. Senator from the State of
                                    Vermont

        I am pleased that the Committee is holding this hearing. Bankruptcy
    is a complex area of the law with many competing public policy
    interests between debtors and creditors and among competing creditors.
    I look forward to hearing our witnesses share their insight and
    experience with the current bankruptcy system. We are fortunate to have
    a number of Senators on this Committee who have developed expertise in
    this area, as well. I look forward to hearing from them, to working
    with them and to our developing a consensus of the areas of our federal
    bankruptcy law that need modification and improvement.
        For the past four years, Congress has tried but failed to pass
    bankruptcy reform legislation. I believe the legislative process broke
    down in the each of the last two Congress when partisanship took over.
    Three years ago, as the Senate was considering bankruptcy legislation,
    I received assurances that our conferees would support the Senate bill
    and the Senate position in conference. Unfortunately, that bill, which
    passed with 97 bipartisan votes, and on which Senator Durbin and
    Senator Grassley had worked so hard, was abandoned to a poor substitute
    that was never enacted.
        Last Congress, we again worked for a bipartisan bill. The
    Republican leadership extended Senate consideration of the bill over
    both congressional sessions when it would not allow votes on two
    proposed amendments in 1999. After the new year we returned to see the
    Senate vote overwhelmingly in favor of one of those amendments, the
    Schumer-Leahy amendment. During Senate consideration we also were able
    to improve the bill by adopting the Kohl-Sessions amendment, capping
    the homestead exemption.
        Because of a Republican amendment that added unnecessary tax
    provisions, the House would not conference on the Senate-passed bill
    and no formal conference was conveyed. For a time we worked informally
    to resolve differences on a bipartisan basis, until the Republican
    majority decided to write their own version of a final bill that they
    had been warned would result in a presidential veto. They then used a
    sham conference to substitute their bankruptcy bill for a State
    Department embassy security bill. That bill dropped the Schumer
    amendment, revised the homestead exemption and did not address the oft-
    articulated concerns of the President, and the exercise predictably
    resulted in a veto rather than enactment. Unfortunately, at the end of
    each of the last two Congresses, final decisions were made by the
    Republican majority behind closed doors.
        The complex and competing interests involved in achieving fair and
    balanced reforms of our bankruptcy system demand that we work in a
    bipartisan manner throughout the legislative process. That is the
    lesson to learn from the failed attempts of past reform measures, and
    it is all the more relevant as we begin this session with an evenly
    divided Senate and an evenly divided Committee. I hope that the
    partisan mistakes of the past will give way to real and sustained
    cooperation so that this Congress can produce a consensus that can make
    changes that are needed to benefit the American people. There is ample
    evidence from the last two rounds that bipartisan consensus is possible
    on responsible bankruptcy reform.
        I look forward to working with all Members of this Committee in a
    respectful, bipartisan way from beginning to end--from hearings, to
    consideration of legislative ideas, to markup, to Committee report, to
    Senate consideration and finally to having a fair and balanced
    conference report signed into law. For us to succeed this time, we must
    work together from beginning to end.
        I believe we can craft a balanced and fair bankruptcy reform law.
    One that addresses and corrects the abuses by both debtors and
    creditors in the current bankruptcy system.
        For example, we should provide for more disclosure of information
    so that consumers may better manage their debts and avoid bankruptcy
    altogether. I know that Senator Grassley, Senator Durbin, Senator
    Schumer and others share a commitment to include credit industry
    reforms in a fair and balanced bankruptcy bill. The millions of credit
    card solicitations made to American consumers the past few years have
    contributed to the rise in consumer debt and bankruptcies. In addition,
    many of the most controversial proposals for change are to benefit the
    credit card industry and use taxpayer-supported bankruptcy courts and
    the authority of federal law to augment and support their debt
    collection. As a result, it is only fair that the credit card industry
    be involved in bankruptcy reforms and be asked to show how those
    changes they seek will benefit consumers through lower interest rates
    and lower fees.
        President Bush underlined the importance of examining credit
    industry practices when he said this week: ``The debt I'm most
    concerned about, however, is the consumer debt, credit card debt, the
    debt that burdens thousands of Americans. And we'd better be really
    careful about not recognizing the combination of an economic slowdown,
    high energy prices and debt overhang--what that means to working
    people.'' I agree with President Bush. I am pleased that Professor
    Robert Manning is here today to discuss his recent research and
    analysis of credit industry practices and consumer debt.
        Another improvement we should make is to adequately address the
    problem of wealthy debtors who use overly broad homestead exemptions to
    shield assets from their creditors. Senator Kohl has been a leader on
    this issue and a champion of closing down this loophole for the rich.
    In some states, wealthy debtors have used their State laws to protect
    million dollar mansions from creditors. This has been a real abuse of
    bankruptcy's fresh start protection.
        In the last Congress, the Senate overwhelmingly voted to close this
    loophole in the Bankruptcy Code. By a vote of 76 to 22, the Senate
    adopted a bipartisan amendment offered by Senators Kohl and Sessions to
    cap any homestead exemption at $100,000. But last year's final bill
    gutted this key reform. I am pleased that Brady Williamson, the former
    Chair of the National Bankruptcy Reform Commission, is here to tell us
    about this consensus reform and others like it that the Bankruptcy
    Reform Commission recommends to Congress.
        Last year's final bill also failed to address the discharge of
    penalties for violence against family planning clinics. A year ago this
    month, the Senate passed the Schumer-Leahy amendment to prevent this
    abuse of the bankruptcy system by a vote of 80-17. We have been
    reminded of this vote often during the past month given Senator
    Ashcroft's vote in favor of the amendment. Despite this overwhelming
    bipartisan endorsement, last year's so-called conference report
    contained not a single provision to end the abusive practice. As a
    result, perpetrators of clinic violence can continue to seek shelter in
    the nation's bankruptcy courts. That would be wrong.
        Attorney General Ashcroft pledged his support for the Schumer-Leahy
    amendment during his confirmation hearings. Today, Maria Vullo, a top-
    rate attorney, will testify about the need to amend the Bankruptcy Code
    to stop wasteful litigation and end abusive bankruptcy filings used to
    avoid the legal consequences of violence, vandalism and harassment to
    deny access to legal health services.
        As we proceed with this legislative process, we should remember the
    purpose bankruptcy serves, which is as a safety net for many Americans.
    Those who use bankruptcy are the most vulnerable of the American middle
    class.
        They are older Americans who have lost their jobs or who are unable
    to pay their medical debts. They are women attempting to raise their
    families or secure alimony and child support after a divorce. They are
    individuals struggling to recover from unemployment.
        As we move forward with reforms that are appropriate to eliminate
    abuses in the system, we need to remember the people who use the
    system, both the debtor and the creditor. Judge Becker and Judge
    Newsome are here today to testify about how reform legislation will
    affect the real people who use our courts every day.
        We need to balance the interests of creditors with those of middle-
    income Americans who need the opportunity to resolve overwhelming
    financial burdens. As the last two Congresses proved, there are many
    competing interests in the bankruptcy reform debate that make it
    difficult to enact a balanced and bipartisan bill into law.
        Although this hearing was scheduled unilaterally with the minimum
    notice allowed under Senate rules, I thank our witnesses for responding
    to the call on such short notice to be with us today. We did not
    receive the names of the four witnesses invited by the Republicans
    until Monday afternoon. We did not begin receiving written statements
    from those witnesses until yesterday afternoon. Accordingly, I expect
    that we will have written follow up questions to be forwarded to these
    witnesses within a reasonable time of reviewing their written
    statements and of reviewing their comments here today.
        I note that the House Judiciary Committee has chosen to hold two
    days of hearings on this important topic. I understand that the House
    Judiciary Committee has also indicated that it intends to hold two days
    of meetings for discussion and amendment of the House bill. I look
    forward to working with Chairman Hatch on a schedule that would allow
    our Committee, the Senate Judiciary Committee, likewise to do its work
    and serve the Senate by fully and fairly considering legislation on
    bankruptcy related issues. These are important subjects that can have a
    great impact on the lives of many people who have already suffered from
    illnesses or divorce or job loss or other personal difficulties. We
    ought to take utilize the expertise of the Members of our Committee to
    ensure that what we report to the Senate is fair and balanced and that
    it will not exact an unintended toll on our neighbors.
        I am hopeful that this year, we will work together in a bipartisan
    fashion from the beginning of the legislative process to the end to
    enact reforms that ensure our bankruptcy laws better serve their
    intended goals and corrects abuses by both debtors and creditors in the
    bankruptcy system.

        Senator Biden. Mr. Chairman, nothing on the merits, but may
    I also welcome Chief Judge Becker?
        Chairman Hatch. Sure.
        Senator Biden. I consider him a friend and I just want to
    associate myself with the remarks of Senator Specter. The Third
    Circuit is the circuit in which Delaware resides, and I want to
    thank the judge for all he has done for the circuit and
    accommodating the movement of some judges onto that circuit
    from the State of Delaware. Again, I would like to associate
    myself with the remarks of Senator Specter. I will not take any
    more time.
        Senator Leahy. As do I. I think we are fortunate to have
    Judge Becker. Even though he has to sit here and listen to all
    these speeches, I think we are darn lucky to have him here.
        Chairman Hatch. Judge, we are happy to have you here and we
    will turn the time over to you. We appreciate and respect the
    work you do on the Third Circuit as Chief Judge. We will turn
    the time to you and we want to listen very carefully to what
    you have to say.

    STATEMENT OF HON. EDWARD R. BECKER, CHIEF JUDGE, UNITED STATES
         COURT OF APPEALS FOR THE THIRD CIRCUIT, PHILADELPHIA,
                              PENNSYLVANIA

        Judge Becker. Thank you, Mr. Chairman. For the record, my
    name is Edward Becker. I am the Chief Judge of the United
    States Court of Appeals for the Third Circuit and a member of
    the Executive Committee of the Judicial Conference of the
    United States, on whose behalf I appear here today. Let me
    state, Mr. Chairman, we are very grateful for your making this
    spot available to us, and the other members of the committee.
        Let me state at the outset that I am here not to discuss
    general matters of debtor and creditor, but about some other
    real people in our society, Federal judges, and the institution
    of the Federal judiciary and the impact of one provision of
    this legislation. I am here to talk only about Section 1235,
    that dealing with bankruptcy appellate procedure. That
    provision would effect a radical change in bankruptcy appellate
    procedure by routing virtually all bankruptcy appeals which now
    go to the district courts directly to the courts of appeals.
        Now, if there is one thing I know a little bit about after
    20 years on the courts of appeals, and actually 30 years on the
    Federal bench, it is about the workload of the courts of
    appeals. We are stretched, we are strained, we work all the
    time. We are at our limit, and we simply cannot absorb this new
    load of all of these bankruptcy appeals.
        It may be quite unusual, but I am here not just on behalf
    of the Executive Committee, but I have spoken to every chief
    circuit judge, that is the chief circuit judges of all of the
    regional circuits who hear bankruptcy appeals. Each and every
    chief circuit judge--and they are the ones who are responsible
    for management of litigation in the courts of appeals, and as
    you know, we are basically the court of last resort in this
    Nation because the Supreme Court doesn't hear very many cases.
    Each and every chief judge opposes this provision and has
    authorized me to speak on their behalf.
        Now, we are not sure of the exact numbers. Our best
    estimate is probably 3,000 more appeals a year. The heaviest
    impact would be on a number of circuits. Frankly, it would be
    on the First Circuit, Senator Kennedy's circuit; the Second
    Circuit, Senator Leahy and Senator Schumer's circuit; the Third
    Circuit, Senator Biden's and my circuit; the Sixth Circuit; the
    Tenth Circuit, Senator Hatch's circuit; and the Ninth Circuit,
    Senator Feinstein's circuit. In terms of the numbers, we
    estimate an increase in caseload between 10 and 20 percent.
        Having mentioned the Ninth Circuit, I spoke to Chief Judge
    Schroeder yesterday, who is especially concerned about the
    impact of this legislation on the bankruptcy appellate panels
    which they have so carefully honed, because essentially if
    there is the option to go right to the court of appeals, she is
    fearful that the BAPs, as they call them, will be simply
    bypassed and that that structure will fall into disuse.
        Some say, well, give us more judges to take up these
    additional cases. Well, this committee knows better than
    anybody the history of more judges. The First Circuit hasn't
    had a new judge since 1984, and they have a sizable increase.
    The Second Circuit would have a 40-percent increase. But I
    don't want to go into all of those details.
        Let me get down to the matter that this body is concerned
    about. You are a policymaking body and you deal with costs and
    benefits. Now, I have talked about the cost. In our view, the
    cost would be incalculable in terms of the burdens on the
    courts of appeals and the need for more judges, which we are
    not going to get and we shouldn't get for this purpose.
        Let me talk about the benefits. Now, this proposal which
    was endorsed by the National Bankruptcy Review Commission is
    offered as a simple, neat solution. We say we have a two-tiered
    appeal. We have one appeal to the district court or the
    bankruptcy appellate panel and another to the court of appeals,
    and this is a simple, neat solution.
        I hope that the committee will not feel I am irreverent
    when I say that to every human problem there is a solution that
    is simple, neat and wrong, and this one is wrong. First of all,
    there are legal problems with it. I take no position on this as
    an Article III judge, but the Department of Justice has long
    taken the position that this has constitutional problems. They
    believe that meaningful review in the district court is
    necessary for it to be constitutional and query whether the 30
    days is meaningful review.
        Second, this is offered that we need more precedent;
    bankruptcy opinions are all over the lot. Give it to the court
    of appeals and there will be more precedent. That is the
    theory. The theory is that if we have more precedent, we will
    have less litigation. I can tell you, after 30 years on the
    Federal bench, more precedent only means more litigation, that
    being the nature of the beast in terms of lawyers.
        And precedent isn't the kind of precedent you make in terms
    of broad rules. All precedent is is the decisions are fact-
    bound; it is very narrow. All you do is deal particularly with
    the facts of the case, and the facts of the case generally are
    pretty fact-bound and they don't help anybody. Additionally,
    the courts of appeals are so burdened that when we decide
    cases, most of them we decide as non-precedential. So you don't
    get precedent when you get to the court of appeals these days
    because we are so busy.
        I can run through my other points very quickly, with your
    permission, Mr. Chairman. With respect to cost, it is said that
    this would be a cheaper way if you have a unitary appeal
    process. But the fact of the business is that it is much more
    expensive to take a case to the court of appeals because of our
    briefing and all of the requirements. The district court
    procedures are simpler, they are much cheaper, and 80 percent
    of the cases fall out. We talk about two tiers, but 80 percent
    of them are gone at the district court level.
        The district courts are doing a good job, so you are making
    it more expensive if you do this in terms of time. It is
    certainly not easier for the 80 percent because you lengthen
    the period with the additional 30 days that are in the statute.
        I concede that in some complex cases the two tiers will
    take longer. They are basically adversary proceedings. In
    Chapter 11, they are traditional, complex litigation. We don't
    deny that is a problem and we have offered a solution. Instead
    of this broad-based solution which is an over-broad solution,
    we offer a targeted solution. And we don't want to stop this
    bill. The Congress wants to pass a bill.
        All we say is substitute for that bankruptcy appellate
    provision a simple provision which says that if the district
    court or the bankruptcy appellate panel certifies to the court
    of appeals that this is a time-sensitive problem--we have got a
    reorganization that is going to stand or fall, we need a
    decision--or if there is a precedent that has to be
    established, let it be certified to the court of appeals.
        Our proposed bill says that acceptance of the certification
    is up to the court of appeals. We think that is more sound, but
    I am authorized by the Executive Committee to say that the
    committee feels that we are bound by the certification. If the
    district court or the bankruptcy appellate panel says the
    interests of justice require you to take this case, then we
    will take it and then we will establish precedent.
        So we think that is a targeted solution and we think that
    is by far the best solution, and we urge the committee and the
    Congress to jettison 1235, as written, and adopted this
    alternative proposal which is, as I say, approved by the
    Judicial Conference. We think it will really solve the problem.
        My statement talks about filing fees, data collection,
    income tax returns, bankruptcy rules. We think there are some
    other burdens imposed on the court, but I don't want to take
    the time of the committee. I will leave that to my statement.
        We also urge additional bankruptcy judges. I know that is a
    matter Senator Biden is concerned about, and we are because of
    the huge bankruptcy load in Delaware. We need more bankruptcy
    judges, but they need them a lot of places. I will leave those
    matters to the statement.
        I thank you so much, Mr. Chairman, and, of course, if
    anybody has any questions, I would be pleased to answer them.
        Chairman Hatch. Well, thank you, Judge. This Senator is
    sympathetic to what you are saying, and your statement, I
    think, covers this very, very well.
        Unless there are any questions, we appreciate your coming
    very much.
        Judge Becker. Thank you so much.
        Chairman Hatch. And we appreciate your taking time out of,
    we know, a very busy schedule. Thank you for being here.
        Senator Leahy. Mr. Chairman, I would just note I think a
    couple may have some short questions in writing for Judge
    Becker.
        Judge Becker. Of course.
        Chairman Hatch. We will keep the record open, Judge.
        Senator Biden. That is what I was about to ask.
        Senator Leahy. We like having your expertise available to
    us, so thank you very much.
        Judge Becker. Thank you so much.
        Chairman Hatch. Thanks so much.
        We are grateful to have had Judge Becker with us today and
    that we could accommodate his schedule.
        [The prepared statement and an attachment of Judge Becker
    follow:]

    Statement of Hon. Edward R. Becker, Chief Judge, United States Court of
                             Appeals, Third Circuit

        Mr. Chairman and members of the Committee:
        My name is Edward Becker, and I am the Chief Judge of the United
    States Court of Appeals for the Third Circuit. I appear before you as a
    member of the Executive Committee of the Judicial Conference of the
    United States to present the position of the Judicial Conference with
    regard to S. 220, the ``Bankruptcy Reform Act of 2001.'' I thank you
    for the opportunity to appear today and would like to address six areas
    of concern to the judiciary: appeal of bankruptcy court decisions, need
    for new judgeships, re-allocation of revenues generated by filing fees,
    mandatory data collection, filing of tax returns with the bankruptcy
    court, and amendment of bankruptcy rules.

                                 Direct Appeals

        The Judicial Conference strongly opposes section 1235 of the bill
    regarding expedited appeal of bankruptcy cases. As proposed, this
    provision would revise the basic structure for appeals from the orders
    of the bankruptcy court by providing that all bankruptcy court orders
    appealed to the district court would become orders of the district
    court 31 days after such appeal is filed, unless the district court
    decides the case within 30 days or extends the time period for
    decision. Functionally, this will result in all appeals from bankruptcy
    courts being routed directly to the United States Court of Appeals,
    depositing some four thousand new cases per year on these courts.
        Turning first to the provisions of section 1235, I note that, as a
    general matter, the Judicial Conference opposes statutory litigation
    priorities, expediting requirements, or time limitation rules in
    specified types of civil cases beyond those few categories of
    proceedings already identified in 28 U.S.C. Sec. 1657 as warranting
    expedited review.\1\ Mandatory priorities and expediting requirements
    run counter to principles of effective civil case management.
    Individual actions within a category of cases inevitably have different
    needs for priority treatment and are best determined on a case-by-case
    basis. In addition, as the number of categories of cases receiving
    priority treatment increases, the ability of a court to expedite review
    of any of these cases is restricted. Because 28 U.S.C. Sec. 1657
    already authorizes the court to expedite a proceeding if ``good cause
    is shown,'' additional restrictions on federal courts are unnecessary.
    ---------------------------------------------------------------------------
        \1\ Report of the Proceedings of the Judicial Conference of the
    United States, September 1990, p. 80.
    ---------------------------------------------------------------------------
        Beyond creating general case management problems by imposing such a
    time limit on the district courts, the particularly short time limit
    imposed by the proposed legislation would undermine the administration
    of justice. The district court would be required either to extend the
    30 day period as a matter of routine or to make a determination as to
    whether direct appeal is appropriate or not within the 30 day period.
    The 30 day period running from the date of filing the appeal is
    patently insufficient to allow practitioners the time needed to
    adequately brief the issue, much less to allow the district court
    adequate time for review. It is clear to me that, as a practical
    matter, this provision requires direct review of these cases in the
    court of appeals. The 30 day layover in district court only increases
    costs to the litigants and will prove to be a meaningless step on the
    way to review by the court of appeals.
        The Judicial Conference has concluded that the inevitable result of
    this provision will be to saddle the courts of appeals with thousands
    of new cases. According to a study of the Federal Judicial Center, it
    has the potential to increase bankruptcy appeals by 400%. The circuit
    courts now handle approximately 1,000 bankruptcy appeals each year.
    Under the proposed procedure, the courts may be faced with 4,000 new
    cases annually. Such a precipitous increase in the caseloads of the
    courts of appeals is utterly unprecedented. All of the chief judges of
    the twelve regional circuit courts of appeals strongly oppose this
    provision. Many of these courts maintain incredibly high workloads
    while being chronically shorthanded. A significant increase in the
    volume of bankruptcy appeals exacerbates a grievous problem and
    negatively affects the prompt and effective processing of all appeals.
        The proposal is particularly unfair to parties to a bankruptcy
    appeal. It will most certainly increase the cost of the appeal.
    Practice, including briefing, is more complicated and time consuming in
    appellate courts than in district courts. Attorney fees and other costs
    to the parties will increase in 80% of all appeals, the percentage of
    appeals that currently proceed no further than the district courts.
    Further, appeals are handled far more expeditiously in district courts
    than in courts of appeals. Indeed, the current system is working well;
    the district judges by and large do a good job with these cases. In
    sum, the proposal provides for increased expense and increased delay
    for parties to a bankruptcy appeal, and attempts to fix something that
    ``ain't broke.''
        The Judicial Conference recommends a proposal for expedited appeal
    of a targeted number of bankruptcy cases which is attached hereto. This
    proposal redresses the primary complaints regarding the existing
    statutory scheme for bankruptcy appeals: the need for expeditious final
    disposition of appeals in time sensitive cases (where the success of a
    reorganization depends upon a quick decision), and putative
    inefficiency in the development of binding precedential case law.\2\
    The Judicial Conference proposal will solve these problems without
    creating the aforementioned unnecessary problems for litigants and the
    courts of appeals.
    ---------------------------------------------------------------------------
        \2\ The argument is made that direct appeals to the court of
    appeals will create more precedent AND that more precedent will lead to
    more certainty in the law and less litigation. My thirty years
    experience on the federal bench tells me that the opposite is true.
    More precedent leads to more litigation.
    ---------------------------------------------------------------------------
        The Conference position is that bankruptcy court orders should be
    reviewable directly in the courts of appeals if, upon certification
    from the district court or bankruptcy appellate panel, the court of
    appeals determines that (1) a substantial question of law or matter of
    public importance is presented and (2) an immediate appeal to the court
    of appeals is in the interests of justice. This would allow direct
    appeal where necessary to establish precedential case law and meet
    special needs of parties, while leaving intact the basic bankruptcy
    appellate structure. Most bankruptcy appeals are currently resolved
    effectively by the district courts or by the parties, as shown by a
    Federal Judicial Center review reflecting that 73% of bankruptcy
    appeals in the district courts were resolved with little or no judicial
    involvement. By preserving the district court as a forum for meaningful
    review, the Conference proposal satisfies two objectives-it allows for
    timely resolution of appeals at minimal cost to litigants, and it
    facilitates the establishment of precedential case law in bankruptcy
    without placing undue burdens on the courts of appeals.

                                   Judgeships

        Section 1225 of the bill would create 23 new temporary bankruptcy
    judgeships and extend the existing temporary judgeships in the northern
    district of Alabama, the district of Puerto Rico, and the eastern
    district of Tennessee for a period of three years, and extend the
    existing temporary judgeship in the district of Delaware for a period
    of five years. The section also contains a provision to extend the
    temporary judgeship in the district of South Carolina for a period of
    three years. Because the term of South Carolina's temporary judgeship
    lapsed on December 31, 2000, however, the bill will no longer have its
    intended effect with regard to that judgeship. The term of a judgeship
    that no longer exists cannot be extended. Therefore, the bill needs to
    ``re-authorize'' that judgeship by including it among the new
    judgeships created by the bill.
        The bill falls somewhat short of the needs of the judiciary. The
    Judicial Conference recommends authorization of 23 judgeships provided
    for in the bill, as well as an additional judgeship in the district of
    Maryland and a judgeship in the district of South Carolina to replace
    the lapsed judgeship. In addition, the Conference urges that 13 of
    these judgeships be established on a permanent basis \3\ and the other
    12 on a temporary basis;\4\ that the current temporary judgeships in
    the district of Puerto Rico, the northern district of Alabama and the
    district of Delaware be converted to permanent positions; and, that the
    temporary judgeship in the eastern district of Tennessee be extended
    for a period of five years.
    ---------------------------------------------------------------------------
        \3\ District of Delaware (1), District of New Jersey (1), District
    of Maryland (3), Eastern District of Virginia (1), Eastern District of
    Michigan (1), Western District of Tennessee (1), Central District of
    California (3), Southern District of Georgia (1) and Southern District
    of Florida (1).
        \4\ District of Puerto Rico (1), Northern District of New York (1),
    Eastern District of New York (1), Southern District of New York (1),
    Eastern District of Pennsylvania (1), Middle District of Pennsylvania
    (1), Eastern District of North Carolina (1), Southern District of
    Mississippi (1), Eastern District of California (1), Central District
    of California (1), Southern District of Florida (1) and District of
    South Carolina (1).
    ---------------------------------------------------------------------------
        The Judicial Conference is required by law to submit
    recommendations to Congress regarding the number of bankruptcy judges
    needed and the districts in which such judgeships are needed.\5\ This
    requirement has engendered a process whereby the need for additional
    judgeships is assessed on a biennial basis. The bankruptcy and district
    courts provide recommendations to their respective judicial councils.
    The judicial councils' recommendations are then subject to onsite
    surveys of the districts for which judgeships are requested.
    ---------------------------------------------------------------------------
        \5\ 528 U.S.C. Sec. 152(b)(2).
    ---------------------------------------------------------------------------
        Under the direction of the Conference Committee on the
    Administration of the Bankruptcy System, the surveys include a thorough
    review of the dockets in each respective court and interviews with the
    chief district judge, the bankruptcy judges, the bankruptcy clerk, the
    United States Trustee, and local bankruptcy attorneys. Suggestions for
    improvements in case management and methods to achieve greater
    efficiencies are solicited by the survey team. The survey team then
    prepares a written report and recommendation regarding each respective
    district that is submitted to the Committee's Subcommittee on
    Judgeships. The Subcommittee reviews each request for additional
    judgeships and survey report and then forwards these materials, with
    its recommendation, to the requesting appellate, district and
    bankruptcy courts for additional comment. All relevant materials are
    then provided to the full Committee, which makes recommendations to the
    Judicial Conference. The Conference makes its determination on the need
    for each requested judgeship and then submits its recommendation to
    Congress.\6\
    ---------------------------------------------------------------------------
        \6\ It should be noted that in those instances in which Congress
    declines to authorize the requested judgeships, the on-site survey
    process is not necessarily repeated before the request is renewed.
    Nevertheless, review of each request is conducted to determine whether
    or not the underlying justification for the request has changed to the
    extent that an on-site survey should be repeated.
    ---------------------------------------------------------------------------
        Various factors are considered in this process for determining the
    need for new judgeships. The most significant factor is the ``weighted
    judicial caseload'' of each bankruptcy court. This figure is derived
    from a formula established as a result of a time study of the
    bankruptcy courts conducted by the Federal Judicial Center during 1988
    and 1989. Absent exigent circumstances, the Judicial Conference
    considers requesting an additional judgeship only when the caseload of
    a court exceeds 1500 weighted filings per judge. In those instances in
    which the addition of a judgeship would result in a decrease of the
    caseload below 1500 weighted filings, the Conference seeks a temporary
    position; in those instances in which the weighted filings would remain
    above 1500 per judge even with the addition of another judge, the
    Conference seeks a permanent position.
        Other factors which are taken into consideration during this review
    process, especially in those districts with case weights near the 1500
    weighted filings threshold, include the nature and mix of the caseload
    of the court; historical caseload data and filing trends; geographic,
    economic and demographic factors; effectiveness of the case management
    efforts of the court; and, the availability of alternative resources
    for handling the caseload of the court.
        Additional bankruptcy judgeships have not been authorized by-
    Congress since 1992 when 35 new judgeships were approved. In response
    to a substantial increase in case filings, the Judicial Conference has
    made recommendations to Congress for additional bankruptcy judgeships
    in 1993, 1995, 1997 and 1999. These judgeships have not as yet been
    authorized by Congress.
        The need for the required additional judicial officers is great.
    Bankruptcy filings continue at very high levels and well over a million
    cases are pending in our bankruptcy courts. While the judiciary employs
    a number of creative strategies to manage ever increasing caseloads,
    including the use of temporary bankruptcy judges, recalled bankruptcy
    judges, inter- and intracircuit assignments, additional law clerks, and
    advanced case management techniques, there remains a dire need for more
    judicial resources to handle the burgeoning judicial workload.

                                  Filing Fees

        Section 325 of the bill amends the statutory filing fees for
    chapter 7 and chapter 13 cases and re-allocates a portion of the
    revenues generated by such fees from the judiciary and the Treasury
    general fund to the United States Trustee program. This amendment will
    reduce revenues to the judiciary of approximately $5 million per year.
    While the Judicial Conference takes no position regarding the proposed
    reduction of revenue to the Treasury general fund, it strongly opposes
    reducing revenue currently allocated to the judiciary and providing it
    to the United States Trustees. The existing fee structure takes into
    account the significant costs the judiciary bears in administering the
    Bankruptcy Code. The costs of the United States Trustees are far
    exceeded by the costs of maintaining 324 bankruptcy judgeships and the
    staffs and facilities for these judgeships.
        The current fee schedule took effect in December 1999.\7\ That
    schedule reflects an increase of $25 in the filing fee for both chapter
    7 and chapter 13 cases to a total of $155, and allocates the increased
    filing fee revenue equally between the judiciary and the United States
    Trustee program. Assuming total filings of approximately 1.3 million
    per year, as based upon fiscal year 2000 figures, this increase would
    annually generate approximately $16.25 million each for the judiciary
    and the United States Trustee program. The increase was enacted with an
    understanding by the Appropriations Committees that these funds were
    required by the judiciary to meet its current statutory
    responsibilities, without taking into account any additional funding
    that would be required to meet the new responsibilities imposed by the
    bankruptcy reform legislation.
    ---------------------------------------------------------------------------
        \7\ Omnibus appropriations bill for fiscal year 2000 (Pub. L. No.
    106-113).
    ---------------------------------------------------------------------------
        This bill would further revise filing fees to $160 for chapter 7
    cases and $150 for chapter 13 cases and reduce that portion of the
    filing fee that is allocated to the judiciary from $52.50 as provided
    under current law to $50.00 in chapter 7 cases and $45.00 in chapter 13
    cases. Assuming the annual filing of approximately 900,000 chapter 7
    cases and 400,000 chapter 13 cases, this provision would have the
    effect of reducing revenues to the judiciary by over $5 million per
    year, while increasing revenues to the United States Trustee program by
    over $7 million per year.
        The Judicial Conference strongly opposes this re-allocation of
    revenues at a cost to the judiciary of more than $25 million over the
    next five years. Not only are these funds required by the judiciary to
    meet its current statutory responsibilities, but other provisions of
    this bill will require additional expenditures by the judiciary of an
    estimated $80 million during the same five year period. Moreover,
    revising filing fees that took effect only 14 months ago, with all the
    attendant administrative costs and disruptions, would seem to be an
    unwise expenditure of taxpayer funds.

                                Data Collection

        Section 601 of the bill directs the clerks of court to collect, and
    the Administrative Office to compile and report, financial data of
    consumer debtors and certain categories of case event statistics in
    consumer bankruptcy cases. The Congressional Budget Office estimates
    that this requirement will cost the judiciary $30 million over the next
    five years.
        The Judicial Conference is opposed to the provisions of the bill
    that direct the judiciary to collect and report financial data that is
    unnecessary to fulfill its responsibility to report to Congress and the
    public information on the adjudication of cases. Under these
    provisions, the financial data is to be derived from the schedules and
    statements filed by consumer debtors. This information, filed by
    debtors at the outset of bankruptcy cases and in many instances without
    the assistance of a lawyer, is, at best, of questionable reliability\8\
    Both assets and liabilities are frequently valued inaccurately by
    consumer debtors, and some debt simply cannot be valued definitively at
    the outset of the case because it is unliquidated, contingent or
    disputed. Therefore, these provisions will not generate ``improved
    bankruptcy statistics,'' but will impose significant costs upon the
    taxpayers.
    ---------------------------------------------------------------------------
        \8\ See Report of the National Bankruptcy Review Commission, vol.
    1, ch. 4 (October 20, 1997).
    ---------------------------------------------------------------------------
        A far superior approach, in our view, is to append the
    responsibility to collect, compile and report financial data to the
    responsibility of the United States Trustees to conduct audits under
    the bill. This approach would have two significant benefits: it would
    yield audited, and thus accurate, data, and it would accomplish this at
    a fraction of the cost to the taxpayer. We believe that this data would
    meet the needs of Congress to conduct a continuing assessment of the
    functioning and effectiveness of the bankruptcy system. The staff of
    the Administrative Office is prepared to work with congressional staff
    to craft an appropriate replacement for the provision that currently
    appears in this legislation.
        In the event Congress is committed to imposing the responsibility
    to collect, compile and report financial data upon the judiciary, we
    respectfully request extension of the date upon which this provision
    would take effect. Compliance with these new requirements will require
    revising official bankruptcy forms, developing new statistical data
    fields, training clerks in entering additional data into our computer
    systems, devising data extraction programs, and reprogramming
    Administrative Office statistical compilation programs. We will also
    have to coordinate with forms publishers and software developers so
    that the new forms can be made available to attorneys and debtors. In
    order for these responsibilities to be met in an accurate and thorough
    manner, we recommend that the provisions regarding collection and
    reporting of financial data be revised to take effect 24 months after
    enactment of the bill, with the first report due to Congress no later
    than 36 months after enactment of the bill.
        The bill also requires the bankruptcy clerks and the Administrative
    Office to collect and report certain case event statistics. While the
    judiciary is the appropriate entity to collect and report this
    information, this responsibility would similarly pose a significant
    problem. Events occurring in bankruptcy cases are reported to the
    Administrative Office through the electronic case management systems of
    the courts. The current systems, however, are nearing the end of their
    useful lives and cannot collect additional information of the sort
    required by these bills. To upgrade these systems to meet the
    requirements of this legislation would require a major financial
    investment, contrary to good government and common sense, and divert
    resources from and delay the development and deployment of a new,
    modern electronic case management system that is in the process of
    being deployed in the bankruptcy courts.
        This new system will not be installed and operating in all
    districts for at least three and a half years. Accordingly, if the
    judiciary is to be required to collect and report these case event
    statistics system-wide, we urge that this provision be revised to take
    effect 48 months after enactment of the bill, with the first report due
    to Congress no later than 60 months after enactment of the bill.

                               Income Tax Returns

        The bill requires chapter 7 and chapter 13 debtors, upon request of
    a creditor, to file with the bankruptcy court copies of federal income
    tax returns for the three year period preceding the order for relief
    and for the period during which the case is pending. The bill further
    requires the court to limit access to the returns pursuant to security
    procedures promulgated by the Director of the Administrative Office and
    requires the court to destroy the returns three years after the case is
    closed.
        Implementation of this provision would entail development and
    maintenance of a filing system separate from the public case files,
    with access limited to trustees and parties in interest. Court files,
    with the narrow exception of sealed records, are public records
    available on request. Because the sealing of records is relatively
    rare, sealed records can be easily segregated from the public case
    file. The routine filing of tax returns, however, would be problematic.
        Recognizing that tax returns are not to be made available to the
    public, the bill requires the Director of the Administrative Office to
    establish procedures to safeguard the confidentiality of tax
    information and to establish a system to make the information available
    to the United States trustee, case trustee, and any party in interest.
    To carry out this-responsibility, it would be necessary to establish a
    separate filing system for tax returns in each clerk's office, as well
    as to provide personnel to manage it so that unlawful dissemination of
    this information would not occur. This would be a costly undertaking
    requiring additional office space and personnel.
        As the United States Trustee's files are not public records,
    limiting access to trustees and parties in interest would not require
    segregating tax returns and creating separate procedures governing
    access to them. The Trustee's office also has personnel and procedures
    in place to deal with debtors. While the Trustees may well need some
    additional resources to meet this responsibility, that cost should be
    far less than the cost of establishing a new separate system in each
    clerk's office.
        Accordingly, the Judicial Conference takes the position that the
    bankruptcy courts should not be required to maintain tax returns filed
    by debtors, which are typically of no use in the administration of
    bankruptcy cases. The Conference believes that responsibility for
    collection and maintenance of these tax returns would be more
    appropriately assigned to the United States Trustees, who are
    responsible for supervising and estates and approving distributions to
    creditors.

                                Bankruptcy Rules

        Section 102 of the bill establishes standards governing sanctions
    for abusive filings that are inconsistent with Bankruptcy Rule 9011. In
    addition, section 319 states the sense of Congress suggesting several
    changes to Bankruptcy Rule 9011. The cumulative effect of the
    provisions will cause confusion and needless satellite litigation.
    Accordingly, they should be deleted from the bill.
        There are six provisions in the bill that directly task the Supreme
    Court or the Judicial Conference or its Advisory Committee on
    Bankruptcy Rules to promulgate a bankruptcy rule or an official form to
    implement a new requirement added by an amendment of the Bankruptcy
    Code. Section 221 amends section 110 of the Code to require bankruptcy
    petition preparers to provide to the debtor a notice, the contents of
    which are detailed in section 110(2)(B). The provision states that the
    notice shall be an official form issued by the Judicial Conference.
    Section 419 requires the Judicial Conference's Advisory Committee on
    Bankruptcy Rules, after considering the views of the Executive Office
    for United States Trustees, to propose for adoption rules and forms to
    assist a debtor to disclose the value, operations, and profitability of
    any closely-held business. Section 433 requires the Advisory Committee
    to propose for adoption a standard form disclosure statement and plan
    of reorganization for small businesses. Section 435 requires the
    Advisory Committee to propose for adoption rules and forms for small-
    business debtors to file periodic financial and other reports. Section
    716 expresses the sense of Congress that the Advisory Committee propose
    rules amending Bankruptcy Rules 3015 and 3007 to extend deadlines for
    governmental units to object to confirmation of chapter 13 plans and to
    restrict the rights of interested parties to object to tax claims until
    the filing of a required tax return. Finally, section 1234 takes the
    extraordinary step of amending the Rules Enabling Act to prescribe the
    form to assist a debtor to report monthly income and expenses required
    to implement amended section 521 of the Code.
        These provisions are unnecessary because the Advisory Committee
    automatically reviews any legislation amending the Bankruptcy Code to
    identify and prescribe any needed amendments to rules and forms. More
    importantly, directing the Judicial Conference or one of its committees
    to amend a particular rule or form bypasses the initial stages of the
    Rules Enabling Act process and needlessly undercuts in varying degrees
    the proper role of the Judicial Conference and its committees, the
    bench and bar, the public, and the Supreme Court in that process.

                                   Conclusion

        In conclusion, the Judicial Conference urges the Committee to amend
    the legislation to replace the expedited appeal provision with the
    Judicial Conference proposal, to re-authorize the lapsed South Carolina
    judgeship and provide the other needed judgeships, to leave intact the
    current filing fee structure, to re-assign the responsibility to
    compile and report financial data and maintain tax returns to the
    United States Trustee program, which is better suited to meet these
    responsibilities, to extend the effective date for collection and
    reporting of case event statistics by the bankruptcy clerks and
    Administrative Office, and to delete the provisions regarding amendment
    of bankruptcy rules.
        Again, thank you very much for this opportunity to appear before
    the Committee. I am prepared to answer any questions that you may have.

    SEC.______BANKRUPTCY APPEALS
        (a) Appeals.--Section 158 of title 28, United States Code, is
    amended--
    (1) in subsection (c)(1) by striking out ``Subject to subsection (b),''
        and inserting in lieu thereof ``Subject to subsections (b) and
        (d)(2),''; and
    (2) in subsection (d)--
    (A) by inserting ``(1)'' after ``(d)''; and
    (B) by adding at the end of that subsection the following new
            paragraph:
    ``(2) A court of appeals that would have jurisdiction of a subsequent
        appeal under paragraph (1) or other applicable law may, in its
        discretion, permit an immediate appeal to itself, in lieu of
        further proceedings in a district court or before a bankruptcy
        appellate panel exercising appellate jurisdiction under subsection
        (a) or (b), if the district court or bankruptcy appellate panel
        hearing an appeal certifies, that----
    ``(A) a substantial question of law or matter of public importance is
            presented in the appeal pending in the district court or before
            the bankruptcy appellate panel; and
    ``(B) the interests of justice require an immediate appeal to the court
            of appeals of the judgment, order, or decree that had been
            appealed to the district court or bankruptcy appellate panel.''
        (b) Procedural Rules.--Until rules of practice and procedure are
    promulgated or amended 19 under the Rules Enabling Act (28 U.S.C.
    Sec. Sec. 2071-2077) to govern appeals to a court of appeals 20
    exercising jurisdiction under section 158(d)(2) of title 28, as added
    by this Act, the following shall apply:
    (1) A district court or bankruptcy appellate panel may enter a
        certification as described in section 158(d)(2) during an appeal to
        the district court or bankruptcy appellate panel under section
        158(a) or (b).
    (2) Subject to the other provisions of this subsection, an appeal by
        permission under section 158(d)(2) must be taken in the manner
        prescribed in Rule 5 of the Federal Rules of Appellate Procedure.
    (3) When permission to appeal is requested on the basis of a
        certification of a district court or bankruptcy appellate panel,
        the petition must be filed within 10 days after the district 10
        court or bankruptcy appellate panel enters the certification.
    (4) When permission to appeal is requested on the basis of a
        certification of a district court or bankruptcy appellate panel, a
        copy of the certification must be attached to the petition.
    (5) When permission to appeal is requested in a case pending before a
        bankruptcy appellate panel, the terms ``district court'' and
        ``district clerk,'' as used in Rule 5 of the Federal Rules of
        Appellate Procedure, mean ``bankruptcy appellate panel'' and
        ``clerk of the bankruptcy appellate panel.''
    (6) When a court of appeals grants permission to appeal, the Federal
        Rules of Appellate Procedure apply to the proceedings in the court
        of appeals, to the extent relevant, as if the appeal were taken
        from a final judgment, order, or decree of a district court or
        bankruptcy appellate panel exercising appellate jurisdiction under
        section 158(a) or (b).

                          SECTION-BY-SECTION ANALYSIS

    Section.______Bankruptcy appeals
        Currently, decisions of bankruptcy judges can be appealed either
    to--
    (a) the district court for the respective district or
    (b) to a bankruptcy appellate panel of three bankruptcy judges. Further
        appeals lie from the district court or bankruptcy appellate panel
        to the court of appeals for the circuit.
        In practice, this approach to bankruptcy appeals has had difficulty
    fastening certainty and predictability in bankruptcy law. Unlike those
    of a court of appeals, decisions of a district court acting as an
    appellate court or a bankruptcy appellate panel have no stare decisis
    value or, in other words, are not binding beyond a particular case.
        To address that problem without sacrificing the economy to the
    parties of review by a single district court judge, this section amends
    section 158 of title 28 to permit an appeal to be heard directly by the
    court of appeals if the district court or bankruptcy appellate panel
    certifies that----
    (1) the appeal presents a substantial question of law or matter of
        public importance, and
    (2) an immediate appeal to the court of appeals is in the interests of
        justice, and if the court of appeals agrees to hear the matter.
        Since this creates a new route of appeal, this section provides
        interim procedures until permanent rules can be prescribed under
        the Rules Enabling Act.
        This section preserves the option of prompt, inexpensive review in
    the district court for cases in which the parties need it--i.e., fact-
    intensive cases, small cases, and cases where the parties only want a
    quick ``second look'' by another source. It also provides for direct
    review by the court of appeals so that binding precedent can be created
    in those cases and for those issues meriting that treatment, without
    flooding the courts of appeals with all bankruptcy appeals.

        Chairman Hatch. Our panel will be Judge Randall J. Newsome,
    United States Bankruptcy Court of the Northern District of
    California, in Oakland, California; Philip Strauss, Principal
    Attorney, San Francisco Department of Child Support Services,
    in San Francisco, California; Brady C. Williamson, Esquire,
    LaFollett, Godfrey and Kahn, former Chair of the National
    Bankruptcy Review Commission, from Madison, Wisconsin; Dean
    Sheaffer, Vice President and Director of Credit, Boscov's
    Department Stores, in Laureldale, Pennsylvania; Maria T. Vullo,
    Esquire, Paul, Weiss, Rifkind, Wharton and Garrison, out of New
    York City; Ken Beine, President of Shoreline Credit Union, of
    Two Rivers, Wisconsin; Dr. Robert Manning, Senior Research
    Fellow, Institute for Higher Education, Law, and Governance,
    University of Houston Law Center, in Houston; and Todd J.
    Zywicki, Esquire, George Mason University, Assistant Professor
    of Law.
        We are sorry to have such tight seating arrangements. They
    are left over from yesterday's hearing. We had the CEOs of all
    the major airlines appearing before us, and apparently the
    coach seating kind of upset them just a little bit. [Laughter.]
        Chairman Hatch. It has been left over for you today, so we
    hope it doesn't upset you as much as it did them.
        We will begin with Judge Newsome and go on from there.

      STATEMENT OF HON. RANDALL J. NEWSOME, JUDGE, UNITED STATES
      BANKRUPTCY COURT, NORTHERN DISTRICT OF CALIFORNIA, OAKLAND,
                               CALIFORNIA

        Judge Newsome. Good morning, Mr. Chairman and distinguished
    members of the committee. My name is Randall Newsome and I am a
    bankruptcy judge from the Northern District of California.
        I should note at the outset that I am here representing
    only myself, no other person or organization. My intention this
    morning is not to make policy pronouncements or value judgments
    about bankruptcy reform. That is the role of Congress, not the
    courts. But I think my position as a bankruptcy judge puts me
    in a unique position to provide observations about how S. 220
    will work as drafted.
        My first observation is that the means test in this bill
    will move very, very few people from Chapter 7 to Chapter 13.
    As the data in my written testimony indicates, only about 15
    percent of filers, if that, are above the median income, and
    probably no more than 3 percent will actually be forced into
    Chapter 13 or dismissed.
        Senator Biden. What was that percentage, Judge? I am sorry.
        Judge Newsome. Three percent.
        Senator Biden. Three percent will be forced into 13?
        Judge Newsome. Or dismissed.
        Senator Biden. Or dismissed.
        Judge Newsome. The problem for 97 percent of those who file
    will not be passing the test, it will be taking the test. By my
    count, the means test will require at least another five forms
    on top of what is already required. It will require the
    production of tax returns and a credit counseling certificate
    just to get in the courthouse door.
        So even if you are like the 65-year-old single woman from
    Monticello, Illinois, I discuss in my written testimony making
    $657 a month in Social Security, or the cook from Decatur,
    Alabama, making $850 a month, or the single mother who draws
    Social Security and makes $1,170 per month as a temporary
    worker supporting three kids, you will have to get the credit
    counseling, file 16 or more forms--it might be 14--and dig out
    your tax returns for at least 1 year or more before you can
    perfect a filing in bankruptcy court.
        The means test form alone will probably be several pages
    long. In any event, if you don't submit all the forms on time,
    your case will get dismissed automatically, no matter what the
    circumstances. And once you get dismissed, the bill makes it
    very hard to get back in and stay in. Thus, the overall effect
    of the bill is not to promote repayment of debts in bankruptcy;
    it is to try to keep people out of the system altogether.
        By adding all of these forms and requirements to a simple
    Chapter 7 case and by imposing new requirements on bankruptcy
    attorneys themselves, the bill will make legal services too
    expensive for most consumer debtors to afford. They will be
    left trying to represent themselves or will turn to bankruptcy
    petition preparers, who frankly have become the bane of the
    bankruptcy system.
        One thing it will not do is keep people from filing. If
    your income is about $21,500 a year, which is the median income
    of the bulk of the households in our case surveys, and your
    unsecured non-priority debts are about $23,400 a year, the
    median debt in our surveys, then bankruptcy is just about your
    only option.
        Not only will the bill move virtually no one from Chapter 7
    to 13, it largely destroys any incentive for debtors to file a
    voluntary Chapter 13, with the exception of those seeking to
    prevent foreclosure. At present, all Chapter 13 cases are
    voluntary. They comprise approximately 30 percent of all cases
    filed nationwide, and in some districts especially in the
    South, they amount to over 50 percent of the court's docket.
    Chapter 13 trustees pay out millions of dollars on unsecured
    debt every year. Much of that recovery for creditors may be
    lost under S. 220.
        If these were the results intended by the drafters of the
    bill, so be it. The bankruptcy judge's job is to uphold the law
    as it is written and we will, or at least we will try. But
    these results are not what I understood bankruptcy reform to be
    all about when the process began several years ago.
        Thank you for having me today.
        [The prepared statement and attachments of Judge Newsome
    follow:]

     Statement of Hon. Randall J. Newsome, Judge, United States Bankruptcy
          Court, Northern District of California, Oakland, California

        Mr. Chairman and distinguished members of this committee, I very
    much appreciate the opportunity to comment upon the Bankruptcy Reform
    Act of 2001. By way of introduction, I have been a bankruptcy judge in
    the Oakland division of the Northern District of California since May
    of 1988. From October, 1982 until May, 1988 I was a bankruptcy judge in
    the Southern District of Ohio sitting in Cincinnati. From October of
    1998 until October of 1999, I was the president of the National
    Conference of Bankruptcy Judges. However, I want to make it clear that
    I appear before you today representing myself only, not the NCBJ.
        Before commenting on S. 220, it might be useful to provide some
    information about the people who are filing bankruptcies. One of the
    problems plaguing the debate over bankruptcy reform has been and
    continues to be the lack of empirical data. The anecdotes about
    bankrupt movie stars and rock musicians, as well as the catch phrases
    being bantered about, all make for, great speeches, but don't move us
    any closer to a real understanding of why over a million people filed
    for bankruptcy last year. In an attempt to help fill this empirical
    void, in 1999 60 bankruptcy judges from 33 different states surveyed
    5235 randomly-selected cases that were closed in their districts within
    the previous year. That data was analyzed by Professor Gary Neustadter
    of Santa Clara University School of Law. Based upon his review of the
    3151 cases filed and closed in 1998, he found (among other things) that
    the median gross income of debtors was $21,540, some $15,000 lower than
    the median income for all U.S. households in 1997. Only 15% of these
    debtors had gross annual income equal to or exceeding the national
    median income for families of the same size. The median amount of
    unsecured nonpriority debt for these same debtors was $23,411. A copy
    of Professor Neustadter's findings is attached as Exhibit 1.
        I had my staff review all 5235 cases as to several other categories
    of information. The results of their review are attached as Exhibit 2.
    One of the most disturbing numbers concerns the level of medical debt
    reported. The average unweighted percentage of cases reporting over
    $1000 in medical debt was 25%. The medical debt numbers are probably
    understated, because they don't include medical debts that might have
    been charged to a credit card.
        The data in the surveys also indicate that a small but significant
    number of debtors are either retired or disabled. It is very difficult
    to tell just how many people fall into these categories. Often debtors
    report receiving social security, but also state that they are
    employed, indicating that perhaps some of them are older people who
    can't get by without working.
        One of the more interesting findings from these cases concerns the
    automobiles debtors own. The average model year of all cars and pick-
    ups reported in all 5235 cases was not quite 1989. In other words, the
    average debtor owns a car that is between 6 and 9 years old. Since the
    means test in Sec. 102 of S. 220 allows a deduction from the debtor's
    income for monthly contractual payments to secured creditors, and since
    many debtors probably need a new car anyway, purchasing an automobile
    may become a legitimate form of pre-bankruptcy planning if the bill is
    enacted. That may be good news for the automobile industry, but bad
    news for auto lenders.
        One number that I am unable to provide is how many of the debtors
    in these surveys would be dismissed or converted to chapter 13 under
    the means test. It seems there are as many ways to apply the test as
    there are people studying it. It's not just because some of the numbers
    seem to overlap. It's also because the IRS ``Other Necessary Expenses''
    allowance appears to encompass anything that is reasonable and
    necessary for the health or welfare of the family or production of
    income. The alleged inconsistencies in applying the ``substantial
    abuse'' test presently incorporated into Sec. 707(b) will seem trivial
    by comparison to what is wrought by the means test.
        Notwithstanding these misgivings, I tend to agree with those who
    have speculated that very few debtors (probably less than 3%) will be
    dismissed or forced into chapter 13 by Sec. 102.
        If only 15% of all chapter 7 filers will trigger the means test,
    and only a handful of that group will be shuttled into chapter 13, why
    have the test at all? Putting aside the substantial burden this
    complicated construct will impose on the bankruptcy system, consider
    what every debtor, regardless of circumstance, will be required to do
    in order to obtain relief. I'll use a case from the Central District of
    Illinois. This case is fairly typical of what bankruptcy judges see
    virtually every day. The debtor is a 65-year-old retired single woman
    living in Monticello, Illinois, a small town about 40 miles from
    Decatur and 30 miles from Champaign. Her sole source of income is $657
    per month in Social Security benefits. She also receives $10 a month in
    food stamps. Her monthly expenses total $827 per month, and are
    probably understated. She owns a 1987 mobile home and a 1993 Chevrolet
    Lumina. Both of these assets are exempted and unencumbered by debt. She
    lists $21,739 in unsecured debt on five credit cards and two department
    store cards. To characterize her as insolvent does not do her financial
    condition justice.
        In order to be eligible for chapter 7 relief, she must first obtain
    credit counseling from an approved credit counselor within 180 days
    prior to filing, or if she has a good excuse, within 45 days after she
    files. She will then be required to file a certificate evidencing what
    credit counseling services she received, as well as any repayment plan
    developed.\1\ Assuming she knows she has to obtain credit counseling,
    that the credit counselor must be on the approved list, and she is able
    to locate one, what are they going to talk about? She's 65 years old,
    she's got almost' $22,000 in debt, and she makes $657 per month. She
    needed credit counseling before she went $22,000 into debt, not when
    the money's already been spent. Why are we burdening her with credit
    counseling on the eve of bankruptcy?
    ---------------------------------------------------------------------------
        \1\ S. 220, Sec. Sec. 106(a); 106(d).
    ---------------------------------------------------------------------------
        For many of the debtors in our 5235 cases, credit counseling would
    simply be a pointless exercise. A case from South Dakota involving a
    husband and wife who both work and have three children is illustrative.
    Their mortgage balance is $12,801, and their payments are $118 per
    month. They budget $75 per month for clothes and $25 for recreation.
    They own a 1984 Isuzu and a 1988 Pontiac, and report owing money on one
    or both cars. They aren't in bankruptcy because of credit card debt--
    they don't have any. They apparently filed because of $67,373 in
    medical debts. With three dependents and a combined gross income of
    just over $2500 per month, it is unlikely that a credit counselor could
    do much for them. Nonetheless, S. 220 makes credit counseling a
    condition of eligibility for this couple, apparently on the presumption
    that their financial condition is the result of their profligate
    spending habits. This same presumption apparently applies to the single
    parent with three dependents in Lawrence, Kansas who makes $1170 a
    month as a temporary worker plus $341 in Social Security, has $249 in
    credit card debt but $10,900 in medical debt; and to the couple in
    Oxnard, California with one dependent whose only income is $1090 per
    month in SSI disability payments, who have no credit card debt, but
    report $5307 in medical debt; and to the cook in Decatur, Alabama who
    makes $850 per month and whose only unsecured debts are some $26,419 in
    medical debt. These cases are neither isolated nor anecdotal. There are
    many more just like them among the 5235 cases examined.
        In addition to the credit counseling certificate and the extensive
    set of forms presently required, the retired woman from Monticello,
    Illinois and all other consumer debtors will need to file a means test
    calculation form,\2\ an itemized statement of monthly income,\3\ a
    statement disclosing any reasonably anticipated increase in income or
    expenditures over the next 12 months,\4\ and a certificate of notice of
    alternatives under Sec. 342.\5\ Those who are employed will also be
    required to file pay stubs for the previous 60 days.\6\ If the debtor
    fails to file all of these documents within 45 days of filing the
    petition, or within such additional time as the court allows up to
    another 45 days, then the case is dismissed automatically the day after
    the deadline expires.\7\ If their case gets dismissed for failure to
    file any of these documents, and they try to file again within one
    year, they'd only be entitled to a 30-day automatic stay, which can
    only be extended if they rebut the presumption of bad faith the statute
    imposes.\8\
    ---------------------------------------------------------------------------
        \2\ S. 220, Sec. 102(a)(2)(C).
        \3\ S. 220, Sec. 315(b).
        \4\ Id.
        \5\ Id.
        \6\ Id.
        \7\ S. 220, Sec. 316.
        \8\ S. 220, Sec. 302.
    ---------------------------------------------------------------------------
        Debtors will also have to furnish the chapter 7 trustee with their
    most recent tax return by no later than the date first set for the
    meeting of creditors. All creditors are entitled to request copies of
    those returns. They may also request tax returns for the three years
    prior to filing and for returns that are filed postpetition and prior
    to the closing of the case.\9\
    ---------------------------------------------------------------------------
        \9\ S. 220, Sec. 315(b).
    ---------------------------------------------------------------------------
        The stated intent of the consumer provisions of S. 220 was to
    shepherd those who could repay some of their debts from chapter 7 into
    chapter 13. But the effect of the provisions highlighted above and many
    others in the bill is to make it more difficult for anyone to obtain
    bankruptcy relief of any kind. Notwithstanding all of the hurdles and
    pitfalls, it is doubtful that many people will be deterred from filing.
    The financial condition of the overwhelming majority of debtors is such
    as to leave no other viable option.
        Despite all of the problems in S. 220, there are many parts of this
    bill that would bring about welcome reforms. The provisions regarding
    collection of bankruptcy data, the permanent reenactment of chapter 12
    and amendments to the preference statute to protect small trade
    creditors are representative examples.
        Other provisions could be beneficial with some modification.
    Everyone agrees that instruction on personal financial management is
    sorely needed in this country. The financial management training test
    program in the bill is certainly a step in the right direction. If the
    program were offered at no cost to debtors immediately after they
    attend their Sec. 341 meeting, it probably would be far more effective
    than credit counseling obtained on the run to satisfy a bankruptcy
    eligibility requirement.
        If the bill is to have a means test, it should be similar to the
    one proposed by Senator Grassley in the original Consumer Bankruptcy
    Reform Act of 1997. It should be enhanced by specific standards for
    determining bad faith and the need for specific findings by the court.
    The United States trustee should be assigned to enforce the test as one
    of her mandatory duties. Creditors and chapter 7 trustees should be
    permitted to bring motions to dismiss or convert in any case in which a
    debtor earns more than 125% of the median income for comparable
    households in the state.
        If S. 220 must contain the means test as presently drafted, then
    debtors whose incomes are below the applicable median should be
    entirely insulated not only from its application, but from its
    paperwork requirements as well. All debtors should be required to file
    the schedules and statement of financial affairs presently prescribed
    by the Bankruptcy Rules in order to initiate their case. They should
    also be required to show the United States trustee their tax return for
    the previous year at or before the meeting of creditors. If the tax
    return and other evidence establish probable cause to believe that the
    debtor's income is above the median, then the debtor would be required
    to file all of the additional documents prescribed by the means test
    and by Sec. 315 of the bill. If no such probable cause is found, then
    the debtor would be relieved of any further filing requirements.
        This same two-tiered approach should apply to chapter 13 cases. As
    presently drafted, S. 220 destroys any incentive to file a voluntary
    chapter 13 case, unless the debtor is seeking to save his house from
    foreclosure. The enhanced discharge in chapter 13 has been
    eliminated,\10\ as has the ability to alter the terms of secured
    automobile debts.\11\ When these disincentives are combined with the
    continuing duty to turn over tax returns on a yearly basis and to
    fulfill other means test reporting requirements, the choice between
    chapter 7 and chapter 13 will be obvious to most debtors. If these
    provisions must be a part of S. 220, then they should only be
    applicable to those who were forced to convert their cases to chapter
    13 pursuant to the means test. Voluntary chapter 13 filers who propose
    to pay back a substantial portion of their unsecured debt at a minimum
    should be given the ability to the modify their secured debts on motor
    vehicles purchased more than one year prior to filing. They also should
    be able to discharge debts that would be nondischargeable in a chapter
    7 case under Sec. 523(a)(2), (4) and (6).
    ---------------------------------------------------------------------------
        \10\ S. 220, Sec. 314(b).
        \11\ S. 220, Sec. 306(b).
    ---------------------------------------------------------------------------
        One of the most glaring and widely-publicized abuses in the
    bankruptcy system is the ability of debtors in a few states to shelter
    most of their wealth through the use of an unlimited homestead
    exemption. Section 322 of the bill does not cure this problem. It would
    allow wealthy debtors to move to a state with an unlimited homestead,
    pour the bulk of their assets into a residence, and then hunker down
    for two years until they can file for bankruptcy. The two year
    provision should be eliminated, and a uniform $100,000 cap on homestead
    exemptions in bankruptcy should be imposed.
        A much-needed and relatively uncontroversial suggestion for
    improving the bill would be to stop trying to regulate bankruptcy
    petition preparers, and simply ban them instead. They are subject to no
    standards of practice or conduct, they too often engage in the
    unauthorized practice of law and they frequently cause great harm to
    debtors and creditors alike.
        These ideas for improving the bill are not fully formed, nor do
    they exhaust the list of suggestions. As always, I stand ready to
    assist this Committee in any way it deems appropriate in its pursuit of
    fair and workable bankruptcy reform. Thank you for this opportunity to
    appear and be heard.
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        Senator Sessions [presiding]. Mr. Strauss?
        Senator Hatch has stepped out. He will be back in a minute
    and he asked me to keep the panel moving.

        STATEMENT OF PHILIP L. STRAUSS, PRINCIPAL ATTORNEY, SAN
    FRANCISCO DEPARTMENT OF CHILD SUPPORT SERVICES, SAN FRANCISCO,
                               CALIFORNIA

        Mr. Strauss. I am happy to move.
        Mr. Chairman and Members of the Judiciary Committee, good
    morning. My name is Phil Strauss. I am the Principal Attorney
    of the Department of Child Support Services in San Francisco. I
    am authorized today to speak on behalf of the National Child
    Support Enforcement Association, the California District
    Attorneys Association, and the California Family Support
    Council.
        Basically, my background is for the last 28 years I have
    been an employee of the Office of the District Attorney of the
    City and County of San Francisco, and for the last 25 years I
    have been with, as it was known at that time, the Family
    Support Bureau. That division is now an independent agency in
    San Francisco, known as the Department of Child Support
    Services.
        For the last 13 years, I have been specializing in the
    enforcement of support during bankruptcy. I have practiced in
    this field, litigated numerous cases, handled numerous appeals.
    I write and teach on the issue, and I am here for the limited
    purpose of discussing the effect S. 220 will have on the
    ability of custodial parents to survive after the non-custodial
    parent has filed for bankruptcy protection.
        I am very happy that this committee has invited me to speak
    today because it is important for you to understand the despair
    I see everyday when a bankruptcy petition stops child support
    debt in its tracks. I see far too many custodial parents, 95
    percent or more of whom are women, in very difficult
    circumstances with little or nothing to cushion their fall when
    their child support or spousal support suddenly ceases.
        I am the one who has to look them in the face and say there
    is just nothing I can do to get you the support which you need
    and are entitled to, at least in a timely fashion, after a
    parent has filed for bankruptcy protection. Much is needed to
    be done to protect this most vulnerable population, and these
    are basically moms who have custody of children.
        Based upon my experience, I have proposed nine changes in
    the Code to ensure that support obligations would be paid
    during bankruptcy, and that they would be given significant
    preferential treatment. These proposals were originally
    introduced in the 105th Congress. They were polished and
    enhanced by other child support enforcement attorneys like
    myself in consultation with the National Association of
    Attorneys General. The culmination of that work is the child
    support provisions of the 106th Congress which are now in S.
    220, Sections 211 through 217. Additional refinements were
    added in Sections 218 to 219.
        The principles in drafting these provisions were six-fold.
    The provisions were intended to be largely self-executing, and
    the resulting benefit would be a reduction in the cost of
    litigation, better and more efficient use of court time and
    public resources, and the protection of custodial parents who
    would otherwise simply lose their support rights or sacrifice
    them by having to pay large attorney's fees which would in
    essence eat up whatever they could recover.
        The provisions were intended to ensure that support
    payments would not be interrupted by the bankruptcy process. As
    members of the child support community, we wish to eliminate,
    or at least minimize the statutory conflicts between the
    Bankruptcy Code and the child support program.
        The next principle is we wanted a clear recognition of the
    primacy of child support debts and that all generally
    recognized support debts would be entitled to special treatment
    under the code.
        The fifth principle was the bankruptcy process should be
    structured so that the debtor would be able to liquidate non-
    dischargeable debt to the greatest extent possible within the
    context of the bankruptcy case and allow the debtor to emerge
    from the process with as fresh a start as possible.
        Finally, the Code would assure that all support owing to a
    family would be paid first to the family before the government
    would receive any payments due to them for child support. Under
    current law, when a bankruptcy petition is filed, support
    frequently ceases. Debtors can emerge from the bankruptcy
    process with a discharge without paying their ongoing child
    support and liens securing the support debt can be lost. This
    loss may well doom any prospects for payment of the debt.
        With that in mind, I drafted the provisions. I am here to
    answer any questions about the provisions, but you should know
    that really my expertise is in the field of viewing the
    Bankruptcy Code from the point of view of support creditors.
        Senator Sessions. Thank you, Mr. Strauss.
        [The prepared statement of Mr. Strauss follows:]

       Statement of Philip L. Strauss, Principal Attorney, San Francisco
                      Department of Child Support Services

        I welcome the opportunity to discuss the effect the ``Bankruptcy
    Reform Act of 2001'' will have on the collection of child support and
    alimony when a support debtor has filed a petition for relief under the
    Bankruptcy Code. For the past 28 years I have been employed as an
    attorney by the City and County of San Francisco, the last 25 of which
    have been spent establishing and enforcing support obligations in the
    Family Support Bureau of the Office of the District Attorney. At the
    end of last year the Bureau became the Department of Child Support
    Services, an independent county agency operated in compliance with the
    federal child support program under Title IV-D of the Social Security
    Act. For the last 13 years I have specialized in the collection of
    support during bankruptcy and have taught this subject to attorneys
    both in California and nationally. I have litigated bankruptcy support
    cases before the bankruptcy court, the district court, the Bankruptcy
    Appellate Panel, and the Ninth Circuit Court of Appeals.
        Three years ago I drafted amendments to the Bankruptcy Code which
    were incorporated in bankruptcy reform legislation of the 105
    th and 106 th Congresses. The language of those
    amendments was subsequently refined in a collaborative effort between
    myself and other child support attorneys in coordination with Karen
    Cordry of the National Association of Attorneys General. These
    amendments were adopted pretty must verbatim in the bankruptcy reform
    conference reports of the 105 th and 106 th
    Congresses and in the current bill, S. 220. It is my opinion, and the
    opinion of every professional support collector with whom I have
    discussed the issue, that the support amendments contained in Sections
    211 through 219 of S. 220 will enhance substantially the enforcement of
    support obligations against debtors in bankruptcy. These enhancements
    will also result in a more efficient and economical use of attorney and
    court resources.
        The support amendments have been endorsed by many individuals and
    organizations, including three national associations whose members
    consist of persons whose primary professional duty in the enforcement
    of support obligations in the federal child support enforcement program
    These organizations include: the National Child Support Enforcement
    Association, the National Association of Attorneys General, and the
    National District Attorneys Association. In giving my testimony on this
    issue, I am authorized to speak on behalf of the California District
    Attorneys .Association and the California Family Support Council. The
    membership of these organizations carries out the federal child support
    enforcement program in California.
        During the past 13 years in which I have taught the subject of
    support enforcement during bankruptcy, I have appeared continuously in
    bankruptcy court, written a manual for support attorneys to use when
    dealing with bankruptcy cases filed by support debtors, counseled
    support attorneys in handling bankruptcy cases, and have reviewed
    virtually every court opinion written. on this subject since the
    enactment of the Bankruptcy code in 1978. Based on this experience, I
    developed what essentially became a ``wish list'' of amendments to the
    Bankruptcy Code aimed at facilitating support collection from
    bankruptcy debtors This wish list is reflected in sections 211-217 of
    S. 220. In this statement I will discuss not only how these amendments
    affect support debtors during bankruptcy, but what they mean in the
    larger context of support enforcement generally.
        Before discussing specific sections, I would like to comment on the
    overall erect of these amendments. I believe they achieve the
    following: (1) a reduction in the need to appear in bankruptcy court
    and the consequential reduction in the cost of litigation; (2) a
    reduction in the current conflicts in law and policy between the
    Bankruptcy Code and the federal child support enforcement program
    [Social Security Act, Title IV-D]; (3) reasonable insurance that
    significant support enforcement mechanisms will not be interrupted by
    the bankruptcy process; and (4) a clear recognition of the policy that
    all generally recognized support debts are entitled to a preferential
    treatment in bankruptcy.
        The most important amendment is found in section 214 which removes
    several significant collection remedies from the effect of the
    automatic stay Of these, the most valuable by far, is a provision
    allowing the continued operation of an earnings withholding order as
    defined in the Social Security Act. [42 U.S.C. 666(b)]. Since state
    courts or administrative agencies have already determined the
    appropriate level of support and arrearage payment, the removal of
    withholding orders from the reach of the stay will require a support
    debtor to design his or her bankruptcy plan to accommodate support
    debts--the most serious and primary of all financial obligations. Under
    current bankruptcy law the reverse is true. The support creditor is
    often forced to take a back seat to other ordinary creditors when a
    support arrearage is paid pursuant to a bankruptcy plan.
        The importance of this amendment cannot be, underestimated. Federal
    law requires all support to be paid by employees through wage
    withholding orders. Such orders account for the lion's share of support
    collection receipts.\1\ tinder current bankruptcy law, when a debtor
    files for protection under Chapters 12 or 13, the collection of ever.
    ongoing support is stayed. The economic detriment to a debtor's family,
    which is not receiving public assistance, can be devastating Surely
    sound public policy must recognize that there are some obligations
    which must be met, even when a debtor should be relieved from
    obligations to general debtors. Of these, none can be greater than the
    payment of support needed for the health and welfare of the debtor's
    family.
    ---------------------------------------------------------------------------
        \1\ According to the Committee on Ways and Means. U.S. House of
    Representatives, 1998 Green Book, p. 572, 56% of support collected in
    the last reported year (1996) was collected through the wage
    withholding process.
    ---------------------------------------------------------------------------
        All too often a domestic court may reduce the current support order
    to accommodate the payment of arrears In such cases the total amount of
    payment through the assignment order may not only be helpful, but
    crucial, in providing for the daily needs of the debtor's spouse,
    former spouse, and children.
        This amendment, therefore, not only insures that the payment of
    support by wage earners will not be interrupted. by bankruptcy, it will
    also avoid the need to entangle the debtor's family in the bankruptcy
    process. Under current bankruptcy law the support creditors would have
    to seek relief from the automatic stay in bankruptcy court in order to
    re-institute the earnings withholding order and file a claim to collect
    arrearage payments from the bankruptcy trustee. And even if these
    procedures were preformed by an attorney in the child support program,
    delays in support enforcement would be inevitable and the outcome
    unsure.
        In addition to the removal of the earnings withholding process from
    the automatic stay, other federally mandated collection processes would
    be exempt under section 214 of the bill. These include the interception
    of the debtor's income tax refunds to pay support arrears: the license
    revocation procedures for those debtors who are not paying support; the
    continued enforcement of medical support obligations; and the continued
    reporting of support delinquencies to credit reporting agencies \2\
    ---------------------------------------------------------------------------
        \2\ In addition to the exclusion of enforcement remedies from the
    reach of the automatic, other family law issues are excluded from the
    stay, specifically (I) litigation of child custody and visitation
    issues, and (2) issues relating to domestic violence.
    ---------------------------------------------------------------------------
        Perhaps the second most important and useful amendment to the Code
    is found in section 213 of the bill which prevents a debtor from
    obtaining confirmation of a bankruptcy plan and a subsequent discharge
    if that debtor has not made full payment of all support first becoming
    due after the petition date. This section is significant for two
    reasons. First it will prevent a support debtor from paying other debts
    at the expense of familial obligations. And second, this provision is
    self executing. Neither the support creditor, an attorney for the
    creditor, nor a public attorney will have to seek enforcement of this
    provision in bankruptcy court.
        In addition this section allows a support creditor to seek
    dismissal of an ongoing plan at any time the debtor fails to pay the
    on-going support payment These provisions working together, provide
    crucial check points a three stages of the bankruptcy process. At the
    earlier confirmation stage, the support debtor will be reminded that
    payment of all important current support obligation is a critical step
    in getting approval of a bankruptcy plan as well as the lesson that
    payment of this obligation is essential to financial rehabilitation. It
    will set an example for the debtor early in the bankruptcy process.
    Further, since the goal of the debtor is to obtain a discharge of debt,
    this debtor will, at the outset of his case, understand that the
    failure to meet continuing support obligations will also doom the
    prospects of discharge at the end of the bankruptcy process. Finally,
    the creditor will have the option to seek a dismissal of the case
    during the process if the support debtor ceases to boner payment of on-
    going support obligations.
        Section 211 of S. 220 provides a definition of support obligations.
    This definition is then incorporated in other areas of the Code The
    purpose of this definitional addition is to streamline the provisions
    of the Code dealing with support debts and to give all debts generally
    recognized as deriving from support obligations similar treatment in
    the Code. This provision will not necessarily change current law, but
    it will resolve many conflicting bankruptcy decisions which turn upon
    very technical interpretations of what a support debt is and what it
    might not be. Most significantly, highly arcane decisions concerning
    the dischargeability of such debts will be made moot and litigation
    over these issues minimized. Finally, support debts of all kinds will
    be subject to the same dischargeability, lien avoidance, and preference
    recovery rules
        Under current law only a lien securing unassigned support is
    exempted from statutory lien avoidance procedures. With the new
    definition of support in section 211, all support obligations will be
    excepted from lien avoidance procedures. Not only will this change
    protect the tax payer when the debt is assigned to the government, it
    may also benefit the support creditor/parent who assigned the debt if
    the debt becomes unassigned under the new assignment rules established
    in the 1996 welfare reform legislation (the Personal Responsibility and
    Work Opportunity Reconciliation Act of 1996 or PRWORAI. For example,
    under current bankruptcy law if a support debtor files a Chapter 7 case
    when his support obligation has been assigned to the government under
    the Social Security Act, the bankruptcy court may rule that a lien
    securing this debt impaired the debtor's homestead exemption and then
    void it. The debtor would then. be free to sell the property. If this
    property were the only known asset of the debtor, the debt would become
    uncollectible If tie support creditor then ceased receiving public
    assistance, that debt, now unassigned world likewise be uncollectible.
    However, under section 216 of S. 220, the lien would not be removed and
    the support debt would remain secured and thus collectible.
        Under current bankruptcy law if the debtor pays support during the
    90 day period prior to filing a bankruptcy petition, the bankruptcy
    trustee cannot recover this payment for the benefit of the bankruptcy
    estate unless the debt is assigned Under section 217 of S. 220 the
    trustee would not be able to recover any support paid by the support
    debtor during the preference period This rule significantly benefits
    the debtor because this debt is not dischargeable and would otherwise
    remain owing if recovered for the estate
        No more significant statement of public policy has been made
    concerning the primacy of the payment of support debts than that found
    in section 212 of S. 220. Here the Code provides child support with the
    first priority for payment of unsecured claims. This section is divided
    into two sub-priorities so that distribution within the child support
    priority will go first to the family of the debtor, then to the
    government after the family has been paid, if the support has been
    assigned.
        When these proposed amendments are considered, it is not difficult
    to see why support enforcement professionals so strongly endorse them
    and are so thankful to the sponsors of this legislation for their
    inclusion. Many of these amendments literally remove bankruptcy as an
    obstacle to support enforcement, and they do so in a self-executing
    manner. Consequently, no claims or stay litigation is required to
    continue the collection of a support debt when an earnings withholding
    order is feasible; no confirmation litigation is be needed when the
    debtor is not paying a postpetition preconfirmation support order; and
    no dismissal or stay relief litigation would be required to insure
    postpetition support was paid before a discharge could be granted.
        Avoiding bankruptcy court is important to support creditors and
    their attorneys. Even when a support creditor is financially able to
    hire a bankruptcy attorney, litigation of support issues in bankruptcy
    is likely to eat up large chunks of recoverable support. Most support
    creditors would be totally lost if required to navigate through the
    complex set of rules and procedures to seek relief in bankruptcy court
    without counsel And government support attorneys are generally ill
    equipped to litigate bankruptcy issues and do not have the luxury of
    referring the case to bankruptcy specialists. After all, it should be
    remembered that the law of bankruptcy is a speciality with its own bar,
    judges, code, rules, procedures and, indeed, its own language.
        Some criticism has been raised that bankruptcy reform would be
    detrimental to women and children because it would pit them against
    banks and credit card companies for collection of nondischarged credit
    card debt. Although this argument has some surface logic, no support
    collection professional that I know believes this concern to be
    serious. Of course, if support and credit card creditors were playing
    on a level field, banks with superior resources might have an advantage
    However, nonbankruptcy law has so tilted the field in favor of support
    creditors that competition with financial institutions for the
    collection of post-discharge debts presents no problems for support
    collectors.
        In the first place the ubiquitous earnings withholding process for
    support collection absolutely trumps any financial institution's
    attempt to collect this debt from the debtor's wages or salary since
    withholding orders have priority, no matter when issued or served. In
    most cases if the support collection was 25% or more of the debtor's
    wages, the Consumer Credit Protection Act would lock out the financial
    institution from collection of its debt from the debtor's wages. Thus,
    with respect to creditors of wage earners, there is no conceivable way
    that the existence of postpetition credit card debt, dischargeable
    under current law, would adversely affect the collection of support.
        Even when the debtor is not a wage earner, support creditors have
    numerous and highly significant advantages over other creditors While
    this list is certainly not exhaustive, support creditors have the
    following remedies not possessed by other creditors, and certainly not
    credit card or other financial creditors: (a) support debts are already
    reduced to judgments and have the advantages of court process to
    collect judgments; (b) tax intercept collection; (c) interception of
    unemployment benefits/worker compensation benefits; (d) free or low
    cost collection services by the government; (e) license revocation for
    nonpayment of support; (t) free or low cost interstate collection,
    including interstate wage withholding and interstate real property
    liens; (g) criminal prosecution or contempt actions; (h) no avoidance
    of liens securing the support debt; (i) federal collection and
    prosecution for support debts; (j) denial of passports; (k) collection
    from otherwise protected sources: ERISA plans, trusts, and federal
    remuneration
        To say that these advantageous remedies will necessarily result in
    the collection of support is not possible. Many support debtors are
    actually quite skillful evaders of support obligations. These same
    people will probably be just as adept at avoiding collectors from
    financial institutions. The point to be made, however, is not that
    support debts will necessarily be collected after bankruptcy, but that
    the collection of support debt is in no way hampered simply because
    credit card debt has survived bankruptcy and financial institutions are
    going to attempt to collect it.
        Some have argued that after bankruptcy a support debtor will be
    inclined to pay credit card debt to retain a credit card and not pay
    support Of course, this argument assumes that after bankruptcy the
    debtor wilt find an institution willing to extend credit Even if one
    did, it seems unlikely that retention of a credit card would be more
    important than retention of a driver's license, staying out of jail, or
    keeping a passport.
        The bottom line as I see it in analyzing S. 220 with respect to its
    effect on the collection of support is to note that the advantages
    explicit in the bill far outweigh any speculative concerns that some
    debtors might not pay support if they are left with credit card debt
    after bankruptcy What concerns support collection professionals the
    most in carrying out their duties is not competition with financial
    institutions outside bankruptcy, but competition with other general
    creditors, including financial institutions, during bankruptcy. S. 220
    readjusts the relative strength of support creditors during the
    bankruptcy process, giving them meaningful, even crucial, assistance
    The support provisions of this bill certainly justify the praise given
    them by virtually all of the national public child support collection
    organizations in this country.

                                    Summary

        The support amendments contained in Sections 211 through 219 of S.
    220 will enhance substantially the enforcement of support obligations
    against debtors in bankruptcy. The overall effect of these amendments
    will achieve the following: a reduction in the need to appear in
    bankruptcy court and the consequential reduction in the cost of
    litigation; a reduction in the current conflicts in law and policy
    between the Bankruptcy Code and the federal child support enforcement
    program, reasonable insurance that significant support enforcement
    mechanisms will not be interrupted by the bankruptcy process; and a
    clear recognition of the policy that all generally recognized support
    debts are entitled to a preferential treatment in bankruptcy.
        This bill allows the continued operation of an earnings withholding
    order, thus insuring that the payment of support by wage earners will
    not be interrupted by bankruptcy. Other federally mandated collection
    processes would also be exempt.
        The bill prevents a debtor from obtaining confirmation of a
    bankruptcy plan and a subsequent discharge if that debtor stops payment
    of support. It provides a comprehensive definition of support and
    treats such a debt preferentially throughout the code, including giving
    such a dept the first priority in payment.
        The support provisions of this bill certainly justify the praise
    given them by virtually all of the national public child support
    collection organizations in this country. It streamlines the bankruptcy
    process for support creditors by removing the need for their
    participation in it.

        Senator Sessions. Mr. Williamson is an attorney in Madison,
    Wisconsin, and former Chair of the Bankruptcy Review
    Commission.
        Mr. Williamson?

    STATEMENT OF BRADY C. WILLIAMSON, LAFOLLETT, GODFREY AND KAHN,
       AND FORMER CHAIR, NATIONAL BANKRUPTCY REVIEW COMMISSION,
                           MADISON, WISCONSIN

        Mr. Williamson. Thank you, Mr. Chairman. Among other
    things, I am an appellate lawyer and I don't make it a practice
    to disagree with court of appeals judges, at least publicly,
    but I think it is necessary here, if I might start with a few
    seconds responding to Judge Becker.
        The National Bankruptcy Review Commission unanimously
    recommended the elimination of the two-tiered bankruptcy
    appellate system, and that recommendation is embodied in
    Section 1215 of the pending legislation. Section 1215 will save
    time, it will save an extraordinary amount of money in legal
    fees and costs, and it will improve the development of a law,
    because right now a bankruptcy court has no precedential
    influence beyond its own courtroom. A district court has no
    precedential influence beyond its own courtroom. So we have
    literally thousands and thousands of bankruptcy appeals that
    only matter to the parties, that do not help develop the law.
        While this provision would have a short-term impact on the
    caseload in the court of appeals, it would have a salutary
    impact on the court caseload in the district courts which are
    dealing everyday with drug cases and major civil litigation.
    This is a provision in the bill that should be adopted, has
    been adopted by the Congress, and I can't recommend it more
    forcefully.
        Judge Becker did make a point I want to agree with, and
    that is that an appeal to the U.S. Court of Appeals, at least
    for a practicing lawyer, is a little bit more formidable than
    an appeal to a district court judge. It does take more time, it
    does take more effort. Because of that, I think we will see
    fewer appeals. Litigants in bankruptcy cases will be less
    likely to appeal directly to the U.S. Court of Appeals than
    they will be to the district court. The single most important
    reason for this change is that it will improve the
    jurisprudential chaos that now rules in the bankruptcy courts.
        Now, on a broader point, this will be the fourth time in a
    hundred years that this Congress has undertaken major
    bankruptcy legislation--1898; 1938, in the wake of the
    Depression; and, of course, 1978. Yet, this legislation may
    have a more comprehensive effect, a more dramatic effect on
    consumer bankruptcies and on business bankruptcies, which is
    the focus of my testimony this morning, than those previous
    Congressional efforts to improve the bankruptcy system.
        There is relatively little doubt that bankruptcy
    legislation will be adopted by both Houses and that it will be
    signed into law. And it is that likelihood that leads me to
    urge this committee to review very carefully the changes that
    are being proposed, not to stop the bill, but to ensure that it
    reflects economic reality and that it actually accomplishes the
    goals its proponents espouse.
        Senator Biden. Brady, have you forgotten about Senator
    Kennedy?
        Mr. Williamson. I have not forgotten about Senator Kennedy.
    In fact, I spoke about this very matter with Senator Kennedy in
    Eau Claire, Wisconsin, not long ago.
        Senator Biden. I am sure you did.
        Mr. Williamson. But it is precisely, Senator Biden, because
    this legislation may well be headed for enactment that it
    really requires this committee's careful attention. This
    legislation is not ready for the floor, and it is not ready for
    two overarching reasons.
        One is the economy is literally changing around us. This
    morning's Washington Post: ``Verizon Lays Off 10,000 People.''
    Saturday's Milwaukee Journal Sentinel: ``Record Layoffs Hit
    State.'' In December alone, more than 140 businesses in
    Wisconsin laid off 50 or more employees. That is the fifth
    highest in the country. Whatever the theoretical economists may
    tell us about what is happening in the economy, these layoffs
    are a harsh financial reality for American families, and for
    many they will be a disaster.
        But there is also grave concern about the effect of the
    economy and this legislation on small business layoffs and the
    small business bankruptcies that may follow. We all know about
    the major bankruptcies that have occurred just in the last 30
    days--a major airline. Health care insolvencies are increasing
    rapidly. In Senator Feinstein's State, we have had utilities
    threaten to file for bankruptcy.
        All of this makes a critical point. The legislation about
    which Senator Hatch spoke at the outset, how it passed the
    Congress in 1998 and last session, that happened at a time when
    we were hitting our economic prosperity. But times have
    changed, and that requires this committee to look more
    carefully, as President Bush suggested, at this legislation.
        Let me focus very quickly, Mr. Chairman, since I began
    with--
        Senator Sessions. This is not the court of appeals. You
    don't disappear into a pit if you go over the light, but we do
    try to follow the light as much as possible.
        Mr. Williamson. Thank you. They do tell the story about the
    Chief Justice of the United States cutting off a lawyer in the
    middle of the word ``is'' when his time was up.
        Senator Biden. Wasn't there another guy who had trouble
    with that word?
        [Laughter.]
        Senator Biden. That seems to be a complicated word.
        Mr. Williamson. You know, Senator Biden, as that anecdote
    escaped my lips, I did suspect somebody might make a reference
    to it.
        Senator Biden. I just wondered.
        Mr. Williamson. The bill covers more than 300 pages. It has
    almost 200 sections. With respect to its impact on small
    business and business generally, I want to point out three
    particular provisions that have not gotten a great deal of
    attention--Section 912 dealing with asset-based securitization,
    Section 708 which gives creditors the ability to argue that a
    corporation's obligations to them are not dischargeable.
        Now, this notion of non-dischargeability is common in
    consumer bankruptcy, but it introduces a major new element into
    business bankruptcy that will permit a single creditor--we are
    talking about corporate bankruptcy--to allege that the debtor
    corporation has issued false and misleading financial
    statements, and thereby in effect to stop the bankruptcy, to
    stop the reorganization. So this concept of non-
    dischargeability in corporate bankruptcies ought to receive
    serious examination by the committee.
        Now, you can imagine what impact this would have on a small
    plastics company that employed 50 people in Mobile, Alabama.
    But imagine what this provision might do to a major
    reorganization, especially in an industry that produces a
    product or a service that is not quite so mundane as plastics--
    tobacco, firearms, HMOs, and in California utilities.
        Senator Sessions. Mr. Williamson, I appreciate your
    comments and I know, serving on the commission, you have a lot
    of insight. We will make that a part of the record. If you have
    any other things you would like to add to it, what you have
    already said, we would be glad to hear it. However, in the
    interest of time, it would be good if you could wrap up
    shortly.
        Mr. Williamson. I do, Mr. Chairman, and I will do it on an
    issue that I know that you agree with me on, and that is the
    need for this legislation to contain the original Sessions-Kohl
    amendment. That amendment, of course, eliminates one of the
    grossest abuses in bankruptcy law, which is the unlimited
    homestead exemption. It passed this body 76-22, with bipartisan
    support.
        There has been widely reported in the media another example
    of a citizen in the State of Florida using the unlimited
    homestead exemption to cheat his creditors. The bankruptcy law
    in this country in many ways represents our values, and it
    cannot be one of our values that people who are able to use $3
    million homes are able to cheat their creditors.
        Thank you, Mr. Chairman.
        Senator Sessions. Thank you very much, and I share that
    view. It is not far from Mobile to Pensacola. It is a shame
    that you can simply sell your house in Mobile and buy one only
    50 miles away in Pensacola without having to give that house up
    after filing for bankruptcy.
        Mr. Williamson. Although I don't know why, Mr. Chairman,
    anyone would want to move from Mobile to Pensacola.
        Senator Sessions. I do not either.
        [Laughter.]
        Senator Feinstein. Mr. Chairman, he said three sections,
    but he only named two, 912 and 708. What is the third one?
        Mr. Williamson. Senator, the third would be the sections
    dealing with small business bankruptcies. There are a package
    of proposals to accelerate the process for small business
    bankruptcies. The difficulty with it, I think, is that the
    definition of a small business bankruptcy is a corporation that
    has less than $3 million in liabilities. And in some States--
    Alabama, probably not Delaware or California, but Wisconsin for
    certain--that would be 90 percent of all bankruptcies. So it is
    not that we are doing a special provision for smaller
    bankruptcies. In most States, we are doing a provision that is
    going to affect all bankruptcies.
        Senator Sessions. As you know, on the homestead we did make
    progress with this legislation. We were up against a number of
    States whose constitutional provisions were being overridden by
    this legislation and Senators from those States were quite
    tenacious in protecting their State's law. It was not an easy
    task, but in spite of those Senators' tenacity we were able to
    craft this much-improved alternative.
        [The prepared statement of Mr. Williamson follows:]

      Statement of Brady C. Williamson, LaFollett, Godfrey and Kahn, and
    Former Chair, National Bankruptcy Review Commission, Madison, Wisconsin

        Three times in the last 100 years, Congress has passed major
    legislation exercising its Constitutional responsibility to adopt
    ``uniform'' laws of bankruptcy. The Bankruptcy Act of 1898 gave the
    country its first comprehensive system. The Chandler Act of 1938,
    adopted in the wake of the Depression, gave American families the
    choice they still have today--between liquidation in Chapter 7 and a
    multi-year repayment plan in Chapter 13. And, of course, the
    legislation adopted in 1978 recreated the bankruptcy code that (amended
    in 1984 and 1994) today protects creditors and consumer and business
    debtors.
        The legislation pending before the Senate Judiciary Committee is no
    less comprehensive than the three major ``reforms'' of the last
    century--indeed, in many ways, it is more comprehensive. And it will be
    more dramatic in its impact on creditors, on consumers with unbearable
    debt, and on failing corporations. This legislation, in different
    forms, passed both the Senate and the House in 1998 but failed when
    there was no agreement on a conference report. This legislation, as a
    conference report, passed both the Senate and the House last year but
    failed when the President declined to sign it. Now, it is again before
    the Congress: S. 220 here and H.R. 333 in the other body.
        There already have been hearings, the bill's proponents maintain,
    and the Congress already has expressed bipartisan support for the
    legislation. With a new President, they contend, the bill is ``ready''
    for final passage.
        It is not.
        There is relatively little doubt that new bankruptcy legislation
    will be enacted this year. Yet the legislation before the Committee
    should not be sent to the floor of the Senate, let alone adopted there
    wholesale, without significant improvements. In fact, the likelihood
    that the bankruptcy law will be changed this year should lead the
    Committee to review very carefully the pending legislation--not to stop
    it, but to ensure that it reflects economic reality and that the bill
    actually accomplishes the goals its proponents espouse.
        The bill is not ``ready'' for two overarching reasons. First, the
    significant changes occurring today in the American economy are not
    reflected in the bill. Second, notwithstanding the previous
    consideration of the bill, it carries provisions that are self-
    defeating and, in particular, the business bankruptcy sections of the
    legislation will have significant consequences that have not received
    the attention they deserve. Some of the most troubling provisions were
    added to the bill late last year without the benefit of any
    consideration at all in either body.

                                Economic Change

        Last Saturday, the Milwaukee Journal Sentinel carried this
    headline: ``Record layoffs hit state.'' In December alone, more than
    140 state businesses laid off 50 or more employees, the fifth highest
    in the country. There no doubt have been similar news stories in Utah
    and Vermont and New York and many other states because the dramatic
    increase in layoffs is a national trend.
        Even with relatively high employment, businesses are laying off
    American workers in record numbers. Most find jobs elsewhere--although
    often only after a period of no income--frequently at lower wages and
    benefits. Bankruptcy has become a pace to stop for those on their way
    down the economic ladder who want to climb back. Two-thirds of the
    debtors is bankruptcy report a significant period of unemployment
    preceding their filings. For single-parent households, even a short
    period of unemployment can be devastating. Married couples fare
    slightly better, but they do not escape employment problems: more than
    half of the married couples in bankruptcy reported both the husband and
    the wife unemployed preceding the bankruptcy filing.
        Whatever the theoretical economists may conclude, the harsh reality
    of these layoffs means financial disaster for some American families.
    Given the falling national savings rate and the thin financial margin
    familiar to many families, the result surely will be more consumer
    bankruptcies.
        There is also a harsh reality in these statistics for American
    business. The layoffs at AOL Time Warner, Lucent Technologies,
    DaimlerChrysler, General Electric and other major companies add up, The
    Chicago Tribune has just reported, to a ``corporate carnage'' that is
    overwhelming. Yet small business layoffs have a far greater cumulative
    effect on the economy, and these less-publicized layoffs may well
    precede a sharp rise in small business bankruptcies. Unlike consumer
    bankruptcies, which have decreased for months, business bankruptcies
    have been increasing, and they will only continue to increase.
        While the bankruptcy courts are flooded with laid off workers, the
    entrepreneur who has struggled to run a small business is also at grave
    risk. Creditors will not lend to small businesses without the personal
    guarantee of the owners. The legal structure that protects large
    corporations offers no debt relief for the owner of a failing small
    business. Small business owners are three times more likely to file for
    bankruptcy than their wage-earning counterparts.
        Business bankruptcies is some areas--steel and heavy manufacturing,
    the motion picture theater industry, and the dot-coms so vibrant in the
    past--already have reached alarming levels. Another major airline just
    filed for Chapter 11. Sunbeam went into Chapter 11 this week. Health
    care insolvencies, particularly failing HMOs, continue to increase and,
    while the pending legislation addresses limited aspects of that trend
    in the health care industry, it does not address more fundamental
    questions--whether federal or state law has precedence, for example.
    Nor does it address the loss of health care coverage for consumers
    already pushed to their financial limit.
        And all of this makes this critical first point. This legislation
    was largely drafted at a time when this country's economy was at the
    height of its prosperity--when business and consumer bankruptcies were
    decreasing. That prosperity was the prism through which the Congress
    and legislation requires thoughtful analysis in today's light.
        President Bush, in an interview on Monday, expressed that very
    concern. The Milwaukee Journal Sentinel reporter who took part in that
    interview quoted his complete response to a question about the national
    debt:
    ``It's important to pay down the debt at the federal level,'' Bush
            said. ``No question about it, and our plan does that. The debt
            I'm most concerned about, however, is the consumer debt, credit
            care debt, the debt that burdens thousands of Americans. And
            we'd better be really careful about not recognizing the
            combination of an economic slowdown, high energy prices and
            debt overhand--what that means to working people.''
        The President said that it was time to be ``really careful,'' and
    so it is with this legislation.
        Nowehere, perhaps, is the light of today's economy colder or
    harsher than in California, where about one of every ten consumer
    bankruptcies in this country are filed. There, a new problem has
    arisen: major utilities already have threatened to file for
    bankruptcy--leaving the state and its ratepayers and the financial
    institutions with millions of dollars at risk all potential parties in
    a single bankruptcy proceeding before a single federal judge.
        Has anyone (besides the legal counsel for the utilities and their
    creditors) closely reviewed the bankruptcy code to determine the effect
    a utility filing might have? Has anyone (including the legal counsel
    for the utilities and their creditors) closely reviewed this
    legislation to determine it effect on a utility filing? Everyone has a
    stake in these questions, including the pension funds and their members
    heavily invested in utility stock.
        Five years ago, the U.S. Supreme Court in Seminole Tribe of Florida
    v. Florida, 517 U.S. 44 (1996), applied the Eleventh Amendment in a
    case about the regulation of gambling that has had significant
    repercussions in bankruptcies where state and local government are
    often creditors and claimants. If a major utility fails and files for
    bankruptcy, whether in California or in any other state, the tension
    between federal authority and state autonomy inherent in the
    Constitution will have to be resolved in very difficult circumstances.
        Over the last two years, the Congressional debate on this
    legislation has focused on its consumer provisions--the means test, for
    example, and the expanded priority status the bill affords some credit
    card debt. That attention was, and it remains, warranted, but the
    debate has obscured the sweeping effect of the legislation's Chapter 11
    proposals. And those proposals need the same kind of vigorous debate
    that has characterized the consumer provisions.
        In yet another development, not reflected in the legislation, the
    new Study on Financial Privacy and Bankruptcy requires prompt
    consideration. Its recommendations should be considered as part of this
    legislation to balance the important privacy interest of individual
    families and businesses using the bankruptcy system with the public
    interest in the open and efficient administration of that system. The
    bankruptcy process necessarily involves ``private'' financial
    information, and there can be abuse both in disclosing the information
    needlessly and in subject it to confidentiality too readily.

                              Legislative Problems

        Too much has happened since the bill was drafted to rush it to the
    floor of the Senate, especially at the beginning of a new Congress and
    especially with the country's economic direction uncertain. So, even if
    the legislation before the Committee were flawless, it still would
    require the attention of the Committee's members and staff. But the
    bill is far from flawless.
        Parts of the bill were drafted in haste in the closing days of the
    last session. Parts of the bill were not even considered by the Senate,
    let alone by this Committee, and parts of the bill stand in sharp
    contrast to the expressed will of the Senate. (This is not the bill
    that the Senate initially adopted last year.) While all of that may be
    understandable, it should not bind this Committee or the Senate to
    adopt the legislation unchanged. Many of the bill's problems arise not
    from what the drafters or the proponents intended but from the
    unintended consequences of those intentions.
        The bill covers more than 250 pages and has almost 200 sections.
    While there are more examples, three sufficiently illustrate the point
    that the bill requires additional consideration to prevent it from
    having harsh or unintended consequences.
        The bill section 912 declares that assets transferred as part of an
    ``asset based securitization,'' including accounts receivable, no
    longer will be property of the estate as defined in 11 U.S.C. Sec. 541.
    That means these assets no longer will be available to help the
    corporate debtor reorganize. This provisions has not been fully
    explored, yet it may well prove a significant obstacle to successful
    corporate reorganizations that will save jobs.
        Section 708 gives creditors the ability to argue that a
    corporation's obligations to them are non-dischargeable. While this
    concept, non-dischargeability, is common in consumer bankruptcy, it has
    not been part of the bankruptcy code since 1978. And for good reason.
    The old law permitted a single creditor to disrupt a corporate
    reorganization at the expense of other creditors. Indeed, a single
    creditor could prevent what almost everyone else desires: a
    reorganization that treats all creditors fairly and permits the
    corporation to reorganize for the benefit of all of its creditors,
    customers and employees.
        If the legislation becomes law, a single creditor can stop a
    potentially successful reorganization with the charge that a
    corporation deliberately made materially false financial statements.
    Whether or not the allegation can be provide, there organization
    process will slow to the point that it becomes impractical if not
    impossible for the corporation to reorganize. Creditors no longer will
    be united in interest nor dedicated to a reorganization that treats all
    of them fairly. Smaller businesses will be particularly susceptible to
    this kind of tactic but, just for the moment, consider it repercussions
    not on a plastics company employing 50 workers but on a company
    employing thousands of workers with a less mundane product or service--
    tobacco products, for example, or firearms or, more recently HMO's and
    utilities.
        There is no evidence that the provisions was added, late in the
    legislative process, to address a particular problem or to affect a
    particular industry. Indeed, there is no public evidence at all of the
    provision's genesis. The potential impact of this single provisions is
    enormous, however, and undeniable. Moreover, it collides with the
    provisions of the bill designed to more business bankruptcies through
    the judicial system more quickly. And those provisions, too, require
    additional attention from this Committee.
        The proposal provides accelerated deadlines for the ``small
    business debtor'' in bankruptcy, and this is the third--and, perhaps,
    best--example of the law of unintended consequences. In addition to its
    mandate for speed and new reporting requirements, these provisions
    require that the corporate debtor show within six months that, more
    likely than not, the court will confirm a plan of reorganization within
    a reasonable period of time. Many aspects of this part of the bill
    reflect current judicial scheduling practices. Yet the new requirements
    will have a dramatic impact on the number of successful reorganizations
    and, of no less significance, on the number of successful creditor-
    debtor negotiations that lead to successful reorganizations or orderly
    liquidations.
        The collective impact of these provisions, moreover, regardless of
    their individual merit, warrants reconsideration in light of their
    virtually universal application. The proposal defines the ``small
    business debtor'' as any business with less than $3 million in
    liabilities. In some states, that will include every Chapter 11 filed.
    Especially in light of current economic conditions, the Committee
    should ask whether the inflexibility in the proposed statutory
    deadlines for ``small business debtors'' makes sense. Four out of every
    five corporations that face a potential Chapter 11 today might well be
    subject to these ``special'' provisions.
        For these reasons, and others, the legislation has drawn opposition
    from creditor groups like the Commercial Law League and businesses
    concerned about its practical impact. The National Bankruptcy
    Conference, perhaps the pre-eminent independent group in the bankruptcy
    field, has reviewed last year's conference report and just released its
    analysis. Provision by provision, the NBC's report reviews the areas
    where the legislation makes good sense and, in contrast, the areas
    where it conflicts with itself or promises consequences neither desired
    nor imagined by its proponents.
        The Committee already has heard testimony about the need for
    careful consideration of this bill--both in light of changing economic
    conditions and the consequences, unintended in some instances, of the
    proposal. There is another reason the Committee needs to place its mark
    on the proposal: it ignores, in some key respects, the expressed wishes
    of the Senate. Important provisions adopted by the Senate have
    disappeared without a trace. There are several examples, but I'll
    conclude with just one.
        On November 10, 1999, the Senate by an overwhelming vote of 76 to
    22 adopted the Kohl-Sessions amendment limiting the homestead exemption
    to $200,000 nationwide. The legislation returned by the other body to
    the Senate late year, and the proposal now before this Committee, does
    not include that provisions. In its place, there is only a two-year
    limitation on a debtor's ability, in some states, to claim an unlimited
    homestead exemption. That provision invites the continuation of state-
    sanctioned abuse that cheats creditors out of their money and that
    cheats this country out of a law that is fair and balanced.
        Just last month, a Florida citizen, Paul Bilzerian used that
    state's unlimited homestead exemption to cheat his creditors. He filed
    for bankruptcy in 1991. He now has filed for bankruptcy again. Yet he
    retains his $5 million Florida home, which no one can touch--not the
    government and not his other creditors that, together, claim $200
    million in debt owed to them. Today, Mr. Bilzerian is in jail, but he
    stills owns that home with all of the equity in it. The provisions of
    this would not change that. By contrast, if the Kohl-Sessions amendment
    were part of this proposal and became law, he might still be in jail,
    but his creditors would not be paying part of his penalty.
        The National Bankruptcy Review Commission conducted 21 public
    hearings and meetings in 1996 and 1997, and it received more than 2,300
    submissions from people across the country interested in a fair and
    balanced bankruptcy system. A consistent theme emerged from that
    process. The bankruptcy system should reflect the values of this
    country. Most states, for example, offer a homestead exemption because,
    as a society, we place a high value on home ownership and the stability
    it can provide. Most states do not offer an unlimited homestead
    exemption, however, because creditors are entitled to be repaid if
    there is a legal basis for repayment and the debtor has the ability to
    repay. Unlike the insolvency systems in many countries, the law of this
    country recognizes the economic benefit of a second chance for
    businesses and for families: while we are altruistic, we also are
    pragmatic.
        These are parts of this bill that could be passed today--without
    strong objection and with obvious benefit. The family farm bankruptcy
    provisions in Chapter 12, the translational insolvency system
    established in the bill and the elimination of mandatory district court
    appeals provide the best, but not the only, examples. Other parts of
    the legislation require serious attention and amendment. While that
    might be done on the Senate floor, this Committee--particularly with
    the expertise of its members--is in the best position to make the
    changes and additions the bill requires and, in the process, to ensure
    that the bankruptcy system continues to represent this country's
    values.

        Senator Sessions. Mr. Beine, I understand you are with
    Shoreline Credit Union and have a unique perspective to share
    with us. I see that you are a credit union president.

      STATEMENT OF KENNETH H. BEINE, PRESIDENT, SHORELINE CREDIT
                      UNION, TWO RIVERS, WISCONSIN

        Mr. Beine. Thank you. Good morning, Chairman Hatch and
    other members of the committee. I am Kenneth Beine, President
    of Shoreline Credit Union in Two Rivers, Wisconsin, a $50
    million State-chartered, federally insured credit union. I
    appreciate the opportunity to be here to tell you about our
    concerns with bankruptcies and how they are impacting credit
    unions, and my credit union in particular.
        I am speaking on behalf of the Credit Union National
    Association, CUNA, which represents over 90 percent of the
    10,500 State and Federal credit unions nationwide. We are very
    pleased that the committee is holding today's hearing on
    bankruptcy abuse prevention legislation, S. 220.
        Credit unions have consistently had three top priorities
    for bankruptcy reform legislation: a needs-based formula,
    mandatory financial education, and maintenance of the ability
    of credit union members to voluntary reaffirm their debts.
        Last year's conference report, while a product of
    compromise, did a good job of balancing these issues. We
    strongly urge the 107th Congress to pass this compromise bill
    as soon as possible. Any further dilutions may result in this
    bill not addressing the real bankruptcy problems facing
    America's consumers.
        CUNA strongly supports the provisions in S. 220 that
    require a person contemplating bankruptcy to receive a briefing
    about available credit counseling and assistance in performing
    a budget analysis, and prohibits a Chapter 7 or 13 debtor from
    receiving a discharge if the debtor does not complete a course
    in personal financial management.
        Any sensible bankruptcy reform should include educational
    requirements to give debtors the tools they need to make wise
    decisions about filing for bankruptcy, and more importantly to
    succeed financially after bankruptcy. I am confident that early
    financial education would have helped some young adult members
    of Shoreline Credit Union to make different decisions than they
    did.
        In one case, a couple in their mid-20's decided they wanted
    a clean slate prior to getting married. They ran up credit card
    purchases, one pre-paid on an auto loan with us to have a
    cosigner released, the father. Both were employed full-time.
    They both then filed Chapter 7. My credit union's share of
    their version of financial planning was a write-off of
    approximately $3,000 in credit card debt, plus another couple
    hundred dollars in disposal of the auto.
        Credit unions strongly believe that reaffirmations are a
    benefit both to the credit union, which would avoid a loss, and
    to the member debtor, who by reaffirming with their credit
    union continues to have access to financial services and to
    reasonably priced credit.
        As not-for-profit financial cooperatives, losses to credit
    unions have a direct impact on the entire membership due to a
    potential increase in loan rates or a decrease in interest on
    savings accounts. CUNA is pleased that S. 220 preserves the
    ability of its members to voluntarily reaffirm their loans.
    CUNA could not support bankruptcy reform legislation that
    undermined the ability of credit unions and their members to
    work out reaffirmation agreements.
        Perhaps the best demonstration of the credit union
    movement's position that reaffirmation benefits both the member
    and the credit union comes from another real-life example. We
    had a middle-aged couple file for Chapter 7 in 1999 due to
    several medical problems and a loss of employment. They
    reaffirmed their automobile loans with Shoreline. Although not
    required to repay their credit card loans, they were adamant
    about doing so, and did so quite voluntarily after discharge.
    Needless to say, today they are members in good standing and
    only ask to be granted future loans.
        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 of their
    debts should be required to file a Chapter 13, rather than have
    all their debts erased in Chapter 7.
        Therefore, CUNA supports the needs-based provision that is
    contained in S. 220. This provision was a compromise developed
    out of the bankruptcy reform bill that received overwhelming
    support in the 106th Congress. The 106th Congress strongly
    supported needs-based bankruptcy, and CUNA supported these
    efforts. Today's hearing shows that the 107th Congress is
    continuing to move toward passage of bankruptcy abuse reform
    legislation, and we hope that bankruptcy reform will become law
    in the coming months.
        Thank you. I will be happy to answer any questions.
        Senator Sessions. Thank you very much.
        [The prepared statement and attachments of Mr. Beine
    follow:]

        Statement of Kenneth H. Beine, President, Shoreline Credit Union

        Kenneth Beine, president, Shoreline Credit Union, in Two Rivers,
    Wisconsin.
        Credit unions have consistently had three top priorities for
    bankruptcy reform legislation: a needs based formula; mandatory
    financial education; and maintaining the ability of credit union
    members to voluntarily reaffirm their debts.
        Last year's conference report, while a product of compromise, did a
    good job of balancing these issues. We strongly urge the
    107th Congress to pass this compromise bill as soon as
    possible.
        Any further dilutions may result in this bill not addressing the
    real bankruptcy problems facing America's consumers.
        The current near-record level of filings has occurred in the best
    of economic times.
        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.
        CUNTA supports the needs-based provision that is contained in S.
    220. This provision was a compromise developed out of the bankruptcy
    reform bills that received overwhelming support in the
    106 Congress.
        CUNTA strongly supports the provision in S. 220 that requires a
    person contemplating bankruptcy; to receive a briefing about available
    credit counseling and assistance in performing a budget analysis. We
    also strongly support the provision in this legislation that would
    prohibit the chapter 7 or 13 debtor from receiving a discharge if the
    debtor does not complete a course in personal financial management.
        Credit unions are not-for-profit financial cooperatives, therefore
    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 accounts.
        Credit unions strongly believe that reaffirmations are a benefit
    both to the credit union, which does not suffer a loss, and to the
    member/debtor, who by reaffirming with the credit union continues to
    have access to financial services and to reasonably priced credit.
        CUNTA could not support bankruptcy reform legislation if any
    amendment would undermine the ability of credit unions and their
    members to work out reaffirmation agreements.
        Good morning, Chairman Hatch and other members of the Committee. I
    am Kenneth Beine, president of Shoreline Credit Union in Two Rivers,
    Wisconsin, and I appreciate the opportunity to be here to tell you
    about our concerns with bankruptcies and how they are impacting credit
    unions--and my credit union in particular. I am speaking on behalf of
    the Credit Union National Association (CUNA), which represents over 90
    percent of the 10,500 state and federal credit unions nationwide.
        We are very pleased that the Committee is holding today's hearing
    on bankruptcy abuse prevention legislation, S. 220. Credit unions have
    consistently had three top priorities for bankruptcy reform
    legislation: a needs based formula, mandatory financial education, and
    maintaining the ability of credit union members to voluntarily reaffirm
    their debts. Last year's conference report, while a product of
    compromise, did a good job of balancing these issues. We strongly urge
    the 107th Congress to pass this compromise bill as soon as
    possible. Any further dilutions may result in this bill not addressing
    the real bankruptcy problems facing America's consumers.
        Shoreline is a $50 million state-chartered, federally insured
    credit union. We have a community-based charter, serving everyone who
    lives or works in Manitowoc County, and have almost 12,000 members.
    Currently we have $38 million in loans to our members-some $14 million
    in car loans, more than $16 million in home-secured loans, and almost
    one-half million in personal loans. In addition, we have issued about
    1,600 credit cards for another $1.5 million.
        Nationwide, non-business bankruptcy filings were almost 925,000 in
    the first nine months of 2000. While final full-year data is not yet
    available, the results from the first nine months suggest that full-
    year filings will exceed 1.2 million--very close to the 1.39 million
    record level of 1998. The 2000 total is likely to be about 4 percent
    lower than in 1999, but viewed in a broader historical context the
    results are disturbing: 1.2 million felines is double the national
    total in 1989 and four times higher than the total in 1984.
        Furthermore, the current near-record level of filings has occurred
    in the best of economic times. The U.S. economy grew at its fastest
    annual pace in 16 years in 2000 and unemployment rates hovered near 30-
    year lows throughout the year. As the economy slows, the number of
    filings will undoubtedly begin to climb. We expect overall filings to
    grow by roughly 5 percent in 2001, though some industry experts believe
    the increases ;will be even higher. In fact, according to SMR Research,
    bankruptcy filings are predicted to increase nationwide in 2001 by up
    to 20 percent to record heights for a variety of economic reasons.
        Credit unions are quite concerned about bankruptcies in the last
    few years because they have seen similar trends in the number of credit
    union members who file. Data from credit union call reports to the
    National Credit Union Administration (NCUA) suggest that roughly
    220,000 credit union member-borrowers will file in 2000. This figure is
    nearly 66 percent higher than the level of filings we witnessed just
    six years ago. In addition, CUNA estimates that over 40 percent of all
    credit union losses in 2000 will be bankruptcy-related, and those
    losses will total approximately $475 million.
        In Wisconsin we expect a 2.5 percent increase in the total number
    of credit union borrower bankruptcies in 2000. This translates to a
    total of roughly 4,150 filings.
        At Shoreline Credit Union, bankruptcy filings and losses have shown
    a steady increase since 1996. In 1996 we had 1 member who filed for
    bankruptcy; in 1997 we had 3; 1998 brought 5 filings; in 1999 it rose
    to 8; and we hit 10 in 2000. We had only one Chapter 13 bankruptcy
    filing during the same period. In our case over 60 percent of our
    chargeoffs are Chapter 7 filings.
        As the number of member bankruptcies has increased, so too have the
    dollar losses to my credit union. Our loss from the one bankruptcy in
    1996 was only $1,875, but in just one year the losses increased to
    $9,883--an increase of over 500 percent. As noted in the Fact Sheet
    attached to my testimony, our bankruptcy losses have doubled each of
    the past three years.
        Shoreline is a careful lender. We cannot afford to be otherwise. We
    do a good job with scrutinizing loan applications and carefully
    determining that the applicant is creditworthy before extending credit.
    We examine credit reports, verify income, and see that a reasonable
    debt-to-income ratio is maintained by the borrower. We even look at the
    applicant's disposable income to determine that the applicant can make
    the payments. We routinely monitor our credit cards and do not make
    across-the-board increases to the credit limit.
        In an effort to combat the number of bankruptcies at the credit
    union, Shoreline has tightened its credit policies. We now use
    bankruptcy predictors as part of the credit granting process. We have
    increased collateral requirements and opt to require a cosigner or co-
    maker on more loans than in the past. We do not reissue cards to those
    members who are overextended or have a poor repayment history with the
    credit union. We are also looking into introducing ``risk-based
    lending'' procedures in the near future.
        If a member is experiencing financial problems and mentions
    bankruptcy to us, our loan officers inform the member of the downside
    to such an action--damaged credit, loss of services--and let the member
    know that the credit union is there to help them through the financial
    difficulty. We attend all 341 hearings, where creditors are permitted
    to question the debtor, and encourage reaffirmations by offering
    debtor-friendly terms.

                   Credit Unions Support Financial Education

        Credit unions clearly recognize the value of financial counseling
    for their members. According to a recent CUNTA bankruptcy survey, 70
    percent 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. Shoreline
    regularly refers members who are experiencing financial difficulties to
    the local CCCS and have found the program to be beneficial for the
    members and their families. We also try to educate our members about
    alternatives to bankruptcy. We address credit issues in our newsletter
    and recently added a consumer credit session to our annual spring Home
    Buying Seminar series.
        CUNA strongly supports the provision in S. 220 that requires a
    person contemplating bankruptcy to receive a briefing about available
    credit counseling and assistance in performing a budget analysis. We
    also strongly support the provision in this legislation that would
    prohibit the Chapter 7 or 13 debtor from receiving a discharge if the
    debtor does not complete a course in personal financial management. Any
    sensible bankruptcy reform should include education requirements to
    give debtors the tools they need to make wise decisions about filing
    for bankruptcy and to succeed financially after bankruptcy.
        We also strongly support amendments to Section 527 that would
    require a debt relief agency providing bankruptcy assistance to analyze
    the benefits of different forms of debt relief with the debtor and to
    emphasize the need for full and accurate disclosure of assets,
    liabilities and income.
        CUNA is also an active supporter of the Youth Financial Education
    Act (H.R. 61) as introduced by Representatives David Dreier (R-CA) and
    Earl Pomeroy (D-ND). This legislation would authorize the U.S.
    Department of Education to provide grants to state educational agencies
    to develop and integrate youth financial education programs. It would
    also require these funds to be used to carry out programs for students
    in kindergarten through grade 12, based on the concept of achieving
    financial literacy through the teaching of personal financial
    management skills, and the basic principles involved with earning,
    spending, saving and investing.
        Credit unions recognize that financial education needs to be
    available early on and before consumers experience financial problems.
    We are pleased that a financial management training test program is
    included as part of S. 220, as well as the provision encouraging states
    to develop personal finance curricula for elementary and high schools.
        Financial education is a high priority for our national trade
    association. Last year, CUTA and the National Endowment for Financial
    Education (NEFE) entered into a partnership whereby credit union
    volunteers teach financial education in our nation's schools. It is
    based on the philosophy that discipline in managing money is best
    achieved if it is learned early in life. Many credit unions had already
    been working with their local schools, as well as devoting office space
    for consumer libraries that enable members to use a wide range of
    financial periodicals, manuals, and books to learn more about money
    management.
        Credit Unions have also differentiated themselves from other
    financial institutions in terms of giving college students credit
    cards. Many credit unions offer educational sessions on budgeting and
    using credit wisely on college and university campuses at various times
    during the year, including freshmen orientation and classes. Education
    is, the key in helping college students to avoid falling into debt at
    an age where their main focus is on obtaining a college degree. By
    educating these students, credit unions help them to positively handle
    their personal finances and to make them even more attractive
    candidates for credit products such as auto loans and mortgages later
    in life. Many colleges and universities welcome credit union
    representatives to teach these courses on their respective campuses and
    continually ask these representatives to come back year after year.
        I am confident that early financial education would have helped
    some young adult members of Shoreline Credit Union to make different
    decisions than they did. In one case, a couple in their mid-twenties
    decided that they wanted a ``clean slate'' prior to getting married.
    They ran up credit card purchases. One prepaid on an auto loan with us
    to have the cosigner released. (Both were employed full-time.) They
    both then filed for Chapter 7. My credit union's share of their version
    of financial planning was a write-off of almost $3,000 in credit card
    debt plus another couple of hundred dollars on the disposal of the
    auto.
        In another case, an expectant young mother who lived at home with
    her parents (with a stable part-time job and a small automobile loan at
    Shoreline) wanted to quit her job, but didn't want to ``burden her
    child with her credit problems,'' and asked if we would accept the car
    in full payment of the loan balance. My loan officer offered to rewrite
    the loan terms or suspend payments for several months and also informed
    her that she would still be responsible for the remaining balance on
    the loan after the sale of the car. She was not interested. She
    subsequently filed Chapter 7 and turned over the vehicle to us. We
    incurred about a $3,000 loss.
        Even with financial counseling, I recognize there are instances in
    which bankruptcy may be the only alternative for some members, the way
    for them to get a much needed ``fresh start.'' But I am not convinced
    that in either of these examples, bankruptcy was the right solution.

     Credit Unions Support Reaffirmations as a Benefit Both to the Member
                            and to the Credit Union

        Because we are not-for-profit financial cooperatives, 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
    accounts. Credit unions strongly believe that reaffirmations are a
    benefit both to the credit union, which does not suffer a loss, and to
    the member/debtor, who by reaffirming with the credit union continues
    to have access to financial services and to reasonably priced credit.
    CUNA could not support bankruptcy reform legislation if any amendment
    would undermine the ability of credit unions and their members to work
    out reaffirmation agreements.
        CUNA strongly supported the original House-passed bankruptcy bill
    in the 106th Congress, which did not materially amend the
    reaffirmation provisions. The bankruptcy bill that eventually passed by
    both houses and presented to the President in December, however,
    contained a lengthy disclosure statement for reaffirmations, which is
    contained in Section 203 of S. 220. The form is intended to assure that
    debtors entering into a reaffirmation agreement understand all aspects
    of signing that contract. CUNA appreciates the work of this committee,
    and the work of Senators Jeff Sessions (R-AL) and Jack Reed (D-RI), to
    recognize in the Section 203 language the unique relationships that
    credit unions have with their members.
        Shoreline, like most credit unions, has 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. Most credit union
    members take this seriously and continue to reaffirm on their credit
    union loans. However, we are beginning to see that some members do not
    care if they cause a loss and are denied service because they believe
    they can get credit elsewhere--even though it may be at a higher rate.
    We continue to see more surprise bankruptcies, where the member is a
    long-time member and is current on his or her debt at the time the
    bankruptcy petition is received.
        Perhaps the best defense of the credit union movement's position
    that reaffirmation benefits both the member and the credit union is to
    provide another real life example. We had a middle aged couple file for
    Chapter 7 in 1999 due to several medical problems and loss of
    employment. They reaffirmed their automobile loans with Shoreline.
    Although not required to repay their credit card loans, they were
    adamant about doing so, and did so quite voluntarily after discharge.
    Needless to say, today they are members in good standing, and need only
    ask to be granted future loans.

                  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 S. 220. This
    provision was a compromise developed out of the bankruptcy reform bills
    that received overwhelming support in the 106th Congress.
        Let me tell you about a case at my credit union that illustrates
    why needs-based bankruptcy and its provisions are needed. A young woman
    had an automobile loan from Shoreline Credit Union, with her mother as
    a co-signer. The daughter fell behind on the payments, and the mother
    offered to take over the loan completely if the credit union was
    willing to remove the daughter's name from the loan. Since the mother
    had a good credit and employment history, we agreed to do so. The woman
    filed for Chapter 7 before the due date of the first payment. We lost
    $6,000. We eventually learned that she had previously filed for
    bankruptcy and ``didn't want her daughter to have the same credit
    problems.''
        What this member did borders on fraud. People should not be able to
    use the bankruptcy code as a tool to avoid inconvenient obligations by
    transferring their debts to fellow consumers--my members--your
    constituents. This is wrong. This is abuse.
        You have the power to make it right.
        Again, let me say that I am pleased you are holding this hearing
    today. Credit unions are very anxious to see Congress enact meaningful
    bankruptcy reform and believe that a needs-based bankruptcy system
    presents the best opportunity to achieve this important public policy
    goal. The 106th Congress strongly supported needs-based
    bankruptcy, and CUNA supported these efforts. These hearings that are
    being held on S. 220 show that the 107th Congress is
    continuing to move toward passage of bankruptcy abuse reform
    legislation, and we hope that bankruptcy reform will become law in the
    coming months.
        Thank you, and I will be happy to answer any questions.

                                   FACT SHEET

           Total Assets:          $50.5 million (data as of December 2000)
                Members:                                            11,700
                  Total Loans:                                38.0 million

                            Losses Due to Bankruptcy:

              2000           522,375
              1999           534,577
              1998            15,309
              1997             9,883
              1996             1,875

        Number of
         Filings:          Chapter 7          Chapter 13          Total

              2000                 10                  0               10
              1999                  7                  1                8
              1998                  5                  0                5
              1997                  3                  0                3
              1996                  1                  0                1

                                                George R. Yacik
                                       SMR Research Corporation
                                                 Hackettstown, NJ 07890

    Bankruptcies Will Rise Strongly in 2001; Research Firm Predicts ``Flood
                                  of Filings''

        Hackettstown, NJ 09/21/00. Personal bankruptcy filings will begin
    to rise this year and are likely to grow by 10% to 20% in 2001, SMR
    Research Corp. forecast today.
        The new rising trend will mark the end of a mild bankruptcy down-
    cycle. Personal filings reached record levels in 1998, and then receded
    a bit in 1999. In the first two quarters of 2000, bankruptcies
    continued to decline, but only slightly.
        SMR said it expects data for the third quarter of 2000 to show a
    slight increase in personal filings from June levels, followed by a
    stronger increase in the fourth quarter. In 2001, there will be a flood
    of fillings, SMR predicted.
        Total filings in 2001 probably will set a new national record,
    exceeding those of the prior record year, 1998.
        SMR is a market research and predictive modeling firm that
    specializes in consumer financial subjects. SMR operates a database of
    bankruptcy filings and trends at the national, state, county, and metro
    area levels, updated quarterly and with a history back to 1989. SMR
    makes annual forecasts on national trends in personal bankruptcies.
        ``What we're now seeing is the impact of the new interest rate
    cycle, made a little worse by rising energy costs,'' declared SMR
    President Stuart A. Feldstein. Changes in long-term interest rates tend
    to impact the bankruptcy rate with about a 1-year lag, so rising rates
    in 1999 are now starting to hit home.
        In news releases in 1998 and '(999, SMR correctly forecast the
    bankruptcy decline in 1999, and also the impending increase in the
    second half of 2000.
        Interest rate movements are not the major cause of bankruptcy
    filings, but do modify the trend. Most of the central causes of
    bankruptcy have been growing worse since the mid-1980s, as has the
    overall bankruptcy filing rate. The main causes, highlighted in various
    SMR published studies, include:
     Growth in consumer debt relative to income caused by too much
            spending;
     A host of worsening socio-economic problems, including a long-
            time increase in the percent of adults who are divorced and
            increased numbers of Americans lacking any form of health
            insurance;
     A decline in household liquid savings as a ``rainy day''
            cushion--especially among middle class people;
     Increased advertising promotion of bankruptcy by lawyers, and
     Increased credit-risky behavior, such as casino gambling.
        In calendar 1998, total personal filings reached a record high at
    1.38 million, not counting U.S. territories or persons living overseas.
    This number was up from only 0.77 million as recently as 1994.
        In 1999, filings fell to 1.26 million. But for 12 months ended
    March 31, 2000, the number of filings was 1.24 million, showing that
    the declining trend of 1999 had nearly petered out.
        Based on its research, SMR believes that third quarter 2000 data
    will show the annualized filing rate to be up slightly from the second
    quarter of 2000. Fourth quarter 2000 numbers, when available, should
    show a well-developed upward bankruptcy trend.
        The danger for 2001 is that it will mirror events in 1996, when
    bankruptcies exploded by more than 28% from the prior year. In the
    interest rate cycle, 2000 looks similar to 1995 and 2001 may look a lot
    like 1996. Calendar 1995 was the last time a bankruptcy decline leveled
    off, and in 1996 the floodgates opened.
        ``This time around, the snap-back in 2001 could be powerful,''
    Feldstein said. ``Aside from interest rates, we now have fast-rising
    energy and electricity costs. These impact people in danger of
    bankruptcy more than they impact highly solvent consumers.''
        Indeed, SMR's bankruptcy forecast for 2001--a 10%-20% filings
    increase might have been even higher. However, the increase in interest
    rates in 1999 and 2000 hasn't been quite as severe as it was in the
    fast period of rising rates.
        Interest rate changes modify what otherwise has been a long-term
    increase in bankruptcies, SMR noted. Since 1985, bankruptcies have
    declined only in years following periods of sharply reduced long-term
    interest rates. They never declined as low as in previous troughs. And
    when rates rose again, bankruptcies increased sharply about one year
    later.
        SMR's forecast is based on the assumption that federal bankruptcy
    laws will be unchanged. Bills to toughen bankruptcy rules have been
    pending in Congress for the last few years, but haven't been passed.
    One reason is that when passage seemed most imminent in 1999, the
    number of filings fell. Some legislators hoped the problem in
    bankruptcies was about to fix itself.
        ``People who still think that will be in for a rude awakening very
    shortly,'' said SMR's Feldstein. ``Nothing has changed in the
    underlying causes of personal bankruptcy, nearly all of which continue
    to worsen.''
        If new and tougher bankruptcy legislation is passed in 2001, SMR's
    forecast would change.
        As currently written, the legislation would take effect six months
    after passage. During those six months, there likely would be an
    explosion of filings, as lawyers would advise their clients to make use
    of the existing law. Afterwards, the effect of new legislation would
    depend on its precise content.

        Senator Sessions. Dr. Manning, you are a Senior Research
    Fellow at the Institute of Higher Education, Law, and
    Governance at the University of Houston Law Center. We are glad
    to hear from you now.

        STATEMENT OF ROBERT D. MANNING, SENIOR RESEARCH FELLOW,
    INSTITUTE FOR HIGHER EDUCATION, LAW, AND GOVERNANCE, UNIVERSITY
                 OF HOUSTON LAW CENTER, HOUSTON, TEXAS

        Mr. Manning. Thank you, Mr. Chairman and members of the
    committee. I would like to share a somewhat different
    perspective as an economic sociologist and some of my research
    of the last 15 years of studying the impact of U.S. industrial
    restructuring on the standard of living of various groups in
    American society.
        Over the last 10 years, I have been particularly interested
    in the role of consumer credit in shaping the consumption
    decisions of Americans, as well as the role of retail banking
    in influencing the profound transformation of the financial
    services industry.
        I have studied the rise of the credit card industry, in
    general, and the emergence of financial services conglomerates
    such as Citigroup during the deregulation of the banking
    industry in 1980, and the results of my research are summarized
    in my new book Credit Card Nation.
        I think if we take a somewhat global perspective, I would
    like to use the analogy of the American economy as an athlete
    who uses steroids to temporarily exaggerate muscle mass and to
    boost physical strength.
        The U.S. economy, I believe, has been perilously inflated
    through the enormous increase of debt over the last two
    decades. Across all sectors of U.S. society, whether it is
    household, government or corporate, access to easy credit has
    led to pervasive dependence on debt.
        Like the myriad of medical maladies that eventually afflict
    steroid abusers, the negative long-term consequences of social
    debt have been neglected during the past decade of
    unprecedented economic growth. Indeed, what we have seen is a
    tremendous shift in emphasis from savings to debt, the
    emergence of products such as the City Sony credit card, the
    currency of fun, the emergence of young adults that refer to
    their credit card as yuppie food stamps.
        The economic expansion of the last decade, I do not believe
    was as strong as described by leading economic indicators due
    to bank lending policies that promoted inflated consumer
    expectations through easy access to high-cost consumer loans,
    whose interest rates far exceed the pace of household income
    growth.
        I think the point that I want to make very clear is it is
    not just debt, but it is the cost of this debt that is going to
    have such a profound impact on whether this economic slowdown
    will progress to a consumer-led recession. Indeed, similarly,
    the economic indicators do not necessarily imply a consumer-led
    recession if leading financial services conglomerates like
    Citigroup and Bank of America, J.P. Morgan and Chase do not
    overreact to the abrupt decline in national economic growth.
        The concern is that these financial service corporations
    may tighten their lending policies for small businesses, the
    primary generator of U.S. jobs, and the heavily indebted
    families that previously were considered acceptable credit
    risks. I can't overestimate what I think is the importance of
    this issue today.
        This may not only limit future levels of business
    investment and household consumption which could exacerbate a
    downward spiral in macroeconomic growth, but it could also
    force tens of thousands of financially distressed households
    into personal bankruptcy, due to unforeseen events. As the most
    comprehensive analysis of bankruptcy in the early 1980's shows,
    most bankruptcy filings are attributed to unforeseen events,
    such as job loss, health and medical expenses, and divorce,
    rather than simply excessive consumer spending patterns.
        Surprisingly, the consumer financial services industry has
    responded by reducing the fair share contributions to non-
    profit consumer credit counseling organizations and the need
    for financial education at the same time that the demand for
    these services are rapidly escalating.
        Like replacing small business loans with high-interest
    credit cards, the question is whether the financial service
    industry is truly committed to reducing the national rate of
    consumer bankruptcies by supporting institutionally responsible
    policies that balance the often unrealistic consumption desires
    of American households.
        The renewed efforts of the financial service industry to
    enact more stringent personal bankruptcy laws could lead
    bankers to exacerbate a national economic slowdown by forcing
    financially insolvent households to continue paying off a
    portion of their consumer debt years after filing for personal
    bankruptcy. This is not a propitious time for enacting such a
    painful and often devastating policy on some of America's most
    vulnerable households.
        The present legislative proposals tend to reflect a
    societal context of rapid economic growth rather than current
    realities of an unexpected economic slowdown. The U.S. economy
    needs greater stimulation through increased consumer demand
    rather than curtailing the future buying power of a large
    segment of the U.S. population.
        The industry's call for greater individual responsibility
    belies its disregard for its own traditional underwriting
    criteria. For the record, I have provided excerpts of the
    hundreds of interviews that I have conducted in terms of
    perceptions of easy access to credit. Indeed, what is striking
    about the credit card nation is that grandparents with stellar
    past job histories are often rejected for credit cards, while
    their grandchildren who have never had a full-time job are
    inundated with solicitations while in college. Similarly,
    recent college graduates may be rejected for credit cards after
    graduation, but as soon as they do graduate their low salaries
    lead them to a rejection for their credit card debt.
        A striking finding of my study of credit cards among
    students and their debt levels is that recent graduates of the
    late 1980's and early 1990's were more likely to assume most of
    their credit card debt while seeking gainful employment rather
    than when they were enrolled in college. Today, college
    students are routinely graduating with credit card debts of
    $5,000 to $15,000 before they even have a full-time job, plus
    their student loans, before they enter the job market.
        With the specter of a tight job market in the near future
    and the continued corporate promotion of inflated consumer
    expectations, it can be expected that the bankruptcy rate of
    recent college graduates will continue to soar, with
    potentially disastrous long-term consequences. Indeed, the
    fastest growing group of bankruptcy filers last year were
    individuals under 25 years old.
        The recent assumption of tremendous levels of consumer debt
    provided by financial service institutions that have routinely
    ignored their traditional underwriting criteria--and I
    especially refer to the marketing of credit cards to college
    students--requires accountability and financial responsibility
    from both sides, borrowers as well as lenders. Lending policies
    that routinely require the poor and heavily indebted to
    subsidize the low and even free cost of credit card loans to
    the affluent through escalating interest rates and penalty fees
    does not reflect an appropriate policy of shared individual as
    well as institutional responsibility.
        In fact, the increasing financial obligations of filers to
    their creditors after bankruptcy could encourage banks to
    continue extending easy credit to those least able to assume
    their financial responsibilities during a period of economic
    uncertainty and distress.
        Senator Sessions. Dr. Manning, the time has expired, if you
    will wrap up I would appreciate it.
        Mr. Manning. Banks and other financial institutions should
    share the pain as well as the gain associated with liberal
    extension of high-cost consumer credit. Otherwise, consumer
    lending policies of financial institutions may continue to
    discourage the promulgation of prudent and responsible
    underwriting policies. It is my hope that the final form of
    this legislation will promote personal responsibility as well
    as corporate accountability.
        Thank you.
        Senator Sessions. Thank you.
        [The prepared statement of Mr. Manning follows:]

     Statement of Robert D. Manning, Senior Research Fellow, Institute for
    Higher Education, Law and Governance, University of Houston Law Center,
                                 Houston, Texas

        I would like to thank the Committee for this opportunity to
    contribute to ongoing discussions over proposed legislative reforms of
    existing consumer bankruptcy law. As an economic sociologist, I have
    spent the last 15 years studying the impact of U.S. industrial
    restructuring on the standard of living of various groups in American
    society. Over the last 10 years, I have been particularly interested in
    the role of consumer credit in shaping the consumption decisions of
    Americans as well as the role of retail banking in influencing the
    profound transformation of the financial services industry. In regard
    to the former, my research includes indepth interviews and lengthy
    survey questionnaires with over 800 respondents. In terms of the
    latter, I have studied the rise of the credit card industry in general
    and the emergence of financial services conglomerates such as Citigroup
    during the de-regulation of the banking industry beginning in 1980. The
    results of this research are summarized in my new book, CREDIT CARD
    NATION: America's Dangerous Addiction to Consumer Credit and are
    updated on my web site at www.creditcardnation.com.

                     The Explosion of U.S. Consumer Credit:
           long-term performance enhancer or short-term miracle drug?

        Like an athlete who uses steroids to temporarily exaggerate muscle
    mass and to boost physical strength, the U.S. economy has been
    perilously inflated through the enormous increase of debt over the last
    two decades. Across all sectors of U.S. society (household, government,
    corporate), access to easy credit has led to a pervasive dependence on
    debt, much like American's addiction to low cost energy supplies. And,
    like the myriad of medical maladies that eventually afflict steroid
    abusers, the negative long-term consequences of societal debt have been
    neglected during the past decade of unprecedented U.S. economic growth.
        Most Americans would be surprised to learn that total consumer
    debt, including home mortgages (over $6.5 trillion), exceeds the
    cumulative U.S. national debt ($5.7) trillion. And, like the sharp
    increase in federal borrowing that augmented the modest growth of
    federal revenues over the last 20 years (U.S. national debt totaled
    ($940 billion in 1981), consumers have become increasingly dependent on
    unsecured or ``revolving'' credit (about $55 billion in 1981) to
    compensate for stagnant real wages, increasing employment disruptions,
    and higher costs for big ticket items such as automobiles, college
    tuition, insurance, housing, and health/medical costs. Although the
    finance charges on the national debt have grown substantially (from
    $292.5 billion in 1993 to $362.0 billion in 2000), accounting for over
    12 percent of the current federal budget, heavily indebted consumers
    are facing a more serious financial burden since their loans are more
    likely to be in the form of higher interest credit cards (average of
    over 18% APR) versus more modest Treasury bonds (5%-6%).
        At the same time that ``one-stop'' financial shopping has provided
    greater convenience and lower prices for a small minority of U.S.
    households, the most economically disadvantaged or financially indebted
    are increasingly relegated to the ``second tier'' of the financial
    services industry (pawnshops, rent-to-own stores, `payday' lenders)
    where interest rates typically range from 10 to 40 percent--and more--
    PER MONTH! Significantly, this fastest growing segment of the financial
    services industry features the participation of some of the largest
    ``first-tier'' banks such as Wells Fargo, Goleta National Bank, and
    Bank of America. To the dismay of most Americans, the deregulation of
    the financial services industry has led to record revenue growth and
    profits for banks while providing more complex pricing systems, less
    personalized service, and sharply increased costs to the majority of
    consumers. In sum, while U.S. wages in general and household income in
    particular have typically declined over the last two decades, the
    effective demand of American consumers has been enhanced by their
    access to increasingly higher cost credit. This trend is especially
    significant since the U.S. post-industrial economy has been fueled by
    the growth of consumer related goods and services--accounting for about
    \2/3\ of America's economic activity (Gross Domestic Product). As long
    as U.S. consumer demand has increased, stagnant real wages (from mid-
    1970s to late 1990s), declining labor benefits (health, pension), and
    the growth of temporary or ``contingent'' workers (from 417,000 in 1982
    to 1.22 million in 1989 and to 2.66 million in 1997) have been obscured
    by the unprecedented extension of consumer--especially ``revolving''
    credit.
        Like steroid abuse, the dramatic decline in the U.S. personal
    savings rate (from nearly 8.5% in the early 1980s to less than zero
    today) and the sharp rise in consumer debt could have long lasting
    effects on the U.S. economy. Since the end of the last recession (1989-
    91), the Federal Reserve reports that total installment consumer debt
    (credit cards plus consumer loans such as autos and appliances) rose
    from $731 billion in 1992 to about $1.5 trillion today. This includes a
    huge increase in unsecured credit card debt: from $292 billion in 1992
    to $654 billion at the end of 2000. A remarkable trend since credit
    card debt was only $50 billion in 1980. Together with the sharp
    increase in stock market valuations during the 1990s (``wealth effect
    '') and the corporate promotion of immediate gratification (``Just Do
    It'' consumption) which inflated consumer expectations, Americans have
    tended to purchase more than they could possibly afford on their
    household income. Not surprisingly, this was facilitated by the
    aggressive marketing of bank and retail credit cards to traditionally
    neglected groups such as college students, senior citizens, and the
    working poor. It is sobering that the recent decade of economic growth
    and falling unemployment has featured a perplexing phenomenon: personal
    bankruptcy rates in the late 1990s (peaking at 1.4 million in 1998)
    soared to nearly ten times the rate of the Great Depression.
        Not only are most U.S. households being squeezed by mounting
    mortgage and consumer debt, but the ``real'' cost of borrowing has
    risen dramatically since the de-regulation of banking in 1980. For
    instance, the real cost of corporate credit (prime rate) has increased
    only marginally (2.5%-3.0%) whereas the real cost of consumer credit
    card debt has more than doubled (less than 6% to over 11 %) since the
    early 1980s--not to mention soaring penalty fees (about one-third of
    all credit card revenues). Furthermore, even the robust wage increases
    of the last three years do not compensate for the rising cost of
    financing personal debt; only home mortgage related interest is tax
    deductible.
        Today, three out of five U.S. households are responsible for the
    approximately $560 billion in outstanding credit card debt.\1\ Among
    these ``revolvers,'' credit card debt averages over $11,000 per
    household. Hence, a four percent increase in the annual median income
    of U.S. family households (about $50,000) is nearly the same as the
    average cost of financing household credit card debt (18% excluding
    fees) or approximately $2,000. And, this does not include the
    tremendous growth of finance companies (over 24% APR) and the rising
    cost of ``second-tier'' banks. The enormous profits of the latter
    explain the recent entry of the largest ``first-tier'' banks into
    providing second-tier financial services. For instance, Wells Fargo
    formed a joint venture with Cash America (largest U.S. pawnshop
    company) in 1997 to develop a state-of-the-art system of automated,
    payday loan kiosks. Overall, credit card interest charges, penalty
    fees, and second-tier finance costs could total over $140 billion in
    2001. This is an enormous transfer of income to an industry that has
    slashed jobs, cut wages, and raised consumer prices. In terms of
    sustaining the current economic expansion, the effect could be a
    significant reduction in the effective demand of U.S. households as the
    purchase of goods and services is subordinated to the payment of rising
    finance charges attributed to previous consumption.
    ---------------------------------------------------------------------------
        \1\ This figure is based on a conservative estimate that
    approximately 9 percent of credit card debt is paid off before
    incurring interest charges and another 5 percent is not credit card
    debt. The monthly Federal Reserve Bulletin, which reports revolving and
    nonrevolving consumer debt levels, is available at www.bog.frb.fed.us.
    ---------------------------------------------------------------------------
        Before reporting on the experiences of people who have been
    encumbered with high levels of consumer debt, it is important to note
    the recent trends and institutional policies in the consumer financial
    services industry. First, in contrast to descriptions of the credit
    card industry as highly competitive with 6,000 competitors, the reality
    is that the last decade has witnessed a dramatic consolidation of
    credit card issuers. In 1977, the top 50 banks accounted for about half
    of all U.S. credit card accounts. The impressive revenues of most
    credit card portfolios has precipitated massive mergers and
    acquisitions over the last decade. For instance, Bank One's acquisition
    of credit card giant First USA in 1997 was followed by Citibank's
    purchase of AT&T's credit card subsidiary--the eighth largest in 1998.
    Today, the top ten card issuers control over three-fourths of the
    credit card market and nearly 70 percent of the over 1.3 trillion in
    credit card charge volume. Not surprisingly, competition for clients is
    less likely to be expressed in the form of lower prices. Indeed, it is
    striking that the average cost of consumer credit card debt has
    actually risen over the last five years.
        Second, the enactment of the 1998 Financial Services Modernization
    Act has precipitated a new trend in the formation of consumer financial
    services conglomerates. For instance, the 1998 merger of Citicorp with
    Traveler's Group has created a new role for consumer credit cards:
    compiling consumer information files. Credit cards provide a lucrative
    revenue stream for conglomerates such as Citigroup as well as strategic
    information for the cross-marketing of other financial services such as
    insurance, investment services, student loans, home mortgages, and
    consumer loans. By combining different sources of consumer activities
    from various corporate subsidiaries (e.g. Traveler's Insurance, AT&T
    credit cards, Solomon Smith Barney investments), plus the forging of
    strategic partnerships with specific corporate retailers, these
    conglomerates are developing increasingly cost-effective marketing
    campaigns for persuading customers to use their credit for purchasing
    products from members of the conglomerate's extended corporate
    ``family.'' It is not surprising, then, that the major credit card
    associations recently have begun marketing credit cards to teenagers--
    with the required financial contract signed by their parents or
    guardians. This card program is ostensibly designed to help promote
    financial responsibility by encouraging parents to discuss financial
    purchases/budgets with their minor children. Of course, financial
    education could be promoted through the use of debit cards or personal
    checks. Indeed, the key objective is to promote credit card use at an
    early age, especially purchases through virtual internet shopping
    malls. Furthermore, this credit card program facilitates the collection
    of consumer information at an earlier age as well as the direct
    marketing of teenagers without the filter and/or confusion of
    distinguishing the purchases of children from their parents. By issuing
    credit cards in a teenager's name, companies are seeking to shape
    consumption behavior and corporate loyalties at an earlier age while
    minimizing the influence of their parents.
        Third, the growth of subprime credit cards has led to outrageous
    financial terms for the most naive and inexperienced market of the
    working poor. With annual percentage interest rates of over 30 percent
    and costly ``hidden'' charges, even large issuers have been formally
    reprimanded and even sued over duplicitious advertising. For example,
    the sixth largest credit card issuer, Providian National Bank, agreed
    to an out-of-court settlement for a record $300 million in June 2000.
    According to the U.S. Comptroller of the Currency, John D. Hawke Jr.,
    ``We found that Providian engaged in a variety of unfair and deceptive
    practices that enriched the bank while harming literally hundreds of
    thousands of its customers.'' They include a `no annual fee' program
    that failed to disclose that the card required the purchase of $156-a-
    year plan credit-protection plan; customers who complained were
    informed that the plan was mandatory unless a annual fee was paid.
        For those who desperately seek a credit card as a ``bank account of
    last resort,'' the terms that are required of subprime applicants--
    especially the working poor--include unwanted educational materials and
    high membership fees with little available credit. This is illustrated
    by the conditions of the United Credit National Bank Visa. It's direct
    mail solicitation declares, ``ACE VISA GUARANTEED ISSUE or we'll send
    you $100.00! (See inside for details.)'' For those who bother to read
    the fine print, and a magnifying glass would be useful in this case,
    the terms of the contract are astounding,

    ``Initial credit line will be at least $400.00. By accepting this
            offer, you agree to subscribe to the American Credit Educator
            Financial and Credit Education Program. The ACE program costs
            $289.00 plus $11.95 for shipping and handling plus $19.00
            Processing Fee--a small price to pay compared to the high cost
            of bad credit! The Annual Card Fee [is] $49.00.  .  . For your
            convenience, we will charge these costs to your new ACE
            Affinity VISA card. [They] are considered Finance charges for
            Truth-In-Lending Act purposes.''

        Unbelievably, an unsuspecting applicant could pay $369 for a net
    credit line of only $31 at a moderate 19.8 APR. It is no wonder that
    those households who are most desperate for consumer credit often give
    up on the financial services sector after they realize the exploitative
    terms of these contracts.
        A final issue concerns the trend of consumer financial services
    conglomerates of replacing traditional, low cost consumer and small
    business loans with higher cost substitutes. For instance, in low-
    income neighborhoods, this may result in the closing of a first-tier
    bank branch and its replacement with high cost, finance companies (such
    as Citigroup's newly acquired Capital Associates) or second tier
    ``fringe banks'' such as check cashing outlets, pawnshops, and rent-to-
    own stores. Especially disconcerting is the application of this policy
    to the small business sector. Today, the number one source of start-up
    financing for small businesses is credit cards followed by home equity
    loans. Aspiring entrepreneurs--especially women and minorities--are
    routinely denied small business loans and encouraged to assume higher
    cost, credit card debt. As one owner of a computer supply company
    explained, ``1 wanted a business loan [from Wells Fargo] but all 1 got
    was a[nother] credit card instead.'' This trend has potentially serious
    consequences as credit cards have dramatically changed from the credit
    of last resort to the initial source of start-up financing. Since small
    businesses are the primary source of net job growth in the U.S.
    economy, this trend could have severe repercussions during the next
    economic downturn. That is, small entrepreneurs may not be able to
    survive unfavorable economic conditions after exhausting their high
    cost lines of consumer credit at the same time that the economy needs
    to generate more jobs. This restrictive corporate lending policy could
    exacerbate an economic slowdown and possibly contribute to a recession.

                        `Plastic Money for Real People'
            --college marketing campaign by associates national bank

        The lack of individual responsibility in the assumption of
    escalating levels of consumer debt is the cornerstone of the credit
    card industry's argument for the reform of existing bankruptcy laws.
    The emphasis on ``if you play then you should pay'' belies the dramatic
    shift in the promotion of high interest, unsecured lines of credit
    which are most efficiently provided through universal or bank credit
    cards. As the credit card industry successfully increased the ``real''
    cost (net of inflation) of consumer credit and saturated middle-class
    households in the 1980s, the spectacular profits of the consumer-debt
    driven economy led to banks to finance enormous marketing campaigns
    that sought to penetrate nontraditional markets in the late 1980s. The
    abrupt change in the industry's underwriting standards for these loans
    raises the question of whether these new, far less stringent lending
    criteria are encouraging American households to borrow more money than
    banks know they can ever possibly repay. Ironically, these new groups
    tend not to be engaged in full-time employment nor are they adequately
    educated on the lending policies of the financial services industry:
    college students and senior citizens.
        In terms of college students, the lack of information on their
    consumer debt levels (obscured by student loans, private loans, direct
    parental payments, and other forms of family assistance), has led to
    the surprising discovery that the fastest growing group of bankruptcy
    filers is 25 years old or younger. The credit card industry has funded
    research studies that present an idyllic world of tech savvy and
    financially responsible college students that belie the escalating
    social problems associated with credit card debt. Through the ``rose
    colored glasses'' of the credit card industry, which claims that
    approximately 3 out of 5 college students pay off their charges at the
    end of each month, the credit card is portrayed as a ``knight in
    shining armor'' a la Jerry Seinfeld's advertisements for American
    Express. Instead, the flawed research methodology of these few industry
    sponsored studies ignores such crucial trends as the use of student
    loans to pay credit card debts (80% of college students are enrolled in
    public schools), surveys that explicitly exclude students that have
    dropped out of college due to high credit card debts, informal family
    loans or payments for reducing high interest credit card debt,
    supplementary private loans for paying off credit card debts, and
    inclusion of parents' credit cards (where students are secondary card
    users that are not responsible for monthly charges).\2\ Furthermore, by
    focusing on the lifestyle enhancements that credit cards offer to
    ``mature'' students, public attention has been directed away from the
    social problems that have emerged from their unprecedented expansion
    over the last decade. These include physical maladies (from anxiety,
    excessive smoking and drinking, depression), parental authority
    conflicts, loss of scholarships due to extra jobs for monthly payments
    (low grades), job rejection, denial of auto and home mortgage loans,
    rejection for student loans for graduate and professional school,
    decline of apartment rental applications, increasing defaults on
    federal student loans, and, in the most extreme cases, student
    suicides; the latter was recently reported in a Sixty Minutes II
    program (www.cbs.com and www.creditcardnation.com). Not incidentally,
    the sharp increase in consumer debt among college students has defied
    the recent decline in consumer bankruptcies; last year, the number of
    bankruptcy filers 25 years old or younger jumped to nearly 150,000. In
    view of the enormous increase in consumer credit offered to college
    students and the ongoing slowdown in the U.S. economy, the experiences
    of recent college graduates offers instructive insights into industry
    responsibility in the rapidly growing group of bankruptcy files.
    Significantly, the case-studies reported in my 1999 study include
    students whose parents emphasized the importance of credit as a
    convenience and debt as a moral vice.\3\ Even in these cases, the
    promotion of credit cards on college campuses--where universities
    ``earn'' multi-million dollar annual royalties for exclusive credit
    card marketing agreements--quickly erodes cautious family values toward
    the use of consumer credit and the accumulation of debt.
    ---------------------------------------------------------------------------
        \2\ See Robert D. Manning, ``Credit Cards on Campus: Current Trends
    and Informational Deficiencies,'' Consumer Federation of America, 1999
    available at www.creditcardnation.com.
        \3\ See Robert D. Manning, ``Credit Cards on Campus: The Social
    Consequences of Student Debt,'' Consumer Federation of America, 1999
    available at www.creditcardnation.com and Robert D. Manning ``Credit
    Cards on Campus: The Social Consequences of Student Credit Dependency'
    in Credit Card Nation: The Consequences of America's Addiction To
    Credit (Basic Books, 2000).
    ---------------------------------------------------------------------------
        For example, beginning with his middle-class upbringing in Indiana,
    where his father inculcated the Midwestern values of frugality and debt
    avoidance, Jeff entered Georgetown University in 1995 with a commitment
    to conduct his financial affairs on a cash-only basis. Initially, he
    socialized with students like himself--from moderate income Midwestern
    families--whom shared similarsocial backgrounds and cultural
    experiences. But, Jeff soon realized that he wanted to transcend his
    family background and enjoy the more exciting lifestyle of his more
    affluent and urbane friends such as his roommate. At first, his
    adherence to the `cognitive connect' (i.e.; that his income/resources
    must determine consumption) made him ``stand out'' among his peers. For
    instance, Jeff's father always paid restaurant bills in cash. His motto
    is, ``if you don't have the cash then you shouldn't buy it.'' Jeff's
    new friends, however, associated this behaviorwith the quaint and
    backward cultural practices of Depression era farmers. Rare is the
    situation when their parents use cash for common financial
    transactions.
        This clash of cultures led Jeff to apply for a credit card. He
    received two credit cards his first semester including a Gold
    MasterCard. Although Jeff initially obtained his credit cards for
    convenience, he was impressed by the favorable response of others to
    his Gold credit card, ``It made me feel like I had made it.  .  .
    people treated me different when they saw [the Gold card].'' Jeff
    acknowledges that this new respect was premature, since he did not yet
    have a `real' job, but perceived it as an early recognition of his
    future social status as a graduate from a prestigious university.
    Significantly, Jeff first began using his credit cards like cash,
    paying off the balances at the end of the month, ``Why pay cash.
    [Afterall] what's the point of having a credit card.'' His other reason
    for obtaining credit cards was for emergencies. Hence, as long as
    Jeff's savings and loans could finance a carefree lifestyle, his credit
    cards served as a modern convenience that befitted his status as a
    student at an elite, private university. Of course, this situation
    quickly changed when his financial resources were exhausted in the fall
    of his sophomore year.
        As a freshman, Jeff saw his credit cards as his best friend, an
    angel of mercy during crisis situations, ``At first, I decided that my
    credit cards would only accumulate debt in case of emergencies, such as
    being stranded in an airport and needing a [plane] ticket. After a
    while, i decided that it was okay to charge necessary things like books
    and other school related expenses.  .  . Then, after charging for
    'needs;' it was just so easy.. I decided that it was okay to charge
    anything I damn well wanted.'' As his debt increased, with 8 new credit
    cards during his sophomore year, Jeff became disheartened. Although
    they enabled him to rebel against the strict social control of his
    father, Jeff was now encumbered with several thousand dollars of debt.
    Over time, Jeff confounded his pursuit of personal independence with
    the rejection of the cultural ethos of the 'cognitive connect.'
    Afterall, he argued, consumer debt it is a common--even modern--trend
    of professionally successful people and ``everyone else I knew was in
    debt.  .  . and so were many of their parents.'' Among his peers, they
    rationalized their indolent spending behavior by emphasizing ``the
    great jobs that we will get [after graduation] that will enable us to
    pay off our credit card [debts].''
        At the onset of his college career, Jeff's conservative Midwest
    background made him a most unlikely candidate for accumulating a large
    credit card debt. However, with tuition over $23,000 per year at
    Georgetown University, Jeff quickly exhausted the $40,000 ``loan'' that
    his parents saved for his college education. And, with a combined
    household income of over $100,000, his financial aid was primarily
    limited to student loans. Unlike students at less costly public
    colleges, moreover, Jeff was not able to transfer any of his personal
    debts into student loans. This is because Jeff's student loans paid
    only a fraction of Georgetown's tuition while his duties as an on-
    campus resident hall advisor (RA) provided his room and board. Jeff's
    family inculcated the importance of adhering to the `cognitive connect'
    of consuming only what could be paid in cash; credit card use was
    acceptable only if one had sufficient savings or earnings that ``could
    back up your purchases.'' initially, Jeff succumbed to the temptations
    of credit cards for non-economic reasons. They offer emotional security
    in case of personal ``emergencies'' and alleviate social status anxiety
    because ``people treat me so much better when they see my Gold
    [American Express, MasterCard] cards.'' Jeff's first credit card was an
    impulsive response to a Citibank advertisement ``that was hanging on
    the wall in the dorm.'' The Visa card offered a credit limit of $700
    with an introductory rate of 4.9%. By the end of his freshman year,
    Jeff had received three credit cards which were used primarily for
    entertainment-related activities.
        The shift from using credit cards for convenience to financing an
    inflated standard of living was a normal extension of Jeff's college
    experience. As he explains, ``Everyone has to take on debt to go to
    college.  .  . everyone is expected to have student loans.  .  . Even
    in my Midwestern [culture] which emphasizes that debt is bad, college
    loans are viewed as good debt.  .  . Low interest rates.  .  . High
    price of college equals high value.  .  . [produces] a greater return
    on your investment.'' By the middle of Jeff's sophomore year, he had
    exhausted his parents' college ``loan.'' At this point, he confronted a
    profound crossroads in his college career. Either he fundamentally
    altered his consumer oriented lifestyle or abandon his familial
    attitudes toward debt. Faced with the choice of losing his more
    ``sophisticated'' and urbane friends, whom view debt as a necessary
    means to a justifiable end, Jeff easily accumulated 8 more credit cards
    in 1997.
        The most striking feature of Jeff's credit card use is how quickly
    he abandoned the virtue of frugality as a necessary means for
    establishing his own social identity outside of his father's strict
    control. Afterall, the culture of consumption that permeates collegiate
    life views saving as a practice of ``hicks'' while debt is the
    ``breakfast of champions.'' By the end of his sophomore year, Jeff had
    accumulated a couple of thousand dollars in credit card debt. Instead
    of beginning his junior year with savings from his summer job, most of
    Jeff's earnings were used to pay off his credit cards. Significantly,
    as his credit card balances rose, Jeff received congratulatory letters
    from credit card companies extolling his good credit history and
    raising his credit limits as a ``courtesy to our best customers'' so
    that he could avoid over limit fees. Although he has never earned
    $10,000 in annual income, the deluge of credit card offers obscured the
    fragility of his Jeff's financial circumstances, ``with the constant
    arrival of new `pre-approved' credit card applications AND the raising
    of my credit limits the credit card companies made it seem like [my
    level of debt] was okay.  .  . When I started to fall behind, I even
    received letters that allowed me to `skip a payment' because the
    company `understood' that sometimes debts can back-up such as during
    the holidays.'' It was during this period that Jeff eagerly embraced
    the marketing ploys of the credit card industry so that he could
    accumulate ``miles'' or ``points'' for frequent flier and consumer gift
    programs. More importantly, this practice led to ``surfing'' or
    transferring debt from high to low interest ``introductory rate''
    credit cards.
        As Jeff learned to ``tread water'' by ``surfing'' in this period,
    he learned the next lesson of the credit dependent: the ``credit card
    shuffle.'' That is, paying his credit card bills with other credit
    cards through monthly balance transfers and `courtesy checks.' This
    acceptance of his new debtor status was ``disheartening.  .  . but I
    rationalized it by telling myself that everyone else is in debt.  .  .
    Afterall, I'm going to get a great job and pay it off.'' The ``good''
    or ``responsible'' credit card debt such as school related expenses, a
    personal computer, and work suits was soon taken over by entertainment
    on weekends, restaurant dinners, spring break in Florida and then
    London and Canada. With one ten-day vacation costing over $5,000, ``I
    even charged the passport application fee,'' Jeff found himself on the
    verge of exhausting his available cash and credit. Fortunately, the
    university credit union is willing to assist students like Jeff whom
    find themselves ``drowning in credit card debt.  .  . most of the
    people I know that go to the credit union are getting loans to pay
    their credit cards.'' Without the option of federally guaranteed
    student loans to service his credit card debts, Jeff received a $10,000
    loan at a moderate 11.9 percent. This credit union loan essentially
    ``bought some time'' for Jeff before entering the job market--an option
    not available to most college students. Not incidentally, a condition
    of the loan disbursement was that $3,000 had to be used to pay off one
    of his credit cards. The balance of the loan was spent on school
    expenses as well as catching up on his other monthly credit card
    payments.
        During his junior year, Jeff began to engage in riskier and more
    creative credit card schemes. For instance, he began ``surfing'' which
    entails transferring debts from high interest rate cards to those with
    much lower albeit temporary `introductory' rates. As Jeff learned how
    to lower his monthly payments through this technique, he began to
    exhaust his lines of credit. Instead of triggering cautionary warnings
    from his credit card companies, Jeff received new ``Pre-Approved''
    credit card solicitations and congratulatory letters announcing that he
    had ``earned'' an increase in his credit limits. He even began
    receiving letters that encouraged him to miss a payment, such as during
    holiday gift-giving seasons, while lauding his good credit history.
    These mixed messages are easy for college students to misinterpret.
    Indeed, Jeff rationalized that his accumulating debt was not very
    serious since the the credit card companies ``made it seem that
    everything was okay by sending new applications and raising existing
    credit limits.'' During this period, moreover, Jeff became so dependent
    on ATMs (his parents never used them) that he did not even think about
    the transactional costs ($1.50-$3.00). As cash advances became more
    frequent, he did not want to know that the fees and higher interest
    rates made their cost comparable to short-term pawnshop loans.
    Eventually, he ``hit the [financial] wall'' when his meager stipend as
    a residence hall advisor made it difficult to send even minimum credit
    card payments. The $10,000 debt consolidation loan from the university
    credit union temporarily averted an economic crisis. But, this proved
    to be only a temporary financial ``band-aid.''
        Ironically, a contributing factorto his financial crisis was two
    failed business ventures with his roommate which were intended to
    eliminate their debts. The first was a service to translate resumes of
    Mexican and other Latin American students whom were seeking internships
    or applying to colleges in the United States. Encouraged by friends
    seeking their assistance, they purchased all the necessary office
    equipment of a high-tech company: computer, fax machine, cell phones,
    executive chairs, high quality business cards and fliers, web site
    fees, P.O. box, and legal fees for incorporation in Delaware. After
    several months without clients and rapidly depreciating business
    technology, Jeff and his ``partner'' opted to ``cut our losses'' and
    terminate the business. Each lost over $2,500. To add further financial
    insult, they had to pay additional legal fees to dissolve their
    corporation and are still paying the contract for their listing with an
    internet ``search engine.''
        Following this entrepreneurial debacle, they sought to recoup their
    losses through the stock market. Instead of becoming more cautious
    about debt, ``our credit cards allowed us to get too big for our
    britches'' According to Jeff, ``my roommate found out that his company
    was going to be bought out. So, he was convinced that we would make a
    quick profit if we bought some stock before [the acquisition].  .  . a
    sure winner! We each bought $5,000 worth of stock with cash advances
    from our credit cards.  .  . with e-trade we even saved on brokers'
    commissions.  .  . The company was bought-out alright but then it was
    cannibalized and the stock fell.  .  . We each lost over $3,000.'' When
    asked why they pursued such risky ventures while still in school, Jeff
    responded, ``Because we could! The courtesy checks gave us the
    opportunity act on our impulses.''
        By the end of Jeff's junior year, the social empowerment provided
    by his 11 bank and 5 retail credit cards had changed dramatically: they
    had evolved from friends to foes. The social ``doors'' that they had
    previously ``opened'' were now increasingly closed. Jeff was ``so
    concerned about meeting the right people and fitting in with them.  .
    . that [he] did not think twice about $50 bar tabs and spending spring
    break in London.  .  . To think otherwise would have meant certain
    social death.'' Fortunately, Jeff was forced to confront his situation
    after realizing that ``I no longer had control over my credit cards.
    Now, they controlled me.'' The earlier freedom to ``act like an adult''
    had been replaced with the financial responsibility of paying for his
    earlier excesses. Indeed, rather than enjoying his final year at
    college, Jeff is enduring social hell by working full-time while taking
    a normal course load and applying/interviewing for jobs. He works at
    least 30 hours perweek at two part-time jobs (in addition to his
    position as a resident advisor) simply to make the minimum payments on
    his $20,000 credit card debt and $10,000 debt consolidation loan. Most
    of his friends have stopped calling to make plans for the weekend
    because he is ``shackled to my credit cards.  .  . I can't go out with
    them like I used to because I have to work.  .  . ultimately, to pay
    for the fun that I charged on my credit cards a couple of years ago.''
        Today, Jeff views his credit cards with complete disdain, ``I hate
    them.'' He is delinquent on many of his accounts and has threatened to
    declare bankruptcy unless the banks offer him more favorable interest
    rates. Ironically, Jeff's social odyssey of the last four years has
    brought him ``full-circle'' in affirming his father's mantra toward
    debt: ``if you can't afford it, don't buy it.'' What angers him the
    most about credit card marketing campaigns on campus is that they extol
    the benefits of `responsible use' but neglect to inform impressionable
    and inexperienced students about their ``downside'' such as the impact
    of poor credit reports on future loans and even prospective employment.
    This is crucial, according to Jeff, because he now understands that
    ``the credit card industry knows exactly what it is doing [in
    encouraging debt] while taking advantage of students whom are trying to
    learn how to adjust to living away from home, often for the first time.
    .  . Let's face it, how can these banks justify giving me 11 credit
    cards on an annual income of only $9,000. These include a Gold American
    Express and several Platinum Visa cards.''
        Although Jeff does not dismiss his financial responsibility, he
    states that ``I almost feel victimized.  .  . giving credit cards to
    kids in college is like giving steroids to an athlete. Are you not
    going to use them after you get them?'' Furthermore, as a dorm Resident
    Advisor (RA), Jeff emphasizes that the university offers an wide range
    of student informational programs and services but with one notable
    exception, ``there if nowhere to go for debt counseling.  .  .
    everything is discussed in Freshman Orientation or incorporated in
    Resident Advisor training and residence hall programs.  .  . AIDS,
    suicide, eating disorders, alcohol, depression, peer pressure, sex ed,
    academic pressures, learning handicaps.  .  . all but financial crisis
    management.''
        As Jeff has ``gone full circle'' in his attitudes toward credit
    cards, he is now coping with the unexpected ``pain'' of his past credit
    card excesses. Over $20,000 in credit card debt (plus his $10,000 debt
    consolidation loan and over$30,000 in student loans), Jeff has washed
    ashore from his ``surfing'' escapades. Although working two part-time
    jobs during his senior year, Jeff is now delinquent on several of his
    16 credit cards. A business major, Jeff is anxiously awaiting the
    outcome of his job search. He is optimistic as some of his peers have
    already received starting salaries that range from $40,000 to $55,000
    per year. In addition, several have received signing bonuses between
    $3,000 and $10,000. For Jeff, the latter is especially important
    because he plans to use this money to reduce his credit card debt.
        Unfortunately, Jeff's promising career is encountering obstacles
    from an unexpected source--his credit cards. During a recent interview
    with a major Wall Street banking firm, Jeff was asked, ``how can we
    feel comfortable about you managing large sums of our money when you
    have had such difficulty in handling your own [credit card] debts?''
    Jeff was stunned. It was obvious that the interviewer had reviewed his
    credit report--without prior notification--in evaluating Jeff's
    desirability to the firm. ``Can you believe it,'' Jeff declared, ``they
    want an explanation about my personal finances in college and yet they
    lost over $120 million last year! ''
        In their decision not to offer him employment, Jeff wonders how
    much was based on his GPA and how much on the ``score'' calculated by
    the consumer credit reporting agency. This is certainly not a potential
    consequence that is explained by the credit card industry when it
    exclaims, ``Build your credit history.  .  . you'll need [it] later for
    car, home or other loans.'' As Jeff passes by the MBNA Career Center on
    campus, which is named after the credit card company that he owes
    several thousand dollars, the irony of his ``catch-22'' situation is
    not lost on him, ``how can I pay them back when their credit reports
    are hurting my chances of getting a good job!'' It is not surprising
    that growing numbers of students like Jeff are increasingly using
    sexual analogies in describing their unforeseen circumstances. More
    bluntly, they are denouncing the predatory policies of the credit card
    industry as a form of ``financial rape.''
        As Jeffs experience shows, student financial strategies are
    becoming increasingly complex as credit card companies offer ``the
    [financial] freedom to hang ourselves.'' Even students at expensive
    private schools are finding ways to transfertheir credit card debt into
    supplementary loans without the knowledge of their parents. This
    increasingly popular practice helps to explain the wide vacillation in
    student credit card balances due to infusions of cash from other
    sources of loans. In addition, Jeff demonstrates how access to credit
    facilitates costly purchases that would not have been considered under
    the financial constraints of a typical student budget. The latter is
    especially disconcerting. It reflects the strong influences of
    escalating peer consumption pressures as well as sophisticated
    marketing campaigns that target the youth culture. One of the most
    seductive is the Sony advertisement, ``Don't deny yourself. Indulge
    with the Sony [Visa] Card from Citibank.  .  . The official currency of
    playtime,'' Or, more succinctly, the ubiquitous NIKE slogan, ``Just Do
    It.'' Although Jeff has so far avoided personal bankruptcy by securing
    a well-paying job with a commercial real estate developer, he notes
    with concern that some of his classmates have already been laid off due
    to the slowdown of the economy. In fact, some of his highest salaried
    classmates have become victims of the ``reality check'' that many
    dotcom companies are only recently confronting. If Jeff is forced into
    the ranks of the unemployed for an extensive period, he anguishes over
    the prospect that bankruptcy may be his most realistic option.

                      When the `Magic of Plastic' Expires:
                  bankruptcy in the age of financial ignorance

        Unlike Jeff, Cris has not been so fortunate in evading the
    dangerous financial shoals of consumer bankruptcy. This situation is
    especially surprising since her parents are both medical professionals
    with a combined household income of over $100,000. At the University of
    Maryland, Cris enjoyed the freedom of college life (with its promotion
    of a consumer lifestyle) which contrasted sharply with the harsh
    discipline of living at home. At the time, Cris' parents were oblivious
    to her new college lifestyle since she was limited to her meager
    savings from high school. Unbeknownst to them, however, the credit card
    industry was aggressively expanding into the previously ignored market
    of ``starving students'' in the late 1980s. For her father, it was
    ludicrous to think that major banks would give essentially unsecured
    loans to unemployed teenagers whom lacked experience in managing their
    economic affairs or discipline in controlling their consumption.
    Ironically, he was naive when it came to student finances and bank loan
    policies. Indeed, banks were eager to make high interest loans to
    students and credit cards became their financial `vehicle' of choice.
    Ultimately, credit cards became the personal junk bonds of Generation
    X.
        Cris' initial encounter with ``plastic money'' began early in the
    fall of 1989--her first semester of college. Citibank Visa
    advertisements ``were plastered allover the university'' and she
    thought that there was nothing to lose in submitting an application.
    Besides, Cris was curious about the ``power of plastic'' since her
    parents would not permit her to use a credit card in high school and
    she did not want to provoke an argument by asking now. Furthermore, all
    of her friends were receiving financial assistance for college from
    their parents and thus they had considerably more discretionary
    resources for ``play.'' Emboldened by the prospect of financial
    independence, Cris eagerly filled-out the form which did not require
    the consent of her parents--only a copy of her student ID. At the time,
    Cris was 18 years old and working part-time at a telephone answering
    service for about $5.00 per hour. To her surprise, Citibank granted a
    $500 line of credit, which she immediately used to pay a large library
    fine and ``buy a bunch of clothes at the mall that I couldn't otherwise
    afford.'' More importantly, Citibank's decision had a much more
    profound impact on Cris than the monetary value of its loan because,
    ``it made me feel emotionally and financially mature.  .  . [The credit
    card] helped me become independent [in my relations] with my family and
    my friends.  .  . It made me realize that I deserved to be responsible.
    That i should not have to beg my stepfather for money or call my
    grandfather for [financial]] help.''
        Cris' new social and economic empowerment transformed her attitudes
    toward consumption and debt. No longer forced to ``earn'' the ability
    to consume through work related savings (`cognitive connect'), Visa
    also ``liberated'' her from the social control of her parents. At
    first, Cris limited her charges to school expenses and personal items.
    By the end of the academic year, Cris was routinely using her credit
    card for mall excursions, restaurant meals, bar tabs, concert and
    professional sports tickets, and weekend trips to the beach. These
    activities underscored Cris' newfound ``freedom'' and were reflected in
    her rising credit card debts. Indeed, the ``power'' of Cris' first
    credit card convinced her to get a second by the end of the fall
    semester and two or three more in the spring. During this period, Cris
    learned the flip side of the ``power of plastic:'' the need to refuel
    its financial engine with monthly infusions of cash. By the second
    semester, Cris' top priority was maintaining her lifestyle and she
    began working full-time at the answering service company.
        Not surprisingly, Cris' grades plummeted. For the first time in her
    life, she received a `D' and an 'F' which resulted in academic
    probation from the university. As conflicts with Karl intensified over
    her social activities, Cris moved into an apartment with some of her
    college girlfriends. These additional financial pressures reinforced
    Cris' dependence on her credit cards. As her most dependent ``asset,''
    Cris saw them as both her personal ``savior'' and ``best friend.'' When
    she needed economic help, they were always there for her. And, they did
    not ask questions about why she needed the money or moralize about her
    spending patterns. The only problem is that they are ``high
    maintenance'' friends with a small financial price to pay for their
    invaluable assistance. At least that was what Cris thought at the time.
        Cris enjoyed a largely carefree summer and, to reduce her expenses,
    she enrolled in a local community college forthe fall semester. Already
    over $3,000 in debt and earning only $5.00 per hour, Cris was deluged
    with ``Pre-approved'' credit card offers. She attributes her
    desirability to the credit card industry by her prompt remittance of
    minimum monthly payments. During this period, Cris began to view her
    credit cards differently. ``After spending my paycheck, I used my
    credit cards like savings.  .  . I used them for everything .  .  .
    books, tuition, gas, food, hotel rooms at the beach.  .  . whether for
    school, emergencies or simply to enjoy an evening with friends.'' This
    intermingling of credit and earnings was reinforced by unexpected
    situations such as car repairs and medical emergencies. Afterall, she
    had to get her car fixed in order to drive to work and her health
    deserved immediate attention or she could not perform her job.
        During this period, Cris began to engage in more creative and
    costly credit card practices that would foreshadow her eventual debt
    crisis. First, she began to regularly use her credit cards to generate
    additional cash flow. This strategy usually entailed charging all of
    her friends' meals at a restaurant and then collecting their money
    afterwards. Second, she began to routinely take cash advances from her
    credit cards ``when I realized that I could.'' Initially, Cris would
    use cash advance checks to pay bills like rent, utilities, or car loan.
    As she got further into debt, however, Cris learned a sophisticated
    version of the ``credit card shuffle.'' She would take cash advances at
    the end of the month and then deposit the money into her checking
    account so that she could send the minimum payments to the credit card
    companies. According to Cris, ``it got to the point where I had written
    down all of the PIN numbers of my credit cards and, at the same ATM, I
    would take cash advances and then deposit the money directly into my
    [checking] account.'' Significantly, this financial management
    ``system'' was encouraged by her credit card companies whom profit from
    high interest rates, cash advance fees, and over limit penalties,
    ``Every time I began to bump against my limit, the banks would raise
    them. [Because of this practice] it did not become a crisis early when
    I could have realized the seriousness of my situation.'' At the same
    time, market-ing inducements such as 10% off with a new retail credit
    card such as Hechts or a free Orioles bag with an application for an
    MBNA MasterCard were ``too easy'' to pass up.
        Over the next two years, Cris' credit card debt jumped from about
    $5,000 to over $15,000. Cris marveled as she reflected on how she was
    unaware of the amount of debt that had accumulated on her 8 or 9 credit
    cards: ``after being relatively stable for a couple of years it just
    [tripled] overnight.'' She moved back with her parents to reduce
    expenses which now included payments on a stereo, VCR, and TV. However,
    the recurrent conflicts with her stepfather ensured that this was only
    a short-term move. The following year, she moved in with her boyfriend.
    Although Cris had received a moderate raise to $6.50 per hour and
    earned as much overtime as possible, the economic burden of rent and
    utilities plus her car payment led to a sobering realization: her basic
    expenses exceeded her income. At the time, Cris had been content to
    send minimum payments on her credit cards because she had convinced
    herself that she would soon get ``a good job and pay them all off.''
    Instead, at 21 years old, Cris was forced to accept the reality that
    she would have to wcrk full-time and remain a part-time student while
    attempting to reduce her credit card debts. A $5000 debt consolidation
    loan offered only temporary relief.
        As Cris slipped closer to her financial abyss, she was astounded by
    a debt counseling announcement that she saw on television. It explained
    that merely sending minimum payments would require over 30 years to pay
    off existing credit card balances. ``With no end in sight,'' Cris'
    attitude toward her credit cards changed dramatically. From being her
    ``best friend,'' they became her worst enemy--``I hated them.''
    Dependent on the credit card shuffle to ``simply get by,'' Cris sought
    help at a local debt counseling agency. What she received was a
    ``shock.  .  . I thought that they could help anyone.  .  . instead,
    they told me that they could not help me at all.  .  . that I should
    declare bankruptcy. I was mad, they implied that I was beyond help.  .
    . I had nowhere else to go.  .  . I could not believe that this was
    happening to me.'' Cris did not want to abandon her debts but, on the
    other hand, she could not find anyone whom was interested in helping
    her ``put my life back together'' unless she ``started over again.'' In
    fact, the first bankruptcy lawyer that she consulted recommended that
    she ``max-out'' all of her credit cards before filing for bankruptcy.
    Cris was appalled by his suggestion. Afterall, she emphasized, ``I am
    not irresponsible. I was not looking for an easy way out.  .  . He made
    me feel bad about myself and the whole [bankruptcy] process.  .  . I
    was doing it because there was no other option.'' Cris declined his
    offer to represent her during the bankruptcy proceedings.
        In December 1994. at the age of 23, Cris' bankruptcy petition was
    approved. With the guidance of her attorney, which cost $695, the court
    discharged a total of $22,522 from 13 credit cards and a $5,000
    consumer loan; she ``reaffirmed'' two credit cards and continued
    payments on her car loan. According to Cris, ``I felt awful about
    abandoning my debt. Afterall, I tried to renegotiate through Debt
    Counselors but no one was interested in helping me renegotiate my
    debts.'' Indeed, the striking feature of Cris' story is her emphasis on
    individual responsibility while at the same time criticizing credit
    card companies for aggressively marketing excessive lines of credit to
    naive and emotionally vulnerable students, ``I admit that I charged way
    too much.  .  . my debts were all my fault.  .  . [However] they should
    NEVER have given me all those credit cards at my age [under 22].  .  .
    There was just too little effort to get them. The banks make it too
    easy to get into debt.''
        Fortunately for Cris, bankruptcy was a prudent decision because it
    enabled her ``to put the pieces of my life back together.'' In fact,
    she was able to complete her junior college studies as a full-time
    student and is now enrolled to a four-year university. In May 2001,
    almost twelve years after receiving her first credit card, Cris is
    scheduled to graduate with a BA in accounting. For those whom contend
    that the consequences of bankruptcy are too lenient, Cris' experience
    is instructive. Although she agrees that the social stigma is
    diminishing, Cris emotionally responds that,

    ``you don't know how bad [bankruptcy] is. They said [my bad credit]
            would last only 7 years but it will take ten years before the
            bankruptcy is erased from my credit report.  .  . I can't get a
            real credit card, AT&T just rejected me for their card, and
            forget about a house mortgage.  .  . I've talked to people who
            are thinking about declaring bankruptcy for only $4,000-$5,000
            of debts. As little as they knew about credit cards, they know
            even less about bankruptcy.  .  . Kids need to understand the
            future repercussions of accumulating multiple credit cards.
            Many young people see only the immediate benefits/
            gratification. They are so [financially] ignorant. It is so
            sad.''

                           `It's The Economy, Stupid'
      shuffling and surfing in the turbulent seas of economic uncertainty

        Even students who eventually obtain steady, well-paying jobs after
    college graduation, the financial albatross of credit card debt may be
    insurmountable--especially those entering a less favorable job market.
    This increasingly common trend of employment disruption, which has been
    ``regularized'' through the enormous growth of temporary or
    ``contingent'' workers, has fundamentally changed the nature of
    employee loyalty and, in the process, created often unmanageable
    personal debt burdens. For a generation that has never witnessed an
    economic downturn, the perceived lack of an imperative to accumulate
    financial reserves (savings, lines of credit) suggests a potential
    social crisis when they must endure extended periods of un- and
    underemployment. The prospect of a potential recession in 2001, which
    belies the aggressive marketing of credit cards to college students,
    underscores the instructive experiences of ``Daniel'' whose graduation
    from college in the early 1990s resulted in unfulfilled expectations,
    disappointing job prospects, and insurmountable consumer debt
    obligations.
        At the beginning of the employment life-cycle, ``Daniel''
    illustrates how the impact of credit card debt acquired in college can
    be obscured by the middle class squeeze after graduation. That is,
    recent graduates tend to assume greater levels of consumer debt during
    their job search. This includes employment related expenses (resumes,
    business clothing, transportation) as well as personal living expenses
    (rent, food, car, entertainment). Significantly, recent graduates that
    are financing their lifestyle with credit cards are neither classified
    as students or new workers. It is during this transitional period that
    personal credit card debt often grows at a rapid rate--especially
    during a `tight' labor market.
        Daniel's unexpected odyssey into the financial depths of credit
    card debt began innocuously when he was offered a Citibank Visa
    application by a corporate representative while walking through the
    student center. A sophomore at a Howard University, he was struggling
    to pay for his college expenses and enjoy a modest social life in
    Washington, D.C. Daniel's middle-class, professional family is from
    Kenya and his goal was to become an accountant. With limited funds,
    Daniel was eager to receive ``free money'' but was skeptical that a
    major bank would give him a credit card since he was several years away
    from earning a middle class salary. From Daniel's perspective, an
    undergraduate college student is a major loan risk.
        In 1988, however, Citibank was aggressively marketing credit cards
    to college students like Daniel whom it viewed as potentially lucrative
    customers for high interest, consumer loans. Citibank was so desperate
    to expand its credit card portfolio that it abandoned the industry
    policyof requiring parental co-signatures for unemployed students.
    Banks realized that they could ``persuade'' parents to pay for their
    children's credit card debts with threats of lawsuits and today
    ``inform'' parents of the disastrous consequences to their children's
    credit reports if their credit card debts are not repaid. By only
    requiring a copy of his university ID, Daniel quickly completed the
    application and received a $600 line of credit. He immediately used all
    of his ``new money'' for school books, food, and an occasional cash
    advance. At the time, Daniel thought that his ``plastic cash'' had been
    exhausted and he would have to survive on his previous ``starving
    student'' budget. Instead, to Daniel's surprise, he began receiving new
    credit cards in the mail--a peculiar reward for maxing-out his Citibank
    Visa. Over the next seven months, Daniel received Citibank MasterCard
    and Visa ``Gold cards'' with rapidly rising credit limits as well as
    several retail credit cards. For Daniel, it was amazing that all of
    these credit card applications were ``pre-approved'' before he had
    applied for his first job. Apparently, he thought, this reflected the
    banks' confidence in his future earning ability.
        By the time Daniel finished his B.A. degree in 1990, he had over
    five thousand dollars in credit card debt. Although he does not
    remember most of these purchases, Daniel is grateful that his credit
    cards enabled him to enjoy a middle class lifestyle before he had a
    well-paying job. In fact, this consumer debt did not seriously concern
    Daniel because he was convinced that he would earn a good salary soon
    after completing his studies. This is why he justified the frequent
    payment of his consumer debts through cash advances and balance
    transfers from bank cards--the credit card ``shuffle.'' Over the next
    two years, Daniel used students loans and credit cards to finance his
    Masters' degree in accounting. Upon graduating in fall 1991, Daniel had
    amassed over $15,000 in credit card debt. As a Certified Public
    Accountant (CPA), Daniel expected that he would be able to quickly
    payoff these high interest consumer debts. To his shock, however, the
    1989 recession severely affected his employment prospects. Daniel spent
    the summer interviewing for jobs as an accountant and paid his living
    expenses with his credit cards. Although no longer a student but still
    looking for his first job, Daniel's credit card debts were approaching
    $20,000 when he took a ``temporary'' position as a security guard.
    Daniel was stunned that his first annual salary of approximately
    $15,000 was less than his total credit card debt
        Even when a ``good job'' did not materialize, Daniel did not
    perceive his credit card debt as a serious problem. He was certain that
    it was simply a matter of time before he became financially solvent.
    Undeterred by his escalating consumer debt, Daniel's full-time job and
    extensive credit history enabled him to obtain even more credit and
    ``buy whatever I wanted. In stores, I would apply for instant credit
    cards and be set to buy in a few minutes.'' Unfortunately for Daniel,
    his temporary position lasted nearly two years. As he explains,
    ``During this time, I was basically surviving off credit cards. They
    paid my rents, entertainment, gas, and shopping...'' In 1993, Daniel
    finally joined a Washington, D.C. firm as an accountant. As a CPA, his
    initial salary was over $50,000 and he believed that he could begin
    reducing his over $25,000 in credit card debt. However, Daniel's
    newfound professional success persuaded him to ignore his original goal
    of escaping credit dependence and he quickly accepted ``pre-approved''
    offers for Chevy Chase Gold Visa, American Express, and Diner's Club
    cards. Emboldened by his new buying power, Daniel bought a condominium
    and furnished it with his credit cards. He rationalized the condominium
    as a good investment and, after all, the mortgage unlike his credit
    card debts is tax deductible. After a couple of salary increases,
    Daniel's rising standard of living soon included a new car and of
    course auto loan payments in 1994. Now Daniel felt like his hard work
    was being rewarded as a tax paying member of the American middle class.
        By 1996, even with an annual salary of nearly $60,000, Daniel's
    credit card debts exceeded $30,000--and rising. According to Daniel,
    ``My paycheck could only pay my condo, car, and credit cards. Then I
    had to depend on the credit cards for gas, groceries or anything else I
    wanted to buy. No savings. [Over] a few months, I would make thousands
    of dollars in credit card payment and the debts were not going
    anywhere.'' Efforts to replace his high interest credit card debts with
    lower interest debt consolidation loans were time consuming and
    ultimately fruitless. Banks were reluctant to approve new consumer
    loans with such a high debt to income ratio. Reluctantly, Daniel
    believed that he had no other option but to file for personal
    bankruptcy. In early 1997, his Chapter 7 filing was approved by the
    D.C. bankruptcy court and all of his credit card debts were discharged.
        Today, Daniel is recovering from the personal pain of bankruptcy
    and thankful for the opportunity to rebuild his financial future.
    ``Without it [bankruptcy], I would still be increasing my credit card
    debt and they [banks] would still be increasing my credit limits.  .  .
    instead of relying on cash [advances] from my credit cards I can now
    get cash from my savings account.'' Daniel still uses ``plastic'' but
    only for convenience and ``prestige.'' That is, to minimize suspicions
    about his past financial problems; he has a debit card and a `secured'
    Visa credit card. The credit line on his collateralized secured card
    has been raised twice and Daniel hopes that he will be approved soon
    for a retail credit card following two previous rejections. Although
    the days of ``easy credit'' are temporarily over, Daniel knows that it
    is only a matter of time before he is able to rejoin the ranks of the
    middle class with the full privileges of a Gold credit card.You know
    office politics.'' In sum, a review of Daniel's bankruptcy petition
    portrays a well-paid professional who appears to have been unable to
    control his consumption desires. In reality, however, about two-thirds
    of his credit card debt was accumulated during college and his initial
    job search. Hence, the roots of Daniel's financial insolvency were sown
    by his credit dependency as a university student and the unforeseen
    difficulty in obtaining a job in the aftermath of the 1989 recession.

           The Arrival of the `Magic of Plastic' in the Golden Years:
               patching the social safety-net of elderly survival

        Among America's senior citizens, the credit card industry has
    encountered the most formidable challenge to its promotion of easy
    credit.\4\ The debt abhorrent behavior of the parents and grandparents
    of America's Baby Boomers was profoundly shaped by their personal
    experiences during the Great Depression. Today, however, many seniors
    are confronting formidable economic realities that are challenging
    their longstanding attitudes toward ``easy'' consumer credit. The fact
    that the credit card industry began aggressively marketing its products
    to senior citizens in the late 1980s, including lucrative agreements
    with the American Association of Retired Persons (AARP), illuminates
    the intense resistance of these generations to the social shame of
    personal debt. Not surprisingly, according to the 1995 Survey of
    Consumer Finances, older Americans are the least likely to revolve debt
    on their credit cards. In answering `yes' to the question, ``Do You
    Almost Always Pay Off Your Credit Card Balance,'' the response by age
    of respondent is revealing: under 35 years old (40.2%), 35-44 (40.7%),
    45-54 (47.1 %), 55-64 (59.3%), 65-74 (72.0%), and 75 and older (85.8%).
    And yet, with stagnant retirement incomes and rising rent and medical
    costs, credit cards increasing are becoming the financial glue of the
    crumbling social safety-net of America's senior citizens. This sudden
    receptivity reflects both industry policies (reluctance to give
    conventional, low-interest ioans to retirees and aggressive credit card
    marketing campaigns) as well as the growing desperation and
    socialisolation of the elderly--especially widows. This trend is
    illustrated by 78 year old Jeannie May Lawson.
    ---------------------------------------------------------------------------
        \4\ For an extended discussion of credit card use among senior
    citizens, see Robert D. Manning, ``Aging Into Debt'' in Credit Card
    Nation (Basic Books: 2000).
    ---------------------------------------------------------------------------
        Jeannie May has worked hard, all of her life, to raise three
    children and generally to ``just get by.'' Divorced for over 40 years,
    she survives on asocial security check of $648 per month and part-time
    work in the ``old folks home'' where she lives in a small town in
    upstate Illinois; the rent for her subsidized, one-bedroom apartment is
    $196 per month. Unlike many of her generational peers, Lawson lacks an
    accumulated ``nest egg'' for retirement. Her low-income, blue-collar
    jobs did not offer a private pension and divorce deprived her of the
    opportunity for greater household savings. More importantly, the modest
    home that she and her husband purchased with a VA loan after The War,
    was sold years ago. This seemingly uneventful decision has had a major,
    unforeseen impact on Lawson's ``Golden Years.'' That is, home equity is
    the most important source of personal wealth for retirement, especially
    among working class families. Today, nearly four out of five (79.1 %)
    seniors over 64 years old are home owners and only 8 percent are still
    paying on their first mortgages while 28 percent have various home
    equity and second mortgages. Not surprisingly, home equity accounts for
    most assets of older adults.
        Jeannie May symbolizes the plight of America's working class
    elderly. Born in 1915, the United States was still a largely rural
    society--especially in the Midwest--when she was growing Lap in
    northern Illinois. The youngest of five children, her parents worked
    the small family farm that produced mostly corn, and some vegetables
    for the market as well as pigs, cows, and chickens primarily for
    household consumption. Money was scarce as the family, second-
    generation immigrants from England, struggled to make ends meet in a
    local farm economy where credit was informally negotiated and debts
    were commonly satisfied through bartered exchanges. For example, the
    local dentist was frequently paid for his services ``in-kind'' with
    eggs, butter, and freshly dressed chickens while the school teacher
    received food and housing which was supplemented with a small monetary
    salary. This practice of non-monetary exchange was especially common
    during the 1930s when Lawson's most vivid memories concerning credit
    and debt were molded. ``Moneywas hard to come by in those days.  .  .
    many people were losing their farms and even their homes.  .  . it was
    tough times.''
        Jeannie May's rural life experiences, Calvinist religious
    upbringing, and recollections of the Great Depression profoundly shaped
    her attitudes toward personal debt. On the one hand, the economic
    rhythms of the seasonal farm economy required rural families to rely on
    credit for agricultural and household supplies during the planting and
    fallow seasons and then repay their debts after harvesting the corn or
    selling some livestock in the cash economy. Hence, even among yeoman
    farmers, credit and debt were ``natural'' features of their modest
    lifestyle. On the other hand, the local Protestant churches emphasized
    the Calvinist values of hard work and frugality as evidence of a
    virtuous life. This emphasis on savings as a ``sign'' of potential
    spiritual salvation contrasts sharply with the negative views toward
    leisure activities and personal consumption. Lawson remembers sermons
    in the little white church that chastised ``idle hands'' and indolent
    ``material desires'' as moral sins that would lead to disastrous
    personal debt. Together with the painful experiences of the Great
    Depression, when friends and family members ``lost everything to the
    banks,'' Lawson entered her ``golden years'' with very conservative
    attitudes toward credit and debt.
        At 78 years old, Jeannie May still enjoys an active lifestyle that
    belies her age. Unlike her affluent brother, John, she was unable to
    translate the generational advantages of rising wages, inexpensive
    housing, and low educational costs into economic security in
    retirement. This is partially due to Jeannie May's divorce and
    inability to re-marry which forced her to assume the economic
    responsibility of raising her three children on a single income.
    Although national poverty rates among older adults at least 65 years
    old have been falling over the last two decades, from 15.7 percent in
    1980 to 10.8 percent in 1996, older women are nearly twice as likely as
    older men to live in poverty. Also, African American and Latino seniors
    are nearly three time as likely as Whites to live in poverty; Asian and
    Pacific Islander rates are nearly the same as Whites (9.7 versus 9.4%).
        For Lawson, her fragile financial circumstances mean that she can
    not enjoy a leisurely life in her final years; she would prefer to
    catch up on her ``patchin' [a quilt] or kniftin' [an Afghan]'' for a
    newborn nephew or niece. Instead, when her health permits (she has
    diabetes and high blood pressure), Jeannie May works 15 to 30 hours per
    week in the ``[retirement] home's'' kitchen as well as housework and
    errands for ``neighbors'' who are usually several years younger.
    Lawson's experience, of course, is not unusual. The U.S. Census Bureau
    reports that 8.6 percent of women and 17.1 percent of men over 64 years
    old are still ``officially'' employed in 1997, with projected increases
    in 2006 to 8.7 percent for senior women and 17.8 percent for senior
    men. Significantly, this rate for men has declined from 19.0 percent in
    1980 whereas it has risen from 8.1 percent for women. 15 Although
    Lawson occasionally receives small financial gifts from a son in
    Seattle, her older brother is the only source of economic assistance
    that she can depend on in case of an emergency. That is, until the day
    that she received that miraculous piece of plastic in the mail--her
    secret financial savior.
        Jeannie May does not recall the first VISA solicitation that
    arrived in late 1987. What she does remember is her excitement over the
    financial ``freedom'' that it offered. Afterall, as a struggling single
    mother, Lawson was always grateful for the higher standard of living
    that installment credit had provided for her and the children in the
    1940s and 1950s. TheVA home mortgage loan, used car loans from finance
    companies, corporate loans for appliances and furniture, store credit
    from local merchants for clothing, and a charge card for gasoline.
    Lawson confides that she rarely paid off the balance of her credit
    accounts at the end of the month and was often late with her payments.
    Although she accepts most of the responsibility as a poor ``budget
    keeper,'' she laments that her ex-husband's irregular child support
    increased her dependence on consumer credit by ``stretching'' her
    meager earnings.
        Unlike her past experience with proprietary credit cards (Sears,
    Montgomery Ward), the new ``universal'' VISA card offered herthe
    ``magic'' of purchasing items nearly anywhere she wanted and whenever
    she wanted them: local merchants, mail order, and even over the
    telephone. More importantly, it enabled Lawson to the avoid the
    scrutiny of her financially secure brother (a successful dentist) and
    his condescend ing wife who frequently criticized Jeannie's lifestyle
    when ``helping'' with her financial crises. Hence, by avoiding such
    embarrassing financial assistance, Jeannie May did not have to confront
    the Calvinist guilt that would eventually erupt from her escalating
    mountain of consumer debt. This attitudinal denial was reinforced by
    the marketing strategies of the the credit card industry. As long as
    she ``paid her minimums [monthly credit card payments],'' Jeannie May
    convinced herself that she was satisfying her financial obligations and
    thus adhering to her generation's moral code of conduct.
        Unaware of the technological advances in mass marketing, Lawson was
    flattered by the personalized ``invitations'' for bank cards that
    arrived in her mailbox. Jeannie's limited education (she did not
    complete high school), low self-esteem (modest family background),
    meager income as a divorced, blue-collar worker (``scarred'' credit
    history), and respect of authority figures (bankers), made her
    especially susceptible to the marketing ploys that affirmed her self-
    worth as a ``valued'' client. Even after violating her own Calvinist
    values and life experiences during the Great Depression, by. consuming
    more than she could afford, Jeannie willing accepted the banks'
    explanation that she was credit worthy and that she ``deserved'' to be
    ``rewarded'' with a higher line of credit. After all, she did what she
    was told, at least for the first few years: promptly remit the minimum
    payment at the end of each month. As Lawson recounts,

    ``I never really looked at the credit card bills much. What was
            important [to me] was what I had to pay at the end of the
            month.  .  . I didn't really keep track of how much I owed. I
            paid 'em what they wanted [minimum payment]. They were happy
            and I was happy.''

        What is striking and especially disturbing about Jeannie May's
    experience is the ease of manipulating her to assume debt levels that
    she was incapable of financing much less eventually able to pay-off.
    Indeed, the predatory marketing strategies of the credit card companies
    are very effective in exploiting the low self-esteem and falling
    standard of living of America's senior citizens. As a divorcee who
    never remarried, for example, Jeannie May's material lifestyle had
    plunged below that of her brother and even her children--especially
    after her retirement. Although she accepted the Calvinist ethos of hard
    work and frugality, Lawson yearned for some of the indulgences that
    members of the middle class take for granted: vacation trips, new cars,
    household furniture, restaurant outings, gift-giving, and even
    chocolate candies. With few friends (most deceased or in nursing homes)
    and a disconnected extended family (children in Seattle, Milwaukee, New
    York), she began coping with her loneliness by embracing material
    rewards during her leisure time. In the process, Jeannie May sought to
    emulate the consumption privileges of many middle-class wives (such as
    her sister-in-law), whom balanced their husbands' economic success as
    ``producers'' by being the primary household ``consumers.''16 It was
    through the magic of Jeannie May's piece(s) of plastic that she was
    able to finally enjoy a comfortable life that previously had been
    withheld from her.
        For Lawson and millions of elderly citizens, credit cards are
    serving increasingly important purposes during the current era of
    fragmented families and an increasingly fractured social-welfare
    system. Indeed, Jeannie May did not use her credit cards frivolously by
    middle class standards, at least at the beginning. The car needed
    repairs and new tires, her automobile insurance premiums were raised,
    her diabetes and high blood pressure medications were more costly, she
    replaced her reading glasses, and finally bought anew winter coat.
    Lawson's newfound purchasing power also unleased the ability to satisfy
    other ``wants'' that she felt had been unfairly denied. This led to
    such purchases as a sofa and dining room table for her apartment, a set
    of pots and pans for the kitchen, new clothes, knitting and sewing
    materials/supplies, restaurant dinners, and small gifts for family
    members during the holiday season.
        Although supermarkets did not initially accept credit cards, she
    charged groceries and household supplies at drug stores and even mail-
    order steaks (delivered by dry ice) from Nebraska. Later, Lawson began
    making purchases over the telephone via the Home Shopping Network.
    Jeannie May described with irrepressible glee her anticipation of the
    UPS truck as it made its appointed deliveries of her eagerly awaited
    ``surprises.'' For Lawson, the magic of plastic offered the opportunity
    to enjoy the consumer lifestyle promoted by mass advertising yet denied
    by Social Security.
        By the time Jeannie had maxed out her first credit card in late
    1988, about $3,000 in less than a year, she truly believed the banks'
    form letters that extolled her responsible credit history. In fact, she
    began to accept the ``pre-approved'' credit card solicitations that
    arrived in her mail box with the now familiar logos of VISA and
    MASTERCARD, as these were not just any banks that were ``callin' on
    her.'' Esteemed financial institutions such as Citibank, First Chicago,
    Continental Bank, and Chase Manhattan were actually vying for her
    business. According to Lawson, ``I figured if the banks keep on sending
    `em to me, then I figured I'd keep on usin' em.  .  . [Afterall]
    they're in the business of lending money. I. trusted 'em. I thought
    they knew what they were doing.'' And they did. Instead of eliciting a
    financial warning after reaching her credit card limit, Jeannie's
    ``mature'' account status triggered a second and then a third card in
    1989 followed by a fourth credit card in early 1990. By 1991, Lawson
    had a huge credit card debt and was having difficulty ``making all my
    [minimum] payments.''
        Jeannie May really did not know how much debt she had accumulated
    (over $12,000) or even how bad her financial situation was at the time.
    What she did admit was that the infirmities of old age were finally
    catching up to her. ``I never thought of myself as one of the old folks
    [in the retirement home].  .  . I could get around on my own and even
    helped them with their own chores. With my car and job, my life really
    hadn't changed much [in retirement].  .  . I just didn't have to work
    as hard [at a full-time job].'' The reality, however, was that she
    could not live adequately on her Social Security income--even with
    participation in public programs for the elderly such as subsidized
    housing and medical care. As a result, it became increasingly difficult
    to budget her modest monthly income due to rising health-related
    expenses and an uncertain level of supplementary earnings. On the one
    hand, her high blood pressure and diabetes required more costly
    medicines--even with Medicaid assistance--which increased her need to
    work. On the other, her poor health meant that she could not work
    regularly at ``the home'' and thus could not rely on extra earnings to
    supplement her meager Social Security check. Although Jeannie's
    children remain in contact with her, they provide little financial
    help; occasionally they send money, but it amounts to only a ``couple a
    hundred dollars a year.'' Hence, with a limited family support system
    and America's shrinking social safety-net, Lawson's credit cards became
    her most reliable form of assistance against the unforeseen and
    debilitating exigencies of the aging process.
        it was primarily for economic reasons that Jeannie May ignored her
    doctor's advice to ``slow down'' and stubbornly continued to work part-
    time. For Lawson, employment was crucial to maintaining her newfound
    independence. That is, work enabled her to shield the escalating credit
    card debt from outside scrutiny while continuing to enjoy her
    relatively comfortable lifestyle. Unfortunately, the combination of
    financial duress, failing health, and a long life of arduous manual
    labor finally culminated in a mild stroke at the end of 1991. Already
    stretched to her financial limit, the temporary end of her part-time
    job forced Jeannie May to finally confront the reality that she could
    no longer make the minimum payments on her credit cards. While
    convalescing at home, moreover, the tone of her credit card statements
    shifted radically--from friendly to concerned and then to threatening.
    It was at this time time that Lawson desperately sought help from the
    source of last resort: her brother. And, she knew that this decision
    would require a humiliating explanation as well as the end of her
    credit reliant lifestyle. For Jeannie, her Calvinist guilt and personal
    shame would soon be supplanted with the punishment of her previously
    spartan lifestyle.
        Lawson's brother, John, remembers the phone call that led to his
    dismay over the predicament of his sibling. John lived in a posh,
    northside suburb of Chicago and immediately made the three-hour drive
    to Jeannie's apartment. He had always been protective of his youngest
    sister and was surprised by her agitation over what he assumed was a
    relatively minor problem. Afterall, she was a frugal person and there
    were no obvious warning signals to indicate a sudden change in her
    lifestyle. In fact, John was unaware that Jeannie May had any bank
    cards. Upon reviewing her credit card charges, he found not one but
    four separate accounts. Furthermore, John was able to reconstruct her
    consumption patterns. What were normal and modest purchases for him
    were often unnecessary or too costly for Jeannie. Even so, John was
    impressed by the general pattern of essential charges: car repairs,
    gasoline, medicine, groceries, clothes, insurance, and other necessary
    household items.
        After compiling all of Lawson's outstanding credit card bills, John
    was shocked by what they revealed. In less than five years, Jeannie May
    had amassed over $12,000 in consumerdebt. Fear and shame had led her to
    ignore the cumulative outstanding balance while the marketing campaigns
    of the credit card industry continued to persuade Lawson that she was a
    ``good'' customer. For Jeannie May, her elevation to a middle class
    standard of living proved to be a temporary respite. After paying the
    rent, Lawson's Social Security check barely covered the minimum
    payments of her credit card accounts. Clearly, if she ever was to
    regain economic self-sufficiency, Jeannie May had to escape from this
    financial albatross and return to her more modest lifestyle. With the
    help of John's lawyer, Jeannie May filed for personal bankruptcy and is
    no longer responsible for her past credit card debts. In addition, John
    purchased a small annuity that supplements Lawson's retirement income
    (about $200/month) for the rest of her life. Although a compassionate
    and foresightful act, John's recent death of a heart attack at age 87
    means that Jeannie May has lost her only dependable source of economic
    assistance. For her and increasing numbers of the impoverished elderly,
    the ability to secure a bank credit card is the most realistic strategy
    for obtaining a modicum of financial security in their later years.
    And, this is not an unlikely prospect in view of the intensifying
    competition by credit card companies over new accounts of revolvers.

                                 Consumer Debt:
                 individual versus institutional responsibility

        In conclusion, the economic expansion of the last decade was not as
    strong as described by leading economic indicators due to bank lending
    policies that promoted inflated consumer expectations through easy
    access to high cost consumer loans whose interest rates far exceed the
    pace of household income growth. Similarly, the economic indicators do
    not necessarily imply a consumer-led recession if the leading financial
    services conglomerates like Citigroup, Bank of America, and J.P. Morgan
    Chase do not overreact to the abrupt decline in national economic
    growth. The concern is that these financial services corporations may
    ``tighten'' their lending policies for small businesses (primary
    generator of U.S. jobs) and heavily indebted families that previously
    were considered acceptable credit risks. This may not only limit future
    levels of business investment and household consumption--which would
    exacerbate the downward spiral in macro-economic growth--but it may
    also force tens of thousands of financially distressed households into
    personal bankruptcy due to unforeseen events. As the most comprehensive
    analysis of consumer bankruptcy in the early 1990s shows,\5\ most
    filings are attributed to unforeseen events (job loss, health/medical
    expenses, divorce) rather than excessive consumer spending patterns.
    Surprisingly, the consumer financial services industry has responded by
    reducing its ``fair share'' contributions to nonprofit consumer credit
    counseling organizations at the same time that the demand for these
    services is rapidly escalating. Like replacing small business loans
    with high interest credit cards, the question is whether the financial
    services industry is truly committed to reducing the national rate of
    consumer bankruptcies by supporting institutionally responsible
    policies that balance the often unrealistic consumption desires of
    American households.
    ---------------------------------------------------------------------------
        \5\ Teresa Sullivan, Elizabeth Warren, and Jay L. Westbrook, The
    Fragile Middle Class: Americans in Debt (Yale University Press, 2000).
    ---------------------------------------------------------------------------
        With the renewed efforts of the financial services industry to
    enact more stringent personal bankruptcy laws, bankers could exacerbate
    a national economic slowdown by forcing financially insolvent
    households to continue paying off a portion of their consumer debt--
    years after filing for personal bankruptcy. This is certainly not a
    propitious time for enacting such a painful and often devastating
    policy on some of America's most vulnerable households. Indeed,
    legislative proposals tend to reflect an societal context of rapid
    economic growth rather than a sudden and unexpected economic slowdown.
    The U.S. economy needs greater stimulation through increased consumer
    demand rather than curtailing the future buying power of a large
    segment of the U.S. population.
        The industry's call for greater individual responsibility belies
    its disregard for its own traditional underwriting criteria. For
    example, grandparents with stellar past job histories are often
    rejected for credit cards while their grandchildren who have never had
    a full-time job are inundated with solicitations while in college.
    Similarly, recent colleges students may be rejected for credit cards
    after graduation when their entry-level salaries suggest an inability
    to service higher levels of debts. Indeed, a striking finding of my
    study of college student credit card debt is that recent graduates of
    the late 1980s and early 1990s were more likely to assume most of their
    credit card debtwhile seeking gainful employment than while enrolled in
    college. Today, college students routinely graduate with credit card
    debts of from $5,000 to $15,000 plus student loans before they enter
    the job market. With the specter of a tight job market in the near
    future and the continued corporate promotion of inflated consumer
    expectations, it can be expected that the bankruptcy rate of recent
    college graduates will continue to soarwith potentially disastrous
    long-term consequences. Indeed, the faster growing group of bankruptcy
    filers last year were individuals 25 years old or younger.
        Clearly, the recent assumption of tremendous levels of consumer
    debt--provided by financial services institutions that have routinely
    ignored their traditional underwriting criteria--requires
    accountability and financial responsibility from both sides: borrowers
    and lenders. Indeed, lending policies that routinely require the poor
    and heavily indebted to subsidize the low and even free cost of credit
    card loans to the affluent through escalating interest rates and
    penalty fees, does not reflect an appropriate policy of shared
    individual and institutional responsibility. In fact, increasing the
    financial obligations of filers to their creditors after bankruptcy
    would encourage banks to continue extending ``easy'' credit to those
    least able to assume their financial responsibilities during a period
    of economic uncertainty and distress. Banks and other financial
    services institutions should share the pain as well as the gain
    associated with the liberal extension high cost, consumer credit.
    Otherwise, consumer lending policies of financial services institutions
    may continue to discourage the promulgation of prudent and responsible
    underwriting policies. It is my hope that the final form of this
    legislation will promote personal responsibility as well as corporate
    accountability. Thank for you for this opportunity to present the
    implications of my research before the Committee prior to its
    deliberations on this legislation which will impact millions of
    vulnerable citizens.

                                       Robert D. Manning, Ph.D.
                      Institute for Higher Education Law and Governance
                                       University of Houston Law Center

        Senator Sessions. Mr. Dean Sheaffer is the Vice President
    and Director of Credit for Boscov's Department Stores, in
    Laureldale, Pennsylvania.
        Mr. Sheaffer?

    STATEMENT OF DEAN SHEAFFER, VICE PRESIDENT, DIRECTOR OF CREDIT,
       BOSCOV'S DEPARTMENT STORES, INC., LAURELDALE, PENNSYLVANIA

        Mr. Sheaffer. Thank you very much. Good morning. My name is
    Dean Sheaffer. I am Vice President and Director of Credit for
    Boscov's Department Stores. Boscov's is a family owned Mid-
    Atlantic chain with stores in Maryland, New Jersey, two stores
    in Delaware, three stores in New York, and more than two dozen
    stores in our home State of Pennsylvania.
        I am testifying today on behalf of the National Retail
    Federation. I would like to thank the Chairman for providing me
    with the opportunity to testify before this distinguished
    committee.
        Between 1995 and 1999, national bankruptcy filings rose
    more than 60 percent. Last year, there were nearly 1.25 million
    bankruptcy filings. At Boscov's, we have significantly
    tightened our credit standards. Between 1996 and 2000, we
    closed, reduced the credit limit, or took other preemptive
    action on nearly 41,000 accounts, in direct response to
    increased bankruptcies.
        Despite these actions, Boscov's combined January and
    February 2001 bankruptcy write-off will be more than 40 percent
    higher than January and February of last year. Part of the
    problem is that higher-income people who do not really need
    Chapter 7 relief are using that chapter to wipe out all of
    their debts. These people are not on the margin.
        Our response, tightening credit, is a very blunt
    instrument. It does hurt the people who are at the margin--the
    young, the old, the low- to moderate-income. It limits their
    access to credit, but it does not get at the higher-income
    individuals who are filing bankruptcies of convenience.
        Mr. Chairman, I would like to put these numbers in
    perspective. If the current rate of filings holds, within the
    next decade one in every seven American households will have
    filed for bankruptcy. The system is seriously flawed. 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 single day. This money does not simply
    disappear. Last year, to make up for these losses, it cost each
    of our households several hundred dollars. Estimates suggest
    this year's numbers will be 10 percent higher, and next year's
    filings yet another 20 percent higher.
        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, such as
    catastrophic accident, illness, divorce, or job loss, from
    which they cannot otherwise recover.
        Finally, most people who file for bankruptcy do need
    relief. We must be very careful to distinguish the average
    filer who uses the system properly from the smaller but
    significant group of others who misuse the system for their
    benefit.
        For many years, we tracked the payment history of those of
    our customers who use the Boscov's card. The vast majority of
    our customers pay as agreed. In the past, however, we could
    occasionally see a customer who might fall behind a few months,
    make payments to catch up, fall behind again, attempt to
    recover, and so forth. We monitored these accounts and
    intervened as necessary, perhaps by suggesting consumer credit
    counseling or by limiting their credit to minimize the damage.
        Today, however, we see a very different picture. Often, the
    first indication we receive than an individual is experiencing
    financial difficulty is when we receive their notice of
    bankruptcy petition. In a 1998-99 study at Boscov's, almost
    half of the bankruptcy petitions we received were from
    customers who were not seriously delinquent at the time they
    made the decision to file bankruptcy. It appears that
    bankruptcy is increasingly becoming a first step rather than a
    last resort.
        Senator Biden. Could you repeat that again? I am sorry. I
    am not sure I understood what you just said about those who
    filed were not seriously----
        Mr. Sheaffer. When they made the decision to file
    bankruptcy, their account at Boscov's was not seriously
    delinquent.
        Senator Feinstein. Was not seriously----
        Senator Biden. Delinquent.
        Mr. Sheaffer. Delinquent, past due.
        Senator Biden. In other words, they were not in trouble yet
    at Boscov's.
        Mr. Sheaffer. Right.
        In today's law, individuals have a choice as to whether to
    file in Chapter 7, which generally wipes out all their
    unsecured debts, or to file in Chapter 13. Instead of wiping
    out everything, a Chapter 13 filer attempts to pay as much as
    her or she can afford and then the court discharges the rest.
        Not surprisingly, most people 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 at anywhere from 30,000 filers per year
    to nearly a quarter of a million.
        Why are so many persons asking the court to make others pay
    for their debts? Part of it is lawyer advertising. We have all
    seen the ads on TV by lawyers promising to make individual's
    debts disappear. Some do not even mention bankruptcy; they talk
    about restructuring of finances. I question whether these
    aggressive advertisers inform their clients about the serious
    downsides of filing bankruptcy. I also believe part of the
    problem is the declining social stigma associated with filing
    for bankruptcy.
        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 will
    not keep the subgroup of filers who could pay from either
    filing or from filing on the wrong chapter, Congress must
    establish a mechanism that will, and that is simple, fair and
    efficient.
        In 1998, 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. But for that subgroup of filers, for those higher-
    income individuals who would abuse Chapter 7, the needs-based
    test would have said no, pay what you can afford, then society
    will wipe out the rest.
        Last year, we supported the conference report that passed
    both the Senate and the House, but died while Congress was out
    of session. We continue to support both S. 220 and H.R. 333,
    which are identical to last year's conference report. However,
    we are deeply concerned that if these heavily negotiated bills
    are further watered down, the intended benefits are lost.
        We are also deeply concerned that some wish to attach
    amendments regarding essentially unrelated issues. While these
    issues may be important, they should stand on their own merit.
    In the context of bankruptcy, their primary effect is to derail
    the critical, needed changes to bankruptcy law.
        In closing, I want to say that we offer credit to help our
    customers purchase merchandise. In fiscal year 2000, we
    received thousands of bankruptcy petitions amounting to $3.5
    million. For a retailer our size, that cannot continue.
        On behalf of the National Retail Federation, we urge
    Members of Congress to swiftly pass legislation to address the
    problems confronting the Nation's bankruptcy system in the form
    of S. 220 without amendment. 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.
        Thank you very much.
        Chairman Hatch. Thank you.
        [The prepared statement of Mr. Sheaffer follows:]

        Statement of Dean Sheaffer, Vice President, Director of Credit,
           Boscov's Department Stores, Inc., Laureldale, Pennsylvania

        Good Morning. My name is Dean Sheaffer. I am Vice President and
    Director of Credit for Boscov's Department Stores and Chairman of the
    Pennsylvania Retailers' Association. Boscov's is primarily a Mid
    Atlantic department store chain. In addition to Maryland and New
    Jersey, we have 2 stores in Delaware, 3 stores in New York, and more
    than two dozen stores in our home state of Pennsylvania. I am
    testifying today on behalf of the National Retail Federation. I would
    like to thank the Chairman for providing me with the opportunity to
    testify before this distinguished committee.
        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 2000 sale (2000 sales of $3.1
    trillion. NRF's members and the consumers to whom they sell are greatly
    affected by the recent surge in consumer bankruptcies.
        Bankruptcies are still out of control. Between 1995 and 1999,
    national filings rose more than sixty percent (60%). In Pennsylvania
    where we are based, Chapter 7 bankruptcies grew by 90 percent in that
    same time period. Nationally, filings continue to exceed the one
    million filing record set in 1996. Last year there were nearly 1\1/4\
    million bankruptcy filings, the overwhelming majority of which (more
    than 95 percent) were consumer filings. and the latest trends are up
    dramatically.
        At Boscov's, we have--credit. Between 1996 and 2000 we closed or
    reduced the credit limit or took other pre-emptive action on almost
    41,000 accounts in direct response to increased bankruptcies. Many of
    those people would have been good customers, but we had to restrict
    their access to credit because that is the only tool at our disposal.
    We did not want to do it. And yet despite these hesitations, if the
    current trend continued, Boscov's combined January and February 2001
    bankruptcy write off will be more than 40% higher than January and
    February of last year.
        Part of the problem is that higher income people, who do not really
    need Chapter 7 relief, are using that chapter to wipe out their debts
    regardless. These are not people at the margin. This is plain misuse.
    Tightening credit is a very blunt instrument. It hurts people at the
    margin-it limits their access to credit--but it does not get at the
    higher income individuals who are filing bankruptcies of convenience.
    That is why we need this legislation, to target bankruptcy misuse.
        Mr. Chairman, I would like to put these numbers in perspective.
    Bankruptcy filings are more than triple now than they were during the
    much worse economic conditions that existed in the 1980's. If the
    current rate of filings holds within the next decade, 1 in every 7
    American households will have filed for bankruptcy. The system is
    seriously flawed.
        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. Estimates suggest this
    year's number will be 10% higher and next years filings another 20%
    higher. If these bear out, bankruptcy will truly be out of control.
        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 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 other 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 patters 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 to minimize the amount of damage, prior to
    their 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. In a
    1998/1999 study at Boscov's, almost half of the bankruptcy petitions we
    receive were 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 filing
    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 to 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 time that number. Whatever the figure, we should not treat
    bankruptcy as a ``get out of debt free'' card that can be used by tens
    of 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 do not
    even mention bankruptcy--they talk about ``restructuring'' you
    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 costs ``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
    80 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 whet they actually 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. There have also been a number of high profile celebrity
    bankruptcies in recent years. I cannot help but think that this sends a
    message tot he public that the stigma of bankruptcy is fast
    disappearing.
        Finally, these changes have revealed a flaw in the system itself.
    Out bankruptcy code allows individuals to choose the chapter they wish
    to file in, regardless of need. If shame will not 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.
        In 1998, 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 other
    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.'' Last year we supported the conference report that
    passed both the Senate and House, but died while Congress was out of
    session. We continue to support the both S. 220 and H.R. 333 which are
    identical to last years' conference report. However, we are deeply
    concerned that if these heavily negotiated bills are further ``watered
    down'' the intended benefits will be lost. We are also deeply concerned
    that some wish to attach amendments regarding essentially unrelated
    issues. While these issues may bear important, they should stand on
    their own merit. In the context of bankruptcy their primary effect is
    to derail the critical, needed changes to Bankruptcy law.
        In closing, I want to say that we offer credit to help our
    customers purchase our merchandise. Out typical retail balances are not
    large, but we have lots of customers. In fiscal year 2000 we received
    thousands of bankruptcy petitions amounting to 3\1/2\ million dollars.
    For a retailer of our size, that cannot continue. 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 in the form of S. 220 without amendment,
    now.

        Chairman Hatch. Ms. Vullo?

      STATEMENT OF MARIA T. VULLO, PARTNER, PAUL, WEISS, RIFKIND,
                WHARTON AND GARRISON, NEW YORK, NEW YORK

        Ms. Vullo. Thank you, Mr. Chairman and Senator Leahy and
    Senator Schumer, for inviting me to appear before this
    committee today. My name is Maria Vullo and I am a partner with
    the law firm of Paul, Weiss, Rifkind, Wharton and Garrison. I
    was the lead counsel for the plaintiffs in the case in
    Portland, Oregon, in which a jury rendered a $100 million
    verdict against anti-choice extremists who had threatened my
    clients' lives.
        I am here in support of the Schumer-Leahy amendment to the
    Bankruptcy Code which would make violence and threats of
    violence against family planning clinics non-dischargeable in
    bankruptcy. This amendment is needed to prevent further abuse
    of the bankruptcy system.
        Senator Sessions mentioned before Mobile, Alabama, and
    Pensacola, Florida, on a different issue. But what is
    significant, in my view, about those two locations is that an
    abortion doctor was killed in Mobile, Alabama, and two were
    killed in Pensacola, Florida, in 1993 and 1994. Those who
    perpetuate that type of violence and who threaten similar
    violence should not have the benefit of this Nation's
    bankruptcy laws.
        I speak to this issue from extensive personal experience as
    a lawyer involved in litigating this precise issue for more
    than a year. Although I certainly do not seek out this honor, I
    suspect I might be the legal expert on the current willful and
    malicious injury exception to discharge under the current
    Bankruptcy Code, and why the existence of that exception simply
    is not a sufficient answer to the problem that the Leahy-
    Schumer amendment seeks to remedy.
        I have litigated this issue in six different bankruptcy
    courts resulting from the judgment that my clients obtained in
    Portland, Oregon, in February 1999. I filed that case on behalf
    of those clients in October 1995. After 3 1/2 years of delays
    and other tactics, the jury, in February 1999, awarded over
    $100 million in damages under the FACE statute which Congress
    passed and the President enacted in 1994.
        My clients were two reproductive health care clinics and
    four individual physicians. They have faced constant attack by
    anti-choice extremists who have threatened their lives and who
    believe that they are not required to follow the laws of this
    country. As a result, my clients had to spend hundreds of
    thousands of dollars for security devices to protect themselves
    from violent attack. That included bullet-proof vests, bullet-
    proof windows, wigs, disguises, and motion detection devices at
    their homes.
        The jury's damage award included full compensation for
    those out-of-pocket losses, as well as significant punitive
    damages to deter future violations. However, my clients have
    not collected a single cent of that award, and the tactics
    continued after trial by an abuse of the bankruptcy system.
        There were 12 individual defendants in the case, and 6 of
    them filed for bankruptcy after the verdict in 6 different
    places across the country. I have litigated in Baltimore,
    Maryland; Greenbelt, Maryland; Norfolk, Virginia; Jackson,
    Mississippi; Chattanooga, Tennessee. The last one is escaping
    me at the moment, but I have litigated in six different
    bankruptcy courts the exact same issue that I tried in a jury
    trial that lasted a month and that I tried after 3\1/2\ years
    of pre-trial proceedings in that court.
        The proposed amendment, in my view, would do a lot to
    prevent further abuse of the Bankruptcy Code. Unfortunately,
    the current Code, however, allowed the defendants the
    opportunity to abuse the system. The actions of these
    defendants are totally inconsistent with the objectives of the
    Bankruptcy Code to give honest debtors a fresh start.
        There was no question in my case that every one of the
    defendants who filed for bankruptcy did so precisely to avoid
    my clients' collection efforts. Five of them filed on the eve
    of their depositions. One of them filed on the day of his
    deposition, and he is Michael Bray, who has also served time in
    Federal prison for bombing abortion clinics, seven of them.
        These defendants have vowed never to pay any award obtained
    by an abortion provider. They claim not to be subject to the
    laws of this Nation. Unlike the honest debtor whom the
    Bankruptcy Code is intended to protect, these defendants never
    sought to work out a payment plan to pay any part of the
    judgment. They simply sought a discharge in bankruptcy so that
    the jury's verdict would be a complete nullity and they would
    be able to thumb their noses at the system. This is an abuse of
    the bankruptcy laws.
        I litigated it in six different bankruptcy courts.
    Fortunately, I have been successful. We have won in four of
    those bankruptcy courts on the dischargeability question, on
    the willful and malicious injury concept. We have won that,
    however, over a year of litigation, where I had to relitigate
    and relitigate over and over again the exact same issues that
    were tried in the Oregon case. This is standing the doctrines
    of res judicata and collateral estoppel on their heads.
        My firm did all of this for free. We volunteered our time,
    over 3,000 lawyer hours, just in these bankruptcy cases over
    the course of a year, not to mention the out-of-pocket
    expenses. However, it is unfortunate that few private lawyers
    would be willing to undertake this task, and my clients, who
    are individual physicians, cannot do this themselves. It simply
    costs too much.
        I expect that critics of the amendment will ask why it is
    needed, given that I have won in four of the bankruptcy cases.
    To this, I have two brief responses. First, an amendment that
    will make clear what the law already provides should not be
    controversial.
        Secondly, the amendment is needed so that people will not
    be able to abuse the Bankruptcy Code again by invoking the
    automatic stay, by causing the relitigation and relitigation
    over and over again. This is sanctionable conduct and it should
    not be permitted to happen again.
        The FACE statute was passed overwhelmingly by Congress in
    1994 to protect women and their physicians from violence and
    intimidation. The statute has been effective in reducing clinic
    violence. My clients have further protection because of that
    statute, and the judgment and the injunction that they obtained
    under the FACE statute has gone a long way to ensure their
    personal safety.
        The Senate passed the Schumer-Leahy amendment just last
    year with 80 votes in favor of its passage. My personal
    experience both before and since that vote only confirms that
    the Senate was absolutely correct then in voting in favor of
    this amendment and it should do so again now. Those who commit
    acts of violence should not be permitted to perpetuate their
    illegal conduct by abusing the bankruptcy system.
        Abortion clinic bombers should not be able to even argue
    the willful and malicious injury issue. Like those convicted of
    driving while intoxicated or failure to pay child support,
    sound public policy compels that those who commit violence
    against abortion clinics must be held accountable without
    recourse to bankruptcy. The amendment will also reinforce the
    utmost importance of protecting women's reproductive health.
        I ask that my full written statement be made a part of the
    record, and I thank you, Mr. Chairman.
        Chairman Hatch. Without objection, we will put it in the
    record.
        [The prepared statement of Ms. Vullo follows:]

        Statement of Maria T. Vullo, Paul, Weiss, Rifkind, Wharton and
                          Garrison, New York, New York

        I appear before this Committee today because of my involvement in
    opposing the efforts by extremists to abuse the bankruptcy process and
    avoid paying judgments obtained under the Freedom of Access to Clinic
    Entrances Act (FACE). I was lead counsel for the plaintiffs in Planned
    Parenthood of the Columbia/Willamettee, Inc., et al. v. American
    Coalition of Life Activists, et al., No. 95-1671-JO (D. Or.), a case in
    which a Portland, Oregon jury, on February 2, 1999, awarded $109
    million against the defendants for their illegal treats against the
    plaintiffs' lives. The jury's verdict was rendered under FACE and the
    Racketeer Influenced and Corrupt Organizations Act (RICO), and included
    compensatory damages for plaintiffs' out-of-pocket security expenses
    plus punitive damages and treble RICO damages.
        After the verdict, the federal district judge, the Hon. Robert E.
    Jones, issued an injunction to prevent further threats threats against
    the plaintiffs and the judge included findings of fact to support that
    injunction. Among other findings, the trial judge found as follows:
    I conclude from my independent review of the evidence produced at trial
            that plaintiffs have proven by clear and convincing evidence
            that each defendant, acting independently and as a co-
            conspirator, prepared, published and disseminated the ``Deadly
            Dozen'' Poster, the Poster of Dr. Robert Crist and the
            ``nuremberg Files'' with specific intent and malice in a
            blatant and illegal communication of true threats to kill,
            assault or do bodily harm to each of the plaintiffs with the
            specific intent to interfere with or intimidate the plaintiffs
            from engaging in legal medical practices and procedures.
                            41 F. Supp. 2d at 1154.
        At a one-month trail, the jury and the judge found that three
    separate items constituted illegal threats under the Face statute and
    extortion under RICO. Briefly, defendants threats consisted of
    ``wanted'' style posters that followed a pattern of similar posters
    targeting three physicians--Drs. David Gunn, George Patterson and John
    Bayard Britton--who were murdered following the distribution of the
    ``wanted'' posters naming them. These ``wanted'' poster threats are
    addressed in the legislative history of the FACE statute.
        The RICO enterprise, and the organization through which the
    defendants issued their illegal threats, was called the American
    Coalition of Life Activists (ACLA), an organization that required its
    leaders to be ``judgment proof.'' Following the enactment of FACE, in
    January 1995, ACLA released the first threat involved in the Oregon
    case, which was called the ``Deadly Dozen List.'' The Deadly Dozen List
    issued by ACLA contained the names and home addresses of thirteen
    physicians from around the nation--three of whom were plaintiffs in the
    Oregon suit. Immediately after the issuance of this threat, the FBI and
    the United States Marshal's Service contacted the physicians on the
    List, informing them that they should consider this a serious threat to
    their lives, advising them to take security measures, and offering them
    24-hour federal marshal protection.
        At an event later that year in August 1995 held in St. Louis,
    Missouri, the defendants issued their second direct threat, again under
    the ACLA name. This ``wanted'' style poster targeted another of our
    physician clients and included his photograph and other personal
    identifying information. Again, the doctor named on this ``wanted''
    poster was contacted by law enforcement and undertook significant
    precautions to ensure his and his family's personal safety.
        The third threat involved in the Oregon case was called the
    ``Nuremberg Files.'' After unveiling these Files in hardcopy form at an
    ACLA conference held in January 1996, ACLA arranged for this material
    to be posted on the Internet. Amidst images of dripping blood, the
    ``Nuremberg Files'' website contained the names and addresses of
    doctors and other health care workers around the country who provide
    reproductive health services, some including their children's names.
    Doctors who are still working appear in plain text; those who have been
    wounded are ``greyed out''; and those who have been murdered--have a
    line crossing out their names. After learning of this website, the FBI
    again contacted the named physicians and advised them accordingly.
        As the jury learned during the course of trial, my clients no
    longer enjoy the basic freedoms that most of us take for granted.
    Although they are medical professionals who live and work in relatively
    safe communities around the country, they have been forced to live as
    if under constant threat of imminent attack: they have purchased and
    regularly wear bullet-proof vests; they have installed extensive
    security systems including bullet-proof glass and reinforced steel in
    their homes and offices; they have warned their children's teaches of
    the threats by defendants; they have developed emergency plans should
    they come under attack, Including instructing a young child to hide in
    the bathtub should he hear gundshots; they vary their routes to and
    from work to protect themselves from assailants; they have installed
    window coverings to thwart snipers; they have purchased and wear
    disguises to avoid being recognized; and they are ever-vigilant in
    public. They are not secure in their homes or in their offices. They do
    not sit by windows in restaurants. And they even refrain from hugging
    their children in front of open windows.
        The passage of FACE has had a significant impact on the lives and
    safety of reproductive health care workers. But FACE and other statutes
    that are intended to combat violence of all forms will not be fully
    enforceable if those who are found liable for clear violations of the
    law are able to evade their obligations by filing for bankruptcy and
    avoiding the consequences of their illegal actions. The proposed
    amendment to the Bankruptcy Code is one important way to ensure that
    FACE is not rendered a nullity because of defendants' continued efforts
    to violate the law.
        I have been extensively involved in litigating the very issue
    before this Committee in six different bankruptcy courts across the
    country. Following the jury's verdict in February 1999, my firm faced
    the important task of enforcing the judgment that our clients had
    obtained after years of litigation and a month-long trial. Following
    the jury's verdict, several of the defendants announced that they did
    not intend to pay any of the amount awarded by the jury. For example,
    defendant Timothy Dreste--from St. Louis, Missour--announced to the
    press that he would not pay any part of the judgment against him. He
    stated: ``I have no means of paying it, and even if I did, I would
    never pay it.'' Later that year, Dreste pleaded the Fifth Amendment to
    every question regarding his assets during this judgment enforcement
    deposition.
        These statements are consistent with defendant's own Constitution,
    which specifically required the organization's leaders to be judgment
    proof. At page 4 of the document, under the heading ``Doctrine and
    Character,'' the ACLA Constitution states that members of the
    organization ``must. . .have their assets protected form [sic] possible
    civil lawsuits (judgment-proof).'' Thus, the members of ACLA, including
    the defendants in our lawsuit, intentionally have made themselves
    judgment proof precisely to avoid having to pay any part of the
    judgment that my clients obtained. These are not honest but
    disfortunate debtors who find themselves in dire financial straits
    through acts beyond their control. They are not the individuals that
    the Bankruptcy Code was enacted to protect.
        Defendant Michael Bray--who served time in federal prison for
    multiple clinic arson attacks--was one of the six defendants to seek
    bankruptcy protection following the jury's verdict in the Oregon case.
    Bray responded to the Judge's injunction by saying, ``I have no plans
    to submit to those kinds of unconstitutional edicts.'' Bray also stated
    that ``there's no money to be had'' and that he has no intention of
    changing his behavior although, he said, ``I may have to get creative
    about it, though.'' In a newsletter written by Bray after he filed for
    bankruptcy in December 1999, Bray discussed the deposition for which he
    never appeared and noted with respect to the Court's discovery orders
    requiring the production of documents, ``I am good with matches.'' Bray
    sought relief in bankruptcy court--and I submit he, too, has abused the
    Bankruptcy Code well beyond Congressional intent.
        Despite the jury's verdict, and the District Court's explicit
    findings of specific intent and malice, the defendants expected to
    obtain a ``discharge'' in bankruptcy--and thus not pay a single cent to
    the plaintiffs in satisfaction of the judgment. After months of trying
    of trying to obtain discovery of their assets, and after both the
    District Court and the Ninth Circuit denied defendants' motions for a
    stay of the judgment and injunction pending appeal, six defendants
    filed for chapter 7 bankruptcy in six different bankruptcy courts.
    These filings, themselves, were a mockery to the bankruptcy laws and
    the FACE statute. Fortunately, their efforts have been in vain, as we
    have won the dischargeability question thus far in four of the
    bankruptcy cases. But the process of litigating and relitigating the
    same issues in each of the bankruptcy courts demonstrates precisely why
    the proposed amendment is necessary.
        In the two years since the jury's verdict, my firm has committed
    enormous resources to enforcing the judgment, including by representing
    the plaintiffs in the six different bankruptcy courts. With the
    District Court entering discovery orders requiring full disclosure of
    their assets on risk of sanctions, six defendants filed for bankruptcy
    in different venues, precisely to trigger the automatic stay of the
    Bankruptcy Code and thus put a hold on our collection efforts. Five of
    these six defendants filed for bankruptcy on the very eve of his
    scheduled deposition, with one (Michael Bray) filing on the day of the
    deposition itself. In connection with these bankruptcy proceedings, the
    defendants' lawyers have taken the position that the jury's verdict is
    fully dischargeable in bankruptcy, despite the ``willful and malicious
    injury'' exception to discharge that currently exists in the bankruptcy
    Code. These filings, and the litigation we have endured, demonstrate
    the utmost importance of the proposed amendment to the U.S. Bankruptcy
    Code.
        Donald Treshman was the first defendant to file for bankruptcy, and
    he did so on November 2, 1999, just two days before his ordered
    deposition. Treshman had previously filed for bankruptcy in Texas in
    1995, after another Planned Parenthood clinic obtained a judgment
    against him following a full trial and after Treshman transferred his
    house to an acquaintance. Treshman's earlier bankruptcy petition was
    dismissed when he abruptly moved to Maryland. This time, Treshman filed
    for bankruptcy on the heels of a series of rulings by the District
    Court in Oregon requiring full disclosure of his assets and compliance
    with the Court's injunction.
        Three additional defendants filed for bankruptcy in the same week
    in December 1999 on the heels of court orders requiring full financial
    disclosure. Charles Wysong filed in the Eastern District of Tennessee
    (Chattanooga) on December 6, 1999; David Crane filed in the Eastern
    District of Virginia (Norfolk) on December 8, 1999; and Michael Bray
    filed in the District of Maryland (Greenbelt) on December 9, 1999. Each
    of these defendants was scheduled for a deposition that same week, but
    filed for bankruptcy to avoid that deposition and frustrate our
    legitimate collection efforts. Similarly, on January 18, 2000, right
    before his and his wife's depositions were to take place in Jackson,
    Mississippi, triggering the automatic stay. The last defendant to file
    for bankruptcy protection was Joseph Foreman, who filed in Roanoke,
    Virginia in February 2000 after we garnished his bank account but
    before we could collect on that garnishment in Virginia.
        Because the proposed amendment does not currently exist, the
    defendants were able to invoke the protection of the automatic stay of
    the Bankruptcy Code, and force litigation and relitigation of the
    ``willful and malicious injury'' issue in the various bankruptcy courts
    across the country. This has been a lengthy and expensive process,
    involving a separate trustee and a separate judge in each case--each of
    whom has had to familiarize himself with this case. Because these
    defendants live in different parts of the country, my law firm has had
    to proceed against them in six different bankruptcy courts. In each
    case, we have had to commence an adversary proceeding in bankruptcy,
    file motions for summary judgment setting forth the prior proceedings
    and legal principles, and appear in those courts for multiple hearings.
    To date, my firm has expended over 3,200 attorney hours in litigating
    these bankruptcy proceedings, in addition to the time spent by local
    counsel in each jurisdiction and the substantial expense of filing
    fees, service fees, and travel around the country.
        Thus far--after extensive litigation and considerable expense--we
    have won the ``willful and malicious injury'' issue in four of the
    bankruptcy courts. Despite these victories, enactment of the proposed
    amendment to the Bankruptcy courts. Despite these victories, enactment
    of the proposed amendment to the Bankruptcy Code is necessary because
    defendants should not have been given the opportunity to litigate the
    issue of their discharge in bankruptcy when they have clearly violated
    the FACE statute as intended by Congress. There is no doubt that these
    defendants did not seek relief from the bankruptcy courts as part of
    the good faith effort to work with plaintiffs on a payment plan for the
    judgment. Rather, defendants made it clear that they intended to seek a
    full ``discharge'' in bankruptcy and thus not pay one cent to their
    creditors. Without enactment of the proposed amendment, this type of
    abuse will continue.
        As this Committee knows, Section 523(a)(6) of the U.S. Bankruptcy
    Code currently provides for an exception to discharge for debts
    resulting from ``willful and malicious injury.'' As we have
    demonstrated to four of the bankruptcy courts thus far, the jury's
    findings of intention to intimidate and its punitive damages award,
    coupled with the trial judge's findings by clear and convincing
    evidence that the defendants acted with malice and with specific intent
    to threaten, satisfy the ``willful and malicious injury'' standard of
    the current Bankruptcy Code. We have argued successfully that those
    findings are entitled to collateral estopped effect, and that the
    defendants cannot relitigate those findings in Bankruptcy Court.
    although we have been victorious, defendants' filings constitute an
    abuse of the bankruptcy system that needs to be corrected--and which
    can be corrected in the future by an amendment tot he Bankruptcy Code.
    The fact that my case--with express findings going directly to the
    willful and malicious standard--still has required protracted
    litigation to determine again and again that these debts were
    nondischargeable underscores the important of the amendment. Not every
    FACE case will yield such explicit findings. Indeed, the specter of
    endless bankruptcy litigation in even the most straightforward cases
    will deter aggrieved physicians and other victims of abortion clinic
    violence from bringing FACE case will yield such explicit findings.
    Indeed, the specter of endless bankruptcy litigation in even the most
    straightforward cases will deter aggrieved physicians and other victims
    of abortion clinic violence from bringing FACE cases in the first
    instance.
        Thus, it is my considered position, based upon my personal
    experience litigating the current law of ``willful and malicious
    injury,'' that the Bankruptcy Code should be amended so that the
    bankruptcy process is not abused again as it has been abused by the six
    defendants in my case who filed for bankruptcy. Whatever one's position
    on abortion, we all can agree that anit-abortion extremists should not
    get away with their violence and threats of violence in violation of
    the FACE statute. My clients are entitled to compensation for their
    injuries--which include the purchase of bulletproof vests and other
    security devices. Defendants have continued to resist every effort to
    obtain satisfaction of any part of the money judgment--and they have
    abused the bankruptcy process as part of this improper effort.
        I am confident that no defendant in my case will ultimately obtain
    a discharge in bankruptcy for my clients' judgment. Nevertheless, we
    should not be in the position of relitigating the matter over and over
    again because the current Bankruptcy code contains a loophole that
    permits this type of abuse. While defendants relitagate the ``willful
    and malicious injury'' exception to discharge in six different
    bankruptcy courts, judicial resources are expended to address these
    issues six times and who knows how many appeals will follow. The
    evidence at trial was undisputed that, upon the release of defendants'
    threats, with the advice of law enforcement, my clients purchased
    bulletproof vests, installed extensive security systems at their homes
    and offices, and took other security precautions because of defendants'
    actions. The jury awarded my clients their security costs as
    compensatory damages, and also awarded punitive damages under FACE
    against each of the defendants to prevent and deter further illegal
    activities. Allowing these defendants to abuse the bankruptcy process
    to dalay enforcement of the judgment totally undermines the effective
    enforcement of the FACE statute and the true purposes of the Bankruptcy
    Code.
        The many months of litigation that I have endured in these
    bankruptcy courts confirms the need for an amendment to the Bankruptcy
    Code that precludes further litigation over the meaning of the words
    used in the current statute. The amount of time and expense necessary
    to relitigate these issues has been extraordinary, and the risk of
    inconsistent results has been real, despite my victories. The only way
    to prevent this from happening again is for an amendment to the
    Bankruptcy Code to be enacted that unambiguously provides that FACE
    violations are nondischargeable in bankruptcy. Without such a clear
    statement, future defendants in FACE actions will continue to file for
    bankruptcy in order to delay any efforts to hold them responsible for
    the illegal actions. The proposed amendment to the Bankruptcy Code is
    therefore necessary so that Congressional intent in enacting the FACE
    statute is fully effectuated and the bankruptcy process is not abused.
        Thank you for you consideration.

        Chairman Hatch. Mr. Zywicki, we will take your testimony.

       STATEMENT OF TODD J. ZYWICKI, ASSISTANT PROFESSOR OF LAW,
       GEORGE MASON UNIVERSITY SCHOOL OF LAW, ARLINGTON, VIRGINIA

        Mr. Zywicki. Thank you, Mr. Chairman and distinguished
    Senators. I want to thank you for moving this legislation so
    quickly this term and placing it with such a high priority
    because I think it really is an important piece of legislation
    and I am pleased that it is moving forward.
        I have attached to my statement a time series that really
    sort of blows the mind when you look at it. The upward spiral
    in bankruptcy filing rates just since 1980 is really quite
    striking. We have seen a brief respite in recent years, but I
    haven't talked to anybody who thinks that that really means
    anything but a brief respite, and nobody seriously expects that
    the upward trend is going to end unless we do something to
    address the upward trend. In fact, all the data indicates that
    the upward trend has started again already.
        Moreover, few believe that even a small part of the fraud
    and abuse that is in in the system is caught. There are some
    very poor mechanisms in place currently to try to ferret out
    fraud and abuse. But under the current system with 1.4 million
    people a year filing bankruptcy, it is simply impossible for
    judges to try to locate the fraud and abuse that is going on in
    the system without some sort of procedural mechanisms of the
    type that are provided for in this bill.
        As a result, the efforts that have been attempted to try to
    hit fraud and abuse are haphazard. They are applied unequally,
    unfairly. They really mock the rule of law and there is really
    no sense in which the Bankruptcy Code is being applied
    consistently, fairly, or equally throughout the country.
        Moreover, the fact that there really is abuse going on has
    created a widespread perception in the public that the
    bankruptcy system is really just a place where you go to scheme
    your creditors. The public really thinks of the bankruptcy
    system as a big game these days, and I think in the long run
    that is really detrimental in that it will undermine faith in
    the bankruptcy system generally. So I think it is important to
    get a hold of the fraud and abuse, both to ferret out fraud and
    abuse, but also to reinstill faith in the public that the
    bankruptcy system is working the way it is supposed to.
        This bill does that. This bill is an incremental, common-
    sense, experienced-based attempt to come to grips with the
    fraud and abuse that is in the system, and to rebalance the
    bankruptcy system to try to get a rein on some of the things
    that have really manifested themselves increasingly in recent
    years.
        It preserves the fresh start. It doesn't deny anybody the
    right to file bankruptcy, but it targets the abuses that we see
    in the system, whether it is high-income people shirking debts
    they can repay, whether it is the scheme of fractional
    interests that are used to prevent banks from exercising their
    legitimate foreclose rights, whether it is hiding assets, all
    the different sorts of things that are going on.
        I think the bill shows a striking amount of common sense
    and grounding and experience of what is going on everyday in
    the bankruptcy courts, while at the same time preserving the
    integrity of the bankruptcy system for those who need it.
        I think it is important to recognize that being pro-debtor
    in bankruptcy is not the same thing as being pro-consumer. Most
    consumers pay their bills, so that taking it easy on debtors
    who don't pay their bills, for instance, doesn't help consumers
    who do pay their bills. Being pro-debtor is not the same thing
    as being pro-consumer.
        Bankruptcy losses for a business are a business expense.
    They are the same thing as paying the electric bill, paying
    salaries, paying rent, paying taxes. To the extent that they
    have bills that they can't collect, that is a cost of business,
    and just like rental payments, electricity payments, all these
    other expenses, get passed on to consumers.
        It is inevitable that some bankruptcy losses get passed on
    to consumers, and they get passed on in a variety of ways. It
    is not just interest rates. It is also higher down payments,
    say, on a car because creditors are unwilling to extend as much
    credit and risk.
        There was a story on bankruptcy in Fortune magazine,
    bankruptcy in Memphis, Tennessee, which is the bankruptcy
    capital of America. The story reports that in Memphis, where
    the bankruptcy filing rate is 4.5 percent of the families every
    year file bankruptcy in Memphis, the down payment on a used car
    in Memphis is the wholesale price of the car. Why? Because
    nobody is willing to extend any credit that they could be left
    hanging out on, so the down payment allows them to recover what
    they have to pay.
        Creditors suffer, and in particular small creditors suffer.
    What has been striking about this bill is from the very
    beginning, it is small businesses, it is credit unions like we
    heard from today, it is small department stores like Boscov's
    who are trying to run credit operations. It is small furniture
    companies who are trying to sell furniture on credit.
        Throughout the entire process, these small creditors are
    the ones who have supported it. Why? Because they have the most
    difficulty passing these losses on to other consumers because
    they simply don't have the revenue base to spread it in the way
    that other people might.
        Finally, I think this sends an important moral message that
    people should pay their debts if they can pay their debts. And
    it doesn't expect the impossible; it doesn't expect people to
    pay what they can't pay. It says if you can pay 50 percent or
    60 percent or 70 percent of your debts, if you can do that and
    you can pay a substantial portion of your debts and you make
    above the median income, you should do that as a condition for
    discharge. You will not be denied the right to file bankruptcy.
    It simply places a condition on your ability to file bankruptcy
    to keep your promises to the extent that you can.
        I have identified about 7 to 10 percent of filers who would
    be affected by the means test. There is one study that purports
    to find otherwise, but it is methodologically flawed. I could
    talk about that more. It claims to only find 3 percent, but it
    is a fundamentally flawed study. We are talking about
    recovering $3 billion, roughly, that would otherwise be
    discharged.
        I see that I am out of time. I would be happy to address
    some of the other things that have come out in the testimony,
    but I want to add one last message, which is this has been
    going on for a few years. When the bankruptcy bar starts
    attacking the bankruptcy bill and that sort of thing, it seems
    like they get you in the catch-22.
        When the economy is good and filings are falling off a
    little bit, they say, look, we don't need bankruptcy reform,
    filings are tapering off on their own. When there is a
    recession on the horizon, they say, well, bankruptcies are
    going to rise and now is not the time to tighten up the
    bankruptcy laws.
        Is there ever a time? If you can't tighten them in good
    times and you can't tighten them in bad times, when is the time
    to think about reforming the bankruptcy system? I think now is
    the time to do it, and it is the time to do it in a balanced,
    common-sense, experienced-based kind of situation like we have
    here, which is it does not deny people the right to file
    bankruptcy, but targets the fraud and abuse in the system.
        Thank you.
        [The prepared statement of Mr. Zywicki follows:]

     Statement of Todd J. Zywicki, George Mason University School of Law,
                              Arlington, Virginia

        Distinguished Senators, it is a privilege to appear before you
    today to speak on the subject of ``Bankruptcy Reform.'' At the end of
    the last congressional session this body passed by an overwhelming
    majority a bankruptcy reform bill that would bring balance and sanity
    to a bankruptcy system that is threatening to spiral out of control. It
    has been reintroduced this session as S. 220 (the ``Bill''). Recent
    reports indicate that bankruptcy filing rates have begun to rise again
    after a brief respite in recent years. Clearly the time is right to
    address some of the problems with the bankruptcy system. Recognizing
    this, I am pleased to see that this Committee has acted promptly to
    introduce a bankruptcy reform Bill and to hold hearings on the issue. I
    am pleased to provide my views on the matter. I hold both a J.D. and a
    Master's Degree in Economics. I was also a John M. Olin Fellow in Law &
    Economics at the University of Virginia and am a tenured member of the
    faculty at George Mason University School of Law, one of the premier
    centers for the study of economic analysis of law. In addition to my
    publications in law reviews, I have also published several articles in
    peer-reviewed economics journals. As such, I believe that I am in a
    sound position to discuss both [Lc legal and economic aspects of the
    current bankruptcy system as well as the probably effects of the
    bankruptcy reform Bill.
        This Bill represents a thoughtful and well-considered effort to
    address many of the problems that are manifest in the bankruptcy system
    today. The Bill makes incremental reforms to the consumer bankruptcy
    system to address many of the loopholes and technicalities that
    opportunistic debtors have found to evade their financial and personal
    responsibilities. The reforms provided for by this Bill are grounded in
    commonsense and experience derived from the observation of the day-to-
    day operation of the bankruptcy system in practice.
        The current system has been little-changed since its enactment in
    1978. Since that time the number of personal bankruptcies is roughly
    five times larger than when the Code was enacted. Today, some 1.4
    million Americans troop through the bankruptcy courtrooms every year.
    This growth in numbers has been matched by a growing sophistication
    among lawyers and the public about the opportunities for fraud and
    abuse-both legal and illegal-in the bankruptcy system. Few reasonable
    observers believe that even a small fraction of the fraud and abuse
    present in the system is caught. As a result, similarly-situated
    debtors and creditors throughout the country suffer from dissimilar and
    unpredictable treatment on the basis of accident of geography or
    judicial whim. By guaranteeing unequal treatment for similarly-situated
    individuals, the system mocks the rule of law. In turn, this undermines
    public confidence that the bankruptcy system is operating fairly and
    efficiently. Instead, it is increasingly viewed as a system prone to
    cynicism and manipulation, and a free-ride for debtors lacking in
    conscience and personal responsibility.
        Thus, the current system suffers from a crisis of both real and
    perceived abuse. This Bill addresses both of these problems. This Bill
    rebalances the bankruptcy system, by taking sensible steps to address
    many of the most prominent abuses by both debtors and creditors that
    have been manifested in recent years. At the same time, it preserves
    the commitment to the fre;'i start for all debtors who need it. By
    preserving the fresh start but also addressing abusive behavior, this
    Bill will restore fairness and efficiency to the bankruptcy system and
    thereby restore public confidence in the system. A failure to act in a
    sensible and rational way today will lead to continuing abuse and
    continuing public frustration. Acting sensibly today will head-off more
    drastic and ill-considered action later.
        Being pro-debtor is not the same as being pro-consumer. When some
    people get a free-ride in bankruptcy, the rest of us are forced to pick
    up the slack. The overwhelming majority of Americans pay their Bills
    and live up to their financial responsibilities. But it should not be
    forgotten that those who pay their Bills inevitably have to pay more to
    make up for those who do not. Bankruptcy losses are a cost of business.
    Like all other business expenses, when creditors are unable to collect
    debts because of bankruptcy, some of those losses are inevitably passed
    on to responsible Americans who live up to their financial obligations.
    Every phone bill, electric bill, mortgage, furniture purchase, medical
    bill, and car loan contains an implicit bankruptcy ``tax'' that the
    rest of us pay to subsidize those who do not pay their bills. We all
    pay for bankruptcy abuse in higher down payments, higher interest
    rates, and higher costs for goods and services. I can see no good
    reason why a schoolteacher earning $30,000 a year should have to pay
    more for a mortgage or more for a new couch because some other guy
    making $100,000 a year finds it inconvenient to pay his debts. I can
    see no good reason why a nurse earning $40,000 a year should have to
    pay more for a car loan because some doctor earning $250,000 doesn't
    want to pay for his Mercedes.
        This bankruptcy ``tax'' takes many forms. It is obviously reflected
    in higher interest rates. But it is also reflected in higher down-
    payment requirements, as creditors desire greater up-front payments to
    reduce the risk of nonpayment. It is reflected in shorter grace-periods
    for paying bills and higher penalty fees and late-charges for those who
    miss payments. Finally, it is reflected in fewer benefits to consumers,
    whether the co-branding benefits offered by credit cards today or such
    things as greater customer service or extended business hours.
    Retailers raise their prices or close their credit operations.
    Regardless of which of these forms it takes, it is evident that the
    rest of us suffer when some people choose not to pay their bills.
        Moreover, it is lower-income and fixed-income Americans who suffer
    the most, as it is they who have the fewest credit choices and the
    least ability to absorb increased credit and other costs. When
    furniture stores are forced to close their credit operations because of
    bankruptcy losses, this further restricts the options of low-income
    creditors. When credit card issuers find it infeasible to issue credit
    to low-income borrowers, those borrowers are not made better-off by
    having their choices reduced. Instead, if they need a new transmission
    or new suit, they are forced to turn to pawn shops and high-interest
    ``payday'' lenders who offer terms far more abusive than any credit
    card issuer. See Todd J. Zywicki, The Economics of Credit Cards, 3
    CHAPMAN L. REv. 79 (2000). Consumers as a whole, and especially low-
    income consumers, are not made better-off when bankruptcy losses
    increase prices and decrease service.
        Creditors also lose from a runaway bankruptcy system. Smaller
    businesses and small creditors suffer the most from a runaway
    bankruptcy system, as they tend to have the narrowest margins and the
    least ability to spree those losses among their customers. The small-
    town furniture store selling couches and end tables on credit suffers a
    lot when his customers don't pay up. As do independent car salesmen,
    jewelers, contractors, and other small businesses who extend credit to
    their customers. Thus, it is not surprising that support for bankruptcy
    reform comes from across the full spectrum of creditors, but small
    creditors, such as small retailers and credit unions, are among the
    strongest supporters of bankruptcy reform.
        The Bill will also reinforce the lesson that bankruptcy is a moral
    as well as an economic decision. Filing bankruptcy reflects a decision
    to break a promise made to reciprocate a benefit bestowed upon you. The
    moral element of bankruptcy is reflected in the observation that the
    English word ``credit'' comes from the Latin word for ``trust.''
    Parents seek to teach their children values of personal and financial
    responsibility, and promise-keeping and reciprocity provide the
    foundation of a free economy and healthy civil society. Regrettably,
    the personal shame and social stigma that once restrained opportunistic
    bankruptcy filings has declined substantially in recent years. We have
    ``defined bankruptcy deviancy downward'' such that it has become a
    convenient financial planning tool, rather than a decision freighted
    with moral and social significance. Requiring those who can to repay
    some of their debts as a condition for bankruptcy relief sends an
    important signal that bankruptcy is a serious act that has moral as
    well as economic consequences. Moreover, reducing the number of
    strategic bankruptcies will reduce the bankruptcy tax paid by every
    American family on goods and services, giving them more money for
    groceries, vacations, and educational expenses.
        The Bill establishes a much-needed system of means-testing to force
    high-income debtors who can repay a substantial portion of their debts
    without significant hardship to do so. Under current law, there are few
    checks on high-income debtors seeking to walk away from their debts and
    few safeguards to prevent bankruptcy fraud. Current law requires a
    case-by-case investigation that turns on little more than the personal
    predilections of the judge. The Bill narrows the judge's discretion by
    establishing a presumption of abuse where a high-income debtor has the
    ability to repay a substantial portion of his debts, as measured by an
    objective standard. At the same time, the judge will retain discretion
    to override this presumption in cases of hardship. Means-testing is not
    a panacea for all of the ills of the bankruptcy system. But by focusing
    judicial discretion on the existence of real hardship and reducing
    procedural hurdles to challenging abuse, the Bill's reforms will
    vindicate the rule of law and reduce abuse.
        By targeting high-income bankrupts with substantial repayment
    capacity, it is estimated that means-testing will recover roughly $3
    million of the $40 million discharged in bankruptcy every year.
    Although means-testing will affect only 7-10% of bankruptcy filers, but
    focusing scrutiny on those high-income debtors who can repay a
    substantial portion of their debts without significant hardship, the
    Bill makes possible the recovery of substantial losses with minimal
    administrative cost. Equally important, means-testing will have no
    efect on those making less than the minimum income threshold provided.
    Thus, for the 80% of filers whose income lies beneath the state median,
    means-testing will have no effect whatsoever.
        It should also be stressed that means-testing will not prevent
    anyone from filing bankruptcy and receiving a bankruptcy discharge.
    Instead, it will simply condition the discharge for affected filers to
    pursuing a chapter 13 repayment plan rather than going into chapter 7.
    In fact, the means-testing rules will simply govern eligibility for
    chapter 7 relief; it has no impact on the confirmation of the debtor's
    chapter 13 plan. In approving the debtor's plan the court will still
    apply the budgetary processes provided for under current law without
    any consideration of the means-testing eligibility rules.
        The means-testing provisions also provide an excellent example of
    the incremental and balanced approach to this issue. Under current law,
    it is already the case that the primary factor for courts to consider
    in deciding whether to dismiss a debtor's case for substantial abuse
    under Sec. 707(b) is whether the debtor can repay a substantial portion
    of his debts without significant hardship. Overwhelmed by the number of
    cases they confront and lacking the will to enforce its provisions
    consistently, however, it has been observed by one scholar that many
    perceive Sec. 707(b) to be a ``dismal failure.'' Jack F. Williams,
    Distrust: The Rhetoric and Reality of Means-Testing, 7 AM. BANKR. INST.
    L. REv. 105 (1998). The Bill simply creates a more formal and reliable
    mechanism for implementing the goals that bankruptcy courts are already
    seeking to apply, but will do so in a way that more efficient and fair
    than the current system. See Edith H. Jones and Todd J. Zywicki, Its
    Time for Means-Testing, 1999 BRIGHAM YOUNG UNIVERSITY L. REV. 177.
        The Bill also targets a whole range of other abuses of the
    bankruptcy system, including such things as the use of ``fractional
    interests'' to prevent legitimate foreclosures and abuse of the
    cramdown provisions of the Code by filing bankruptcy simply to strip
    down the value of a secured creditor's claim. It creates new
    protections from bankruptcy ``mills'' and ensures that bankruptcy
    filers undergo credit counseling to try to workout a consensual
    solution to their financial problems. The Bill also eliminates abuse of
    unlimited homestead exemptions, a reform advocated by even. the Bill's
    critics. In short, it reflects practical solutions grounded in common-
    sense experience regarding the problems in the bankruptcy system.
    Contrary to the selective outrage of its critics, however, the Bill
    does not limit itself to reducing abuse of the homestead exemption but
    takes a comprehensive approach to rooting out all forms of bankruptcy
    abuse.
        It has been claimed by some that the Bill would negatively impact
    the ability of divorced spouses to collect spousal and child support.
    This claim is based on vague, speculative, and inaccurate accusations
    about how the nondischargeability of certain debts will impact post-
    petition efforts to collect these obligations. In contrast to these
    speculative accusations, the Bill offers concrete assistance to non-
    intact families in several ways. Among its numerous provisions
    protecting the rights of former spouses and children are the following
    protections: (1) Extends the scope of nondischargeability of spousal
    support obligations to make nondischargeable certain property
    settlements, (2) excepts state child support collection authorities
    from the reach of the automatic stay, (3) elevates the priority level
    of child support to first priority, (4) makes exempt property available
    for the enforcement of domestic and child support obligations. These
    speculative claims about the negative effects of the Bill appear to be
    simply a concerted effort by the Bill's opponents to distract attention
    from the real reforms and protections included in the Bill.
        Moreover, the Bill's provisions on credit card nondischargeability
    merely rationalizes some exceptions to discharge and closes loopholes
    in the current law relating to the misuse of credit cards. Given this
    modest aim of simply closing loopholes in the already-existing
    exception to discharge for credit card fraud, it is difficult to see
    how `his reform could have more than a trivial effect on collection of
    spousal support payments. Nor have the Bill's opponents supplied any
    details about the size of this purported effect. Assuming the effect is
    non-trivial, it is also not unique to make certain debts
    nondischargeable on the basis of public policy. Current law already
    makes a multitude of exceptions to discharge, including such things as
    tax obligations, fraudulently incurred debts, student loans, and
    victims of drunk drivers. As a result, the Bill would no more ``pit''
    postpetition child support obligations against credit card issuers than
    current law ``pits'' child support obligations against the victims of
    drunk drivers, the victims of fraud, student loan obligations, or tax
    obligations. Indeed, the burden on a debtor from nondischargeable
    credit card debts will be substantially smaller than the financial
    burden on a debtor from the inability to discharge fraud liabilities,
    tax liabilities, student loan debts, and drunk-driving judgments. That
    opponents of the Bill have instead singled-out credit card issuers for
    criticism says more about their desire to demonize the credit card
    industry and less about their commitment to protecting women and
    children or to real bankruptcy reform.
        In contrast to the broad-based support for the Bill, opposition
    primarily has come from one isolated comer--lawyers. Certainly the
    opposition of some lawyers is based on sincere, albeit mistaken,
    beliefs about the content and impact of the legislation. But it is
    ironic that bankruptcy lawyers have been quick to question the motives
    of creditors in seeking reform, while remaining slow to acknowledge
    their own stake in opposing reform. James Shepard, a member of the
    National Bankruptcy Review Commission, estimates that bankruptcy is now
    a $5 billion a year industry for lawyers and others. By reducing
    filings among high-income filers and reducing the cost of bankruptcy
    cases by making them more predictable and less expensive, means-testing
    will reduce both the volume and expense of bankruptcy cases. By closing
    loopholes, the Bill reduces the need for lawyers to find those
    loopholes. The Bill also will reduce bankruptcy filings by requiring
    bankruptcy lawyers to inform their clients of availability of non-
    bankruptcy alternatives, such as credit counseling, and by cracking
    down on bankruptcy ``mills'' that mass-produce bankruptcy petitions
    with little regard to the welfare of their clients. Put simply, more
    bankruptcies means more money for bankruptcy lawyers, and fewer
    bankruptcies means less money for bankruptcy lawyers. Also to the
    dismay of bankruptcy lawyers, the Bill elevates child support
    obligations to the first administrative priority--a position currently
    occupied by attorneys' fees obligations. Efforts in the bankruptcy bar
    to downplay the importance of this protection for divorced mothers
    appear to be little more than a cynical effort to hide the self-
    interest of bankruptcy lawyers behind the skirts of divorced mothers.
        Balanced bankruptcy reform preserves the protection of the
    bankruptcy system for those who need it, while limiting abuse by those
    who are preying on that generosity simply to evade their financial
    responsibilities. This Bill brings balance to a consumer bankruptcy
    system that has become a tool for rich and savvy debtors to evade their
    financial responsibilities. America has one of the most charitable and
    forgiving bankruptcy systems in the world and many of those who file
    bankruptcy truly need it as a consequence of personal trouble. But too
    many people today are preying on our charity and using the bankruptcy
    system not because they need it, but simply to evade their
    responsibilities or to maintain an unrealistic and extravagant
    lifestyle at the expense of those who live responsibly. Ignoring
    rampant abuse undermines public support for the bankruptcy system
    generally, which will eventually hurt those who legitimately need
    bankruptcy relief.
        There has been much talk in the media and elsewhere about the surge
    in consumer bankruptcies in recent decades. It should be noted that
    this discussion is largely beside the point in the current context.
    This Bill does not deny anyone the right to file bankruptcy, nor does
    it apportion blame for bankruptcy filings. It simply provides pragmatic
    solutions to identifiable problems in the current bankruptcy system. To
    the extent that larger bankruptcy issues are implicated, however, it is
    evident that this Bill is an appropriate response to the problem. Two
    identifiable factors present themselves as explaining the rise in
    consumer bankruptcy filings in recent decades. First is a change in the
    relative costs and benefits associated with filing bankruptcy. Second
    is a general decline in the personal shame and social stigma associated
    with bankruptcy.
        It has been estimated that almost half of Americans would benefit
    financially from filing bankruptcy after engaging in some basic pre-
    bankruptcy planning. Moreover, because of the structure of property
    exemptions under bankruptcy and state law, wealthier individuals gain
    the greatest benefits from filing bankruptcy because they can protect
    larger amounts of property in bankruptcy. Given the financial benefits
    created by the enactment of the 1978 Code, it is little wonder that
    consumers have increasingly recognized and acted on the financial
    benefits of filing bankruptcy.
        At the same time, the costs of learning about and filing bankruptcy
    have decreased dramatically. Daytime television and the Yellow Pages
    are awash in bankruptcy advertisements. The mass production of
    bankruptcy petitions by bankruptcy lawyers have driven down prices for
    bankruptcy services. In fact, scholars have reported that one of the
    most difficult tasks confronting lawyers is persuading their clients
    that there really is no catch to filing bankruptcy, because clients
    routinely object that the whole things sounds ``too good to be true.''
        There is also little question that the social stigma associated
    with filing bankruptcy has declined over time. Singer Toni Braxton
    filed bankruptcy, despite having recorded two albums that had earned
    $170 million in sales at the time, and despite owning a baby grand
    piano, a Porsche, and Lexus. She later appeared on Oprah Winfrey, who
    questioned Toni on her purchase of $1,000 in Gucci silverware shortly
    before filing bankruptcy. Toni's response: ``I only spent about $1,000
    on it. If that made me broke, then I was truly in bad shape. It's
    Gucci-I love it. I'd buy it again. And now that I get a huge discount
    because I've given them so much pub, I can really shop.'' This
    attitude, of course, is not limited to pop music stars, as evidenced by
    the comments of one individual to CNNfn, ``When I found out-this was
    watching it on the news, in the newspapers--that more and more people
    are doing it [filing bankruptcy], and . . . it's not just a middle
    class you know, upper class too-rich people--everybody's doing it. And.
    . . I said: Why not me? You know, I'm just one more of them.''
        By contrast, there is no evidence that factors such as credit cards
    have contributed to the bankruptcy problem. It is evident that the
    growth in credit cards has largely been a substitution away from other
    even less-attractive forms of credit, such as pawn shops, loan sharks,
    personal finance companies, layaway plans, and retail store credit. As
    shown in the attached chart, since 1995 it is housing debt, not
    consumer debt that has been rising most rapidly for American
    households. In fact, credit card debt represents only some 3% of
    American household debt. Moreover, defaults on credit card loans have
    risen in tandem with defaults on other forms of consumer credit. This
    rebuts the claim that credit card lenders have contributed to the
    bankruptcy crisis by lending to noncreditworthy borrowers. It is true
    that consumers have increased their use of credit cards, but this has
    been offset by a reduction in the use of other forms of consumer
    credit. If credit card issuers were acting irresponsibly, then defaults
    on credit cards would be rising much faster than on other forms of
    consumer credit. Instead, they are rising at the same rate. Empirical
    studies have demonstrated that increasing bankruptcies have not
    resulted from increased lending to higher-risk borrowers. Instead, what
    has happened is that all borrowers have become more likely to file
    bankruptcy, holding financial risk characteristics constant. What has
    changed is not the structure of consumer borrowing; what has changed is
    the willingness of individuals to file bankruptcy as the preferred
    means of dealing with their financial obligations.
        There has also been substantial confusion about the competitiveness
    of the credit card market. Critics have argued that credit card
    interest rates have remained ``high'' and stable despite changes in
    other interest rates. This criticism is profoundly confused. First, it
    is meaningless to decry ``high'' interest rates without asking ``As
    compared to what?'' What is the ``correct'' interest rate on an
    unsecured line of credit that an individual can draw upon at his
    discretion? Unsecured credit lines at banks have much higher interest
    rates and much higher initiation fees than do credit cards. It is not
    clear what ``high'' interest rates means.
        Credit card interest rates are also much less responsive to changes
    in cost of funds rates than other forms of credit. This is because the
    cost of funds comprises a relatively small percentage of the cost of
    credit card interest rates. The administrative costs of processing a
    large volume of relatively small transactions is enormous, and this is
    completely unresponsive to changes in the cost of funds. Consider the
    following two graphs, reproduced from my article The Economics of
    Credit Cards:
            Chart 1: U.S. Consumer Commercial Bank Rates, 1972-1989

    [GRAPHIC] [TIFF OMITTED] T6343.001

                Chart 2: Federal Funds Interest Rate, 1970-1989

    [GRAPHIC] [TIFF OMITTED] T6343.002

        As these two Charts demonstrate, during the 1970s and 1980s the
    Federal Funds rate rose and fell dramatically over time. Moreover, the
    rates on mortgages and car loans rose and fell accordingly.
    Nonetheless, credit card interest rates remained relatively constant.
    The reason was not because of any collusion or improper behavior by
    credit card issuers, but simply because the cost of funds comprises
    only 25% of the cost of credit card interest rates, whereas it
    comprises 80-90% of the cost of a mortgage or car loan.
        Nonetheless, credit card interest rates have fallen dramatically in
    recent years:
                 Chart 3: Credit Card Interest Rates, 1981-1998

    [GRAPHIC] [TIFF OMITTED] T6343.003

        As this Chart indicates, from 1992 to 1998, credit card interest
    rates fell approximately 15% and have remained relatively stable since
    that time. Nor do we know how much credit card interest rates wou14
    have fallen had bankruptcy filing rates not risen so precipitously
    during this same time.
        Finally a fixation on credit card interest rates ignores the fact
    that the majority of credit card users use credit cards for
    transactional convenience and pay off their bills in full every month,
    rather than revolving balances. For those users, interest rates are
    irrelevant. They instead prefer a credit card that provides tangible
    benefits, such as frequent flyer miles or car rental insurance. They
    also prefer a card without an annual fee. Unsurprisingly, the market
    has responded by providing substantial consumer benefits and by
    eliminating annual fees on basic credit cards. To the extent that this
    is the course preferred by credit card users, this is a triumph of
    competition in the credit card industry, not a failure. In amending the
    bankruptcy code, this body should act very cautiously to make sure that
    it does not interfere with the operation of consumer and commercial
    lending markets.
        Now is the time to act to reform the bankruptcy laws. This Bill is
    a sensible, balanced, incremental, and well-considered attempt to deal
    with these problems before they become intractable.

    [GRAPHIC] [TIFF OMITTED] T6343.004

    [GRAPHIC] [TIFF OMITTED] T6343.005

    [GRAPHIC] [TIFF OMITTED] T6343.006

        Chairman Hatch. We will each have 5 minutes.
        Let me turn to you, Mr. Strauss. What does bankruptcy today
    do to women heading single-parent families who rely on regular
    support payments, and does the proposed legislation improve
    that situation, and if so, how?
        Mr. Strauss. Well, the first thing that happens frequently,
    inevitably, is when somebody files a Chapter 13 bankruptcy, one
    of the most useful means of collecting support is a wage
    assignment or an earnings withholding order. It is called many
    things. That stops, and all the debtor has to do is serve that
    on the employer and mom, who may be depending on that next
    check for rent or Christmas presents or shoes or whatever,
    doesn't get the money.
        When that is passed through our office, because we collect
    on cases in which women are not receiving public assistance--
    they are just struggling and we are enforcing their divorce
    order--we have to tell them it has stopped and we will go do
    our best to start it again.
        I am in a wonderful district; the judges are very
    supportive of child support. But I talk to people all over the
    country whose judges are not the same and they say, look, you
    know, you want to get the support started again, seek relief
    from the automatic stay. It is expensive if you don't have a
    public agency helping you out, and it is time-consuming.
        Senator Biden. It is an automatic stay?
        Mr. Strauss. Pardon me?
        Senator Biden. Now, it is an automatic stay?
        Mr. Strauss. Well, the automatic stay goes into effect in
    all bankruptcies and one of the things that stops is that
    collection.
        Another thing that happens is that is fine for people who
    have wages, but what about the people who are self-employed
    individuals? This bankruptcy bill, whereas it doesn't have the
    immediacy of the last provision, will tell anybody who is
    filing a Chapter 13 that if you want to stay in there and you
    want to succeed in the Chapter 13, we have set up checkpoints.
    One of them is you are not going to get your plan confirmed
    unless you have paid all of your post-petition ongoing support
    obligations. Another checkpoint is you are not going to get
    your discharge unless you have done that.
        Last year, there was, I think, an amendment added by
    Senator Torricelli which I thought complemented both of those,
    and that is during this period if you are not paying it between
    confirmation and discharge, if you stop paying it we can
    dismiss your case. So these are the kinds of remedies, among
    many others, that women who really--and I say mostly women
    because there are men who are custodial parents who are in the
    same financial difficulties. These are the kinds of things that
    would help them out of it, I think, immensely.
        Chairman Hatch. Overall, could you indicate your view on
    how well this bill protects women and children, particularly
    those who are dependent upon regular child support payments?
        Mr. Strauss. Well, this bill would, first of all, create
    exceptions to the automatic stay for many things, but the most
    important one is it would put in an exception which means that
    the automatic stay would not stop a wage assignment, which is
    incidentally what Congress has mandated us to do anyway. Every
    single support order that is issued in any State in the United
    States is supposed to have a wage assignment.
        Senator Sessions. Just so we are all on the same page, let
    me ask you--a wage assignment means that the employer must send
    the money directly to the mother or the child, right?
        Mr. Strauss. Or to an agency like ours. We have done it and
    it is a system by which we collect about 56 percent of the
    child support. That is how important this is to make sure that
    is not stopped.
        Chairman Hatch. Thank you.
        Mr. Zywicki, I only have a few more minutes left, but let
    me just ask you this. Will means-testing mitigate the problem
    of bankruptcy abuse by high-income filers?
        Mr. Zywicki. Mr. Chairman, I believe it does. In
    particular, what it does is it shifts the presumption in cases
    involving high-income filers. Under the current system, you
    have to actually kind of go out and find these people, bring
    motions to dismiss their case and that sort of thing.
        What this does here is gives a nice gatekeeping approach.
    There is a safe harbor provision for those who make less than
    the median income. But above that, what it does is it just
    identifies those who make the above the median income, who have
    substantial repayment capacity without significant hardship.
    And it gives the presumption that they would have to repay some
    of their debts.
        The court would still have the discretion to look at every
    single case to determine whether or not there is some
    significant hardship present in that case that means they
    should not repay their debts. But by creating predictability
    and fairness, it will mitigate the problem of high-income
    filers.
        Chairman Hatch. Mr. Newsome, just a question for you. Do
    you believe that there are cases in the system which would
    qualify as, quote, ``substantial abuse,'' unquote, of the
    Bankruptcy Code?
        I understand you have been a bankruptcy judge for now,
    what, 15 years or thereabouts?
        Judge Newsome. It is going to be 19 in October.
        Chairman Hatch. Nineteen years. In all those years, how
    many cases have you dismissed for substantial abuse?
        Judge Newsome. Of the motions that are filed, I am probably
    running 50 to 60 percent.
        Chairman Hatch. You have dismissed about 50 percent for
    substantial abuse?
        Judge Newsome. That is right.
        Chairman Hatch. OK. Now, how can you blame Congress for
    wanting to bring more accountability to the system?
        Judge Newsome. I don't blame Congress at all, Senator, for
    wanting to bring more accountability to the system. Nobody
    hates bankruptcy abuse more than the judges who see it all the
    time. All I am saying is I think that the unintended effects of
    your bill are going to be very, very harmful to people who
    don't deserve this kind of treatment.
        Chairman Hatch. My time is up.
        Senator Biden?
        Senator Biden. Thank you very much. You know, there is an
    irony here. The bill has been stopped from passage basically
    based on four arguments against the bill.
        By the way, I want to thank all of you, every one of you
    for your testimony because you have all been very helpful. But
    let me try to narrow this down, as I see it.
        There have been four basic reasons why the bankruptcy bill
    has not been able to be passed. One is the argument by my
    friends on my side of the aisle that women receiving support
    and alimony will be damaged by this legislation. They will be
    put at a disadvantage, which you have put to rest here. I want
    anybody to tell me how that would be the case here.
        Number 2, we are told that the second argument is that the
    homestead provision is not sufficiently strong. The third thing
    we are told is that the poor generally will be disadvantaged by
    this bill. And the fourth thing is that those who engage in
    clinic violence will be able to get out from under their
    obligations somehow.
        Now, the irony I find here is two of those four provisions
    that the critics have are positions held by those who support
    the bill, including the creditors. I don't know a single
    creditor who wants somehow to be able to get out of paying a
    debt because they buy a $2 million home. I don't know a single
    creditor who has come forward who has suggested that anyone who
    bombs an abortion clinic, violates a stay-away order at a
    clinic, et cetera, should be able to discharge in bankruptcy.
    There is a real irony here. The creditors support the two
    provisions that some of us want to change.
        I think we should have the stronger language of the FACE
    legislation in the bill. I support that. I also think that we
    should have a flat limit nationwide on how much you can protect
    your home. I think the limit should be around $100,000, maybe
    $250,000, I don't know, but not where it is now, although as
    the Senator said, we have tightened this up a lot. He and I
    both think we could go much further. So there is an irony here.
        I am going to focus on the two things where creditors and
    debtors disagree, or at least those purporting to represent
    debtors disagree. The first one is the argument that the poor
    and disadvantaged or the women receiving alimony or support
    payments are disadvantaged.
        The only legitimate criticism I have heard based on any
    fact is what you have put forward, Judge Newsome, and that is
    the real problem is the burdensomeness of getting out from
    under this legislation, making safe harbor work.
        Does anyone on this panel think that any truly poor person
    is, on the face of the legislation, subject to a more onerous
    test than they are now? Anyone?
        Judge Newsome. Yes.
        Senator Biden. I don't mean burdensome. I mean just on the
    face of the legislation.
        Judge Newsome. Not burdensome, but the fact that you have
    eliminated the ability to get rid of debts under certain
    provisions of 523--you have eliminated the ability to do that
    in Chapter 13--yes, I think that that could impact very
    negatively upon people of very modest means.
        Senator Biden. Well, how about people on the--
        Judge Newsome. Senator, if I could just interrupt you for a
    second, that is also the argument about child support. What you
    have done by way of amendment to Chapter 13 is that you have
    made it possible for credit card companies and others who might
    allegedly hold, not necessarily, but allegedly hold a non-
    dischargeable debt based upon 523(a)(2) to--
        Senator Biden. Explain what 523(as)(2) is.
        Judge Newsome. 523(a)(2) deals with fraud, and at this
    point at least it requires a creditor to bring a complaint
    against the debtor alleging that he committed fraud when he ran
    up his credit cards. It is not just credit cards; it is any
    kind of secured debt.
        Senator Biden. So if there is fraud proven, your point is
    that creditor goes to the head of the line, above alimony?
        Judge Newsome. No, sir. What it does is it does two things.
    By making it impossible to wipe out credit card debts, unless
    you pay a hundred percent in a Chapter 13 the debtor comes to
    the other end of the line, comes out of bankruptcy still owing
    those credit card debts to the extent he didn't pay them in the
    13. That is going to compete with child support.
        Senator Biden. But under the law, child support has to be
    paid.
        Judge Newsome. That is right, but you can't get blood out
    of a turnip. If a guy gets garnished too much or if he gets too
    many payroll orders, his employer is going to fire him. It is
    very easy to do that in some States; Georgia, for example, I
    understand from my friends in Georgia.
        Senator Biden. Mr. Strauss, you look like you wanted to
    comment.
        Mr. Strauss. Well, I hate to disagree with a judge before
    whom I may have to appear sometime, but the bottom line is that
    if it was an even playing field and the credit card companies
    and the child support creditors had the same remedies, I would
    say, yes, the child support creditors may have a problem
    because of the resources of these credit card agencies, but the
    playing field is not level at all. For example, if you are
    collecting from wages--and we have discussed these wage
    assignments--it has to be served on the employer and it takes
    precedence no matter when served and it collects the debt
    first.
        Also, the consumer credit protection law says that when you
    are collecting from a person's wages, only 25 percent of it can
    go to non-child support stuff. But if it is a child support
    thing, it can take as much as 50 to 65 percent, wiping out the
    ability of the other people to collect at all.
        Senator Biden. That is right. Really, what you are saying,
    isn't it, Judge, is that it may cost them their job, it may
    cost them other things, but if they are wage-earner it is not
    going to get in front of collecting the child support?
        Judge Newsome. No, but then the possibility is nobody gets
    anything.
        Senator Biden. Whoa, whoa, whoa, not true. If the wage is
    garnished, the child support gets it first. You are saying if
    it causes them to end up being fired, then no one gets
    anything.
        Judge Newsome. Or if they just give up and run away.
        Senator Biden. Right, which happens all the time now.
        Judge Newsome. All the time now.
        Senator Biden. That happens all the time now.
        Judge Newsome. And you wouldn't want to encourage that,
    would you?
        Senator Biden. No, you wouldn't want to encourage that, but
    I find it a real stretch to figure out how this increases the
    very mentality that already exists in there.
        By the way, Ms. Vullo, I compliment you on your work.
        Ms. Vullo. Thank you.
        Senator Biden. One question. How would the new amendment
    prevent the abuse of process that exists now? There is not a
    single court in America that has ruled that a violation of any
    order relating to a bankruptcy that relates to doing anything
    at an abortion clinic is dischargeable. Not one has ever done
    that, correct?
        Ms. Vullo. To my knowledge, that is correct. There are just
    five cases.
        Senator Biden. I understand that, but there is not one that
    has done that yet. Notwithstanding what my friend from New York
    tells me every once in a while, there is not one that has done
    it yet.
        Now, you make a very valid point. You say the ability to
    abuse the existing law as to contesting what willful means
    allows this process to go on. It is costly, and thereby delays
    your clients and people who should be recompensed from being
    paid, and it costs them to stay in the game, right?
        Ms. Vullo. Yes.
        Senator Biden. How would the new legislation--I am not
    arguing with you, but it is a serious question--how would that
    prevent the same abuse of process?
        Ms. Vullo. The new legislation focuses on the existence of
    an action or a judgment under a particular type of statute. So,
    for example, in my case I have a judgment under the FACE
    statute.
        Senator Biden. Correct.
        Ms. Vullo. The new legislation says that judgment is non-
    dischargeable. We don't get into the question of what willful
    means, what malicious means. It is an automatic non-
    dischargeable, and I would submit that a bankruptcy lawyer
    would have a very, very difficult time signing on to any
    document in bankruptcy court with that statute, whereas now,
    because of the case law that is out there under the willful and
    malicious injury exception, there are hundreds of cases going
    different ways with a lot of different nuances.
        With that, as I have seen in my case, lawyers are arguing
    what those words mean. Despite the fact that there are cases
    out there on our side on the willful and malicious injury
    question, it does not mean that the risk of inconsistent
    results is not real. It is real.
        Senator Biden. The way things are going, the likelihood is
    you are building case law. I support what you want to do, but
    the likelihood is, for example, the very cases you have taken
    in the various district courts, and now circuit courts probably
    in those--have you gotten there yet?
        Ms. Vullo. I haven't gotten there. I am still in bankruptcy
    court. I have got several levels of appeal.
        Senator Biden. They are, at a minimum, building the case
    law that suggests that these do not fall under that exception.
    In other words, I am not suggesting it shouldn't be cauterized
    now. I agree with you. I just want to make we don't put
    ourselves in a position of hyping this beyond what is real.
        What is real is it is a costly process to have to appeal,
    to fight an appeal against a judgment that was warranted in the
    first instance. That is really the problem, right?
        Ms. Vullo. There is more than that, Senator. With all due
    respect, there is much more than that because in my case I had
    specific findings from a trial judge that said specific intent
    and malice, and even then I was in court because I didn't have
    a statute that simply said judgment under FACE, non-
    dischargeable. So they litigated the issue.
        In many, many other cases which will happen in the future--
    the FACE statute is not very old and in many cases that will
    happen in the future. I suspect all there will be will be a
    judgment without specific findings, and you are going to have
    judges all across the country interpreting what the elements of
    the statute are against willful and malicious injury, and they
    may interpret it differently, Senator.
        Senator Biden. My time is up. Maybe I can come back to you
    later or personally talk to you about this. I am not suggesting
    you are wrong. I don't know. I find it hard to see how a
    judgment under the FACE Act, not in bankruptcy now--you
    litigate under the FACE Act. I find it hard to figure how a
    court would render a judgment on behalf of the client without
    specifying what, in fact, was the conduct. I don't know how you
    get there.
        Ms. Vullo. It will happen, and I can give an example. The
    current law says willful and malicious injury requires
    intention to commit the injury, not simply intention to do the
    act. If I bomb an abortion clinic and as a result of that
    bombing someone dies, the intention was to do the act of the
    bombing, not to commit the killing.
        And I would submit--and I think this would be absurd, but
    the current law logically would say that that debt to the
    victim, the dead person, as opposed to the bombed building,
    would be dischargeable in bankruptcy. I don't think we should
    debate over whether or not--
        Senator Biden. That is an absurd reading and it would take
    absurd judges. We don't have that many absurd judges, except
    the ones that the other guys appoint, but I don't know.
        [Laughter.]
        Senator Biden. That is a joke, that is a joke. That was a
    bad joke. I would like to ask unanimous consent to strike that
    from the record because I will have 731 judges calling me and
    wondering if I am talking about them.
        I thank my colleagues for their indulgence. Thank you very
    much.
        Senator Sessions [presiding]. Thank you, Senator Biden.
        I really want to get off this subject, and you have had a
    good day in the sun. If the Schumer amendment is made law,
    someone still would be able to file bankruptcy and delay paying
    your debt until such time as you went to that bankruptcy court
    and overcame their objection still, even though it would be
    easier to overcome the objection. Am I wrong about that?
        Ms. Vullo. An abuser will again abuse the system
    potentially, but it makes--
        Senator Sessions. But the ultimate remedy for a court is
    sanctions for contempt or things of that nature, it seems to
    me.
        Senator Schumer. Frivolous--
        Senator Sessions. Yes, frivolous or that sort of thing.
        Senator Schumer. It could be a frivolous suit and subject
    them to sanctions and would be dismissed right away, which
    happened in none of these cases, as I understand it.
        Ms. Vullo. That is correct. A lawyer would be hard-pressed
    to sign that bankruptcy petition if this amendment were in the
    Code.
        Senator Sessions. Well, I would just say this about this
    subject, which has never been lost and is not a critical matter
    in the world of commercial bankruptcy: If there are other
    similar problems, such as extreme environmental violence that
    results in spikes being put in trees or union attacks on small
    businesses, it seems to me that we ought to consider the same
    type rule as is being urged upon us with regard to abortion
    clinics. That is all I am saying.
        It does strike me that you represent abortion clinics and,
    as such, you want to protect those clinics from violence. But
    others may sue people who roll back odometers and they would
    like to have their cases proceed, too. So there are a lot of
    different issues here, and I think quality and fairness of
    treatment across the board is what I would favor as opposed to
    just targeting one issue.
        Senator Biden. Mr. Chairman, can I ask a question?
        Senator Schumer. Would the Chairman yield?
        Senator Sessions. No. You will have your time.
        Ms. Vullo. May I respond?
        Senator Sessions. I am using my time up right now.
        Senator Biden. I apologize.
        Senator Sessions. You and I have talked about it, Senator
    Schumer, and I respect your concern over this issue. There are
    a lot of abuses in the bankruptcy court, unfortunately, such as
    debtors delaying just adjudication and trying to frustrate
    payment of debts, and that is what this reform effort is trying
    to correct. Sadly, this is just one example of what is going on
    daily in bankruptcy courts across America.
        Senator Schumer. But I would say--
        Senator Sessions. Thank you Senator, but I am claiming my
    time.
        Ms. Vullo. Senator, may I respond to that, please?
        Senator Sessions. No. I am just having my say.
        Senator Schumer. Give her the courtesy of a response, Mr.
    Chairman.
        Senator Sessions. She has had a chance to respond.
        Senator Schumer. I would ask unanimous consent it not be
    taken from my good friend from Alabama's time and let Ms. Vullo
    respond.
        Senator Sessions. On what subject?
        Ms. Vullo. Can I grant that consent?
        [Laughter.]
        Senator Schumer. No, unfortunately you can't. It is up to
    him.
        Senator Sessions. I will not object. If it doesn't cause me
    to lose my time, I would be glad to hear you.
        Ms. Vullo. All I would want to say, Senator, is that there
    is documented abuse here in a particular area. All pieces of
    legislation deal with particular items when this committee
    determines and learns of some element of abuse.
        Senator Sessions. I understand that is your view.
        Ms. Vullo. The fact that there might be other abuse does
    not mean that documented abuse should go unremedied, and that
    is all we are asking with respect to this piece of legislation.
    It is documented and it is a group of people who do not believe
    they have to follow the laws of this country. People who don't
    believe they have to follow the laws of this country should not
    have the benefits of the Bankruptcy Code when they have
    demonstrated that abuse.
        Senator Schumer. And I would say to my friend, just to have
    an analogous example, some animal rights people started
    shooting scientists who were experimenting on animals and then
    somehow claimed bankruptcy as a shield. I would support an
    amendment to do that.
        Senator Sessions. Well, I think there are other problems
    that we could deal with and I certainly do not object. I think
    you make the best point, which is if you have got a documented
    case of abuse, you are more justified in asking for relief.
        Judge Newsome, you mentioned that you granted discharges in
    bankruptcy for abuse.
        Judge Newsome. No, no, I didn't grant discharges in
    bankruptcy for abuse.
        Senator Sessions. Excuse me, dismissals of bankruptcies.
        Judge Newsome. Right.
        Senator Sessions. How many, in terms of actual numbers,
    have you granted throughout your career?
        Judge Newsome. Senator, I don't know.
        Senator Sessions. You said 50 to 60 percent of the motions.
        Judge Newsome. And I can't tell you--
        Senator Sessions. Less than ten?
        Judge Newsome. Oh, no. It has been more than ten.
        Senator Sessions. Less than a hundred?
        Judge Newsome. Less than a hundred.
        Senator Sessions. So it is not many. It would probably be
    less than 1 percent of the cases you have presided over.
        Judge Newsome. Oh, much less.
        Senator Sessions. In my view, the abuse procedure has
    failed.
        Judge Newsome. I agree.
        Senator Sessions. It is not an effective mechanism.
        Judge Newsome. Not as written.
        Senator Sessions. That is why we think, instead of having
    it filed in every court, having judges determining from their
    own feelings what ought to be granted and what not granted,
    that it would be preferable to have a fair, objective statutory
    scheme including bright-line rules based on size of family and
    median income. That would be an improved approach to the
    current problems.
        Judge Newsome. May I respond?
        Senator Sessions. Yes, sir.
        Judge Newsome. The rule you have proposed is anything but
    bright line. There are as many ways of interpreting the means
    test as there are people looking at it. And if you think that
    there has been inconsistency interpreting substantial abuse,
    wait until the judges get a hold of this one.
        Senator Sessions. Well, let me ask you this.
        Judge Newsome. And let me just also say this. The problem
    with the test that is in the statute right now is that the only
    person who can file a motion is the U.S. trustee. The creditors
    can't even bring it to the trustee's attention.
        So if you opened this up, if you opened the test and you
    got rid of the word ``substantial'' and just said if you commit
    an abuse of the Bankruptcy Code, a creditor can bring a motion
    to have the case dismissed for an abuse--contrary, I think, to
    popular belief, there is an objective set of standards under
    the substantial abuse test for when you should dismiss a case
    for substantial abuse. It has been developed in the case law
    and it basically is can the debtor afford to pay something in
    Chapter 13.
        Senator Sessions. Well, it strikes me that it is not very
    difficult. If, for example, a family of four's median income is
    about $50,000, and that same family of four seeks to file for
    bankruptcy with an income of $40,000 they still get to go in
    Chapter 7 and would not, under S. 220 or current law, be put in
    Chapter 13. That is not a very difficult concept for a judge,
    in my view, to understand.
        Now, let me ask you a question, Mr. Strauss. If a person is
    moved from chapter 7 to 13 because they have income above the
    median, and have been found to be capable of paying some of
    their debts they are required to repay those debts over a 5-
    year period, isn't that correct?
        Mr. Strauss. Yes.
        Senator Sessions. And during that 5-year period, you have
    got a Federal bankruptcy judge basically ensuring that they pay
    the child support first out of every single debt that is paid.
        Mr. Strauss. Exactly.
        Senator Sessions. Isn't that a great protection for a
    mother with children?
        Mr. Strauss. Yes. We obviously prefer debtors in Chapter 13
    for those reasons, especially if these other provisions are
    enacted.
        Senator Sessions. Senator Feingold?
        Senator Feingold. Thank you, Mr. Chairman. I am pleased
    that we are having a hearing in committee this year. We didn't
    do that at the beginning of the 106th Congress, in 1999, and I
    thought that was a mistake. I certainly want to thank all the
    panelists.
        In fact, the process we followed in the last Congress and
    in the Congress before that led to a bill that the President
    wouldn't sign and that a majority of the Democratic caucus
    wouldn't support. I am afraid we are heading down that exact
    same road again this year.
        Of course, we have a new President, and most observers
    expect that he would sign the bill that the Chairman and
    Senators Grassley and Sessions have introduced if it gets to
    his desk. But, my colleagues, that doesn't make the bill any
    better or more fair or more balanced, or worthy of this
    committee or this Congress, than the one we passed last year.
        Amending the Bankruptcy Code, as my friend Brady Williamson
    indicated, used to be a non-partisan exercise, where the
    Congress listened to experts, practitioners, law professors,
    judges and trustees, and made careful, considered judgments
    about how the law would work. Now, it seems we ignore the
    experts and, instead, do what the credit industry wants us to
    do. And we use parliamentary tactics to avoid reasoned
    consideration that harm the bill and I think actually discredit
    the Senate.
        We all know how the procedures of the Senate were abused to
    pass the bankruptcy bill last year. This year, the bill has
    been sent right to the calendar for floor action. We have a new
    Judiciary Committee this year with four new members and a 50/50
    split in party affiliation. I strongly believe this committee
    should have the opportunity to fully consider and amend the
    bill.
        I just want to say for the record that our Leaders'
    agreement to have evenly divided committees is really pretty
    much meaningless if major legislation like bankruptcy reform
    doesn't really go through committee, and so there is agreement
    to have equal budget for staffs if major legislation is marked
    up in this committee before that agreement is implemented. This
    is a new Senate with an unprecedented power-sharing
    arrangement, and I think this committee should start operating
    on that basis, in fact, not someday, but now.
        Mr. Chairman, I have a longer statement for the record that
    spells out my concerns about S. 220. I would like to note here
    that this committee should be cognizant of the extent to which
    bankruptcy reform has come to be seen across the country as a
    gift to special interests.
        In that regard, I would like to ask unanimous consent that
    recent studies by Common Cause and the Center for Responsive
    Politics concerning the campaign contributions made by
    supporters of bankruptcy reform legislation be included in the
    record of this hearing.
        Mr. Chairman, I am asking unanimous consent.
        Senator Sessions. Without objection.
        Senator Feingold. In light of the appearance that these
    free-spending industries have created, we have a very heavy
    burden to make sure that we are serving the public interest
    with this kind of far-reaching legislation. We cannot meet that
    burden unless we slow down and open our minds to the kinds of
    criticisms expressed by witnesses at this hearing and by non-
    partisan experts in this field. For two straight Congresses, we
    have ignored the experts. We need to step back and take another
    look.
        Mr. Chairman, I want to welcome in particular the two
    witnesses from Wisconsin, Brady Williamson and Mr. Beine, who
    hail from my State. Senator Kohl very much wanted to be here
    and extends his apologies. He is doing what we in Wisconsin
    consider the Lord's work. He is with Agriculture Secretary
    Venemen talking about the dairy industry.
        We are glad you are here to provide a little Wisconsin
    common sense to this debate. I will hopefully be able to ask
    more questions in another round, but let me just use the time
    here remaining in my round to ask Mr. Williamson to comment
    briefly on whether the efforts of the National Bankruptcy
    Reform Commission that he chaired are reflected in the bill
    that passed the Senate last year and that is before the Senate
    again.
        Brady, if you could start by recounting how the Commission
    went about its work and attempted to study and accommodate all
    the competing views and tried to come up with a balanced bill
    with regard to this law.
        Mr. Williamson. Thank you, Senator. The Commission was
    created by the Congress in 1994. It had 9 members, 3 appointed
    by the President, 4 appointed by Congress, the House and the
    Senate, and 2 by the Supreme Court. It conducted hearings
    across the country, more than 25 hearings, heard from more than
    300 witnesses, received more than 3,000 submissions, and
    attempted to come up with a balanced set of recommendations.
        The Commission submitted its report to the Congress and the
    Supreme Court on October 20, 1997. It had 172 recommendations
    and a 1,300-page analysis of the bankruptcy law which remains
    available today on the Net and I still think is the single most
    comprehensive assessment as of 1997 of American bankruptcy law.
        This legislation includes some of the Commission's
    recommendations. I would single out the Sessions-Kohl provision
    on homestead as an example of that. I would also single out
    direct appeals as an example of that. I would note that the
    Commission found no need for a needs test, as such. The
    Commission addressed the question of abuse in a variety of
    ways, we think with a little more precision and sophistication
    than the legislation does.
        The Commission endorsed the notion of flexibility for
    judges. We have heard a discussion this morning about a family.
    I believe, Senator Sessions, you mentioned a family of four
    with $50,000 of income, and shouldn't it be easy to tell
    whether they get to go in Chapter 7 or Chapter 13. The answer
    is, yes, it should be if it were a normal family. But if the
    family had an autistic child, if the family had economic
    consequences, circumstances that didn't fit readily into IRS
    guidelines, then you have a different story. And then I think
    you need the flexibility and the discretion that the Code today
    affords bankruptcy judges.
        Senator, if I could just take a minute to respond to the
    Senator from Delaware's friendly challenge on his four issues,
    first, Senator Biden, I would note that the people in the
    credit industry who support this legislation have been
    remarkably silent on the importance of the Sessions-Kohl
    amendment.
        Senator Biden. That is not true, by the way. That is simply
    not true. That is simply not true.
        Mr. Williamson. Well, Senator, then I would like to see the
    evidence of that.
        Senator Biden. I will give you the evidence.
        Mr. Williamson. Thank you.
        Senator Biden. It is simply not true.
        Mr. Williamson. Second, with respect to the question of the
    impact of this legislation--
        Senator Biden. You mean homesteading, right?
        Mr. Williamson. Yes, sir.
        Senator Biden. OK.
        Mr. Williamson. With respect to the Senator's comments
    about women and children, bankruptcy law is fundamentally about
    values, and this country and this Congress long ago decided
    that taxes, child support and student loan obligations should
    be non-dischargeable, and the reason was because we as a
    society place a value on that.
        One of the disturbing things about the bill in the
    aggregate, Senator, is that it increases the categories of non-
    dischargeable debt. And by doing that, it places that new non-
    dischargeable debt in competition, inevitably, with the other
    non-dischargeable debt.
        Senator Biden. You are good, Brady.
        [Laughter.]
        Senator Biden. I forgot how much I liked working with you
    over the years. You are so good.
        Mr. Williamson. Senator, Chapter 7's only last a brief
    amount of time and during that period, of course, a bankruptcy
    judge can insist that child support be paid. Chapter 13's may
    last 3 years or 4 years, but one thing we haven't talked about,
    a dark secret here, is that 3 out of every 4 Chapter 13's fail.
    And when they fail and when the debtor is sent out of the
    courtroom into the world, each of that debtor's creditors with
    a non-dischargeable debt--it is passed through bankruptcy
    whether it is 7 or 13--is on the same footing.
        They can go to the single mother or single father with
    children and say we want you to pass. And during the bankruptcy
    process, they can go to that same single mother and say, look,
    we will let you keep your credit card, you just have to
    reaffirm the debt.
        Now, we haven't talked about reaffirmations here, and I
    think we are all aware of the instances in the last 3 years
    where major credit institutions have abused the reaffirmation
    system. This legislation needs to pay more attention to that
    issue.
        The system is about balance, Senator, and it has to be
    balanced and it has to prevent abuse. Bankruptcy judges can
    provide balance if they have the discretion. I associate myself
    with Judge Newsome's remarks because we need to give bankruptcy
    judges flexibility, not put them in straightjackets, and that
    applies as well to the means test.
        Senator Sessions. Senator Schumer?

     STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR FROM THE
                           STATE OF NEW YORK

        Senator Schumer. Thank you, Mr. Chairman. I thank everyone
    here. I think this is an excellent hearing, no matter what side
    of the issue you are on, because we are really discussing the
    issues. This is our committee, I think, at its best and I
    appreciate everybody being here.
        We were not allowed to make opening statements. I am going
    to make part of my opening statement now and then ask that the
    rest be put in the record, and then I will ask a few questions
    if I have time. Otherwise, I will wait for the second round.
        First, I want to thank everybody, all the witnesses for
    being here, and especially Maria Vullo, who is an attorney from
    New York. As we know now, she litigated the Nuremberg Files
    cases.
        Ms. Vullo, I can say to you that in the ante room there,
    two of my colleagues were talking and one said to the other I
    wouldn't want to be litigating against her--the ultimate
    compliment to a litigator.
        Mr. Chairman, bankruptcy law and bankruptcy legislation is
    complicated. It is sometimes archaic, and I can safely say that
    when I walk into, say, O'Halloran's Pub on Clinton Road and see
    my constituents, they are not saying what is new with the
    homestead exemption, the means test and safe harbors, Charlie.
        The fundamental idea behind bankruptcy law and bankruptcy
    reform is actually a fundamental and very simple one. Good
    bankruptcy reform means strengthening the protections for the
    neediest debtors by giving them a safety valve to deal with
    misfortunes that may befall them, while at the same time
    shoring up the system to prevent abusive filings by debtors who
    do not need bankruptcy protections. It is that simple, Mr.
    Chairman, balance the need to protect vulnerable Americans with
    the need to prevent abuses.
        Last year, I opposed the bill that ended up emerging from
    the shadow conference because I think the bill got the wrong
    balance. I am hopeful that this year we will work to achieve
    truly balanced bankruptcy reform, something that is going to
    cure abuses but doesn't throw out the baby with the bath water.
        I hope we are not going to try to jam the same bill through
    that came out of the shadow conference. That bill, which had
    been unilaterally stripped of the FACE amendment, the so-called
    now Schumer-Leahy amendment, had passed 80 to 17.
        By now, I think everyone involved in bankruptcy knows that
    the FACE amendment prevents those who engage in violence and
    intimidation at abortion clinics from hiding behind the
    Bankruptcy Code to escape their court-imposed debt. This
    provision makes clear to those who would harm women and doctors
    that bankruptcy is no escape from accountability for their
    heinous acts. They have tried to use the bankruptcy courts for
    that.
        Now, what could be wrong with that purpose, as my good
    colleague and friend from Delaware said? Probably everyone on
    this panel agrees with that, and the issue frankly is not pro-
    choice or pro-life; it is pro-law. That is why Harry Reid, who
    is pro-life, joined as a cosponsor immediately. That is why
    when I first passed the FACE law in the House we had a
    coalition of pro-choice and pro-life Congress members
    supporting it.
        That is why last year Senators Jeffords, Snowe, Collins and
    Specter made this a wholly bipartisan effort. And that is why,
    when they heard bankruptcy was bring brought up again this
    year, Senators Reid and Jeffords quickly approached me to
    stress their support and desire to cosponsor the amendment.
        And that is why our new Attorney General was so outspoken
    both publicly and privately at his confirmation hearings about
    his support for the FACE amendment. In the last Congress, the
    Justice Department was a strong supporter of FACE. In fact, I
    would like to ask unanimous consent that the DOJ letter I
    received last year showing DOJ's position which outlines why
    this law is so important be placed in the record.
        Senator Sessions. Without objection.
        Senator Schumer. Given Attorney General Ashcroft's pledge
    to enforce FACE and his explicit support of the FACE amendment,
    I hope that this year it will be included in the bankruptcy
    bill.
        Let's not kid ourselves. Attacks on clinics and clinic
    workers are often planned by sophisticated individuals and
    organizations. Violent activists who hide their assets to avoid
    financial repercussions are quite capable of working bankruptcy
    into their schemes to commit violence without accountability if
    they believe it will work.
        Ms. Vullo testified about the Nuremberg Files case. It is
    not fiction. Your testimony was riveting. What happened there
    was appalling and offensive. What is happening now in the
    bankruptcy courts is equally appalling and offensive. We need
    to shut it down. If we don't, there is a substantial risk that
    others will pervert the Bankruptcy Code and it will become a
    widespread tactic used by those who believe that their message
    is more important than our American law and the Bankruptcy Code
    will be perverted.
        Can any of us really doubt that the groups that Ms. Vullo
    has litigated against, if given the chance, will not continue
    to force clinics and doctors, and relitigate and relitigate and
    relitigate? That is my dispute with my good colleague from
    Delaware. He is right that if these little clinics had free
    lawyers--they don't even have to be as good as Ms. Vullo--they
    would win. But they don't. The opponents have huge amounts of
    money and go to court after court after court. And we all know
    in practical effect what the consequence will be. It will be
    that bankruptcy will be a shield from judgment.
        Now, some have argued--we hear this argument a lot--about
    the willful and malicious standard. They say FACE debts would
    be covered. First, I have never argued that FACE debts would
    never be covered. Certainly, some would be if they were proven
    to fall under the willful and malicious injury exception. But
    this in no way means that all FACE debts are covered by that
    exception.
        In the Nuremberg case, the judge made explicit findings of
    maliciousness and intentionality that made it easier in the
    bankruptcy cases to argue that the willful and malicious injury
    exception applies. But even in these cases which should be slam
    dunks, Ms. Vullo and the plaintiffs have spent more than a year
    litigating in bankruptcy court.
        What about cases where there are settlements and part of
    the stipulation of the settlement is we are not going to find
    willful and malicious and there is a judgment? Then what do we
    do? Many, many, many cases end in settlement, probably more
    than actually end in judgment. So it is vital that we make
    perfectly clear that FACE debts are non-dischargeable. If we
    don't, the individuals and organizations seeking to shut down
    clinics will continue to force clinics, doctors and other
    victims of clinic violence into a world of perpetual
    litigation. By doing so, they may well deter victims of clinic
    violence from ever bringing a case in the first instance.
        Mr. Chairman, I have a lot more to say on this subject, but
    I am going to ask unanimous consent that my entire statement be
    put into the record.
        Senator Sessions. We would be glad to. Once again, ably
    delivered.
        Mr. Zywicki, would you respond to Judge Newsome's
    suggestion or statement that judges would find it difficult to
    interpret the means test language in this bill? How hard and
    complex would that be?
        Mr. Zywicki. It is much less complex than under current
    law. Basically, what happens under current law is judges just
    kind of make it up as they go along, just sort of an open-ended
    inquiry. If you read the cases, you see cases all over the
    place. He says it is being refined by case law. That is simply
    not the case. The cases are all over the place, and what this
    does is brings order to it.
        Senator Sessions. Cases on abuse?
        Mr. Zywicki. Yes, cases on abuse. There is no consistency.
        Senator Sessions. But under the proposed language of this
    bill, to what extent is that ambiguous or unclear?
        Mr. Zywicki. This is much less ambiguous or unclear. It
    identifies things very clearly, and most importantly it
    provides a list of expenses and that sort of things. And then
    what it does is cabins at the end a judge's discretion and
    says, look, here is your discretion, here is a simple list to
    follow and here is your discretion; apply your discretion, but
    subject to guidance, not just according to willy nilly
    preferences. So I don't think there is any problem with
    applying the means test as it is drafted.
        Senator Sessions. With regard to the legislation, I think
    it has previously been noted, but this bill passed the House in
    June 1998, 306 to 118, essentially this bill with the means
    test in it. In the Senate, it passed in 1998, 97 to 1. In the
    House, it passed again in May 1999, 313 to 108. In the Senate,
    it passed February 2, 2000, 83 to 14. In the House, it passed
    again on voice vote virtually unanimously, I suppose, without
    even a roll call vote. It passed 70 to 28 in the Senate.
        There have been six different times this bill has been up
    and passed by overwhelming majorities. We don't want to not
    have hearings and let everybody talk, but sometimes it is time
    to stand up and vote and I think we are about at that point
    now.
        Senator Biden, I will let you go now and if I have any
    follow-ups, I will follow you.
        Senator Biden. One of the reasons I think this hearing is
    important is that there has been so much misinformation that
    has been out there across the board. I would argue initially
    the misinformation was on the part of the creditors 4 years
    ago. Now, I would argue the misinformation is on the part of
    those opposing this legislation.
        I start off with sort of just a common-sense notion here.
    Why are there so many more bankruptcies? Why has that happened?
    Part of what our ethic was was that bankruptcy was something
    that was an absolute last resort and was something that you
    really tried to avoid because it had a social stigma related to
    it, beyond a financial stigma related to it. That isn't the
    case anymore. It is not working that way anymore. People still
    need bankruptcy protection. That is why we got rid of debtor
    prisons.
        The irony here is I have been for my 28 years in the Senate
    characterized by the business community as too much of a pro-
    consumer Senator. I have found it kind of ironic that one of
    the things that has been argued here today is that--and I might
    add, Mr. Manning, without any data to support it; I have seen
    no hard data. I read your entire report. I have no hard data
    where you support the idea that you state that you have a
    direct connection between bankruptcy and credit card debt. I
    have not seen that data that you have supported here.
        One of the things I heard today was the autistic child;
    what about the person with the autistic child? Doesn't the
    judge need discretion for that? Well, that is a medical
    expense. Under this legislation, that is set aside. Where the
    heck does that come in? I don't get that. Obviously, I don't
    want to hurt people who have autistic children, but you all
    make it seem like the autistic child is in trouble, you know,
    the parent with the autistic child.
        Brady, I don't think we have been on the opposite of an
    issue, except this one. I can't think of it. How long have we
    known each other, 25 years?
        Mr. Williamson. Twenty-8 years.
        Senator Biden. As a matter of fact, I tried very hard to
    hire you to be my main guy. You were making too much money to
    come work for me.
        Mr. Williamson. Senator, it was your first day in the
    Senate that we met.
        Senator Biden. Well, that is 28 years, and I really have
    overwhelming respect for you and you know that. We have been
    old friends. You have supported me.
        Now, reaffirmation. Are you alleging that for a creditor to
    insist on reaffirmation is easier under the new proposal we are
    making than it is under the old?
        Mr. Williamson. I would not suggest, Senator, that the
    legislation you are holding in your right hand is a model of
    good draftsmanship.
        Senator Biden. I didn't say that. Brady, stop playing games
    with me. Is reaffirmation, as poorly drafted as your brilliant
    drafting capability may discern--is it tighter or looser than
    the existing bankruptcy law? Remember, your legal reputation is
    part of this.
        [Laughter.]
        Senator Schumer. But if he demolishes it, you could always
    get a job with him.
        Senator Biden. I want him any time he is willing to come.
        Mr. Williamson. Senator, I would say that the intent of the
    folks who put that together was to make it slightly tougher.
        Senator Biden. Not intent. Does it make it tougher, Brady,
    or not?
        Mr. Williamson. Senator, I don't think so.
        Senator Biden. I will get back to you on that. The second
    thing I want to ask you about is what new non-dischargeable
    category of debt do we have in this legislation?
        Mr. Williamson. The category of unsecured debt that can be
    non-dischargeable is increased significantly.
        Senator Biden. How?
        Mr. Williamson. The time limits.
        Senator Biden. Right, but no new category, right?
        Mr. Williamson. Well, if you--
        Senator Biden. That is what you said. You said new category
    of debt.
        Mr. Williamson. If you expand the category of non-
    dischargeable unsecured debt incurred within 30 days--
        Senator Biden. Let's go like when we were in grade school,
    you know, file them. Do you mean category in that if you put
    more of a debt within a category subjected to non-
    dischargeability--if you increase the number or lower the
    number, that is a new category. Is that what you are saying?
        Mr. Williamson. It is certainly an expanded category.
        Senator Biden. OK, then that may be more accurate, wouldn't
    it be, because there is no new category?
        Mr. Williamson. Actually, there are.
        Senator Biden. Name me one.
        Mr. Williamson. I believe the drunk driving penalty
    exception is a new category of non-dischargeable debt.
        Senator Biden. You are right. That is a good one. You agree
    with that, don't you?
        Senator Sessions. Abortion clinics. How about that?
        Senator Biden. We want to make abortion clinics non-
    dischargeable, too. But there is no new category of debt that
    the creditors are seeking, is there, that you are aware of?
        Mr. Williamson. Senator, I don't want to be involved in
    semantics with you because of your caution about games. But if
    you expand from 30 days to 90 days--
        Senator Biden. OK, but it is not a new category. It is a
    time limit. You argue that that makes somebody more
    susceptible, but it is not a new category. I mean, that is the
    part I am trying to get at here. I wish you would all be a
    little straightforward with this. You are opposed to this flat
    out.
        Mr. Williamson. That is not correct, sir.
        Senator Biden. Oh, give me a break.
        Mr. Williamson. Senator, whether it is a category or not,
    it is whale of a lot of new debt.
        Senator Biden. OK, that I buy. Just try to be straight with
    me. If you were staffing me and you did that to me, then I
    would fire you because you would not be telling me the straight
    stuff. Just give the straight scoop. That is all I want to
    know, that is all I am trying to figure out. I really mean
    this. That is all I am trying to figure out because a lot of
    games are being playing here, not by you, but everybody out
    here is playing games with this stuff.
        What gets communicated to the press--there was a Time
    magazine article--I think it was Time magazine, wasn't it, that
    was riddled with absolute, total, complete fabrications, not
    because I think the guy writing the article was, in fact,
    somebody who tried to fabricate it, but because he heard things
    like new categories. He heard things like the autistic child,
    he heard things like be able to escape from debt on the
    abortion clinic. No one has escaped yet.
        Ms. Vullo makes an incredible case, I think. I hope the
    credit card industry and I hope the creditors out there are
    listening because she is making a very strong point. Now is the
    time to put pressure on my conservative friends to accept her
    position.
        Senator Schumer. Hear, hear.
        Senator Biden. But the point is she said it straight, she
    said it straight. It may be someday that somebody will be
    discharged in bankruptcy. It may be that someone is convicted
    under FACE and, in fact, gets discharged, but none of that has
    happened yet. But what has happened is it is costly. I am just
    trying to get my arms around this a little bit here.
        Your statement, Brady--any reasonable person listening to
    what you said earlier would walk away thinking that
    reaffirmation is easier to do under this legislation than
    exists today. I doubt whether any honest person would conclude
    that that wouldn't be the conclusion. Maybe that is not what
    you intended, but the way you state it, it makes it sound that
    way.
        Creditors are not people I am crazy about because I am
    listed as--I am not, but I am listed as the poorest Member of
    Congress, literally. I mean, I am not.
        Senator Schumer. Wait a minute.
        Senator Biden. No, no. Seriously, the Washington Post four
    or 5 years ago listed me as the poorest Member of Congress
    because I refinanced my home to pay for Yale, Penn and
    Georgetown. That is what happened. And I am not because the guy
    who does my financial disclosure didn't list the equity in my
    home, because under our stupid rules in order to list the
    equity in your home you have to have a current assessment. It
    costs $500 to get one done. I didn't want to spend $500. I
    would rather pay it to Georgetown than do that.
        To make a long story short, I am not the poorest, but I am
    not a debt-free guy. I am not like a lot of our colleagues here
    who the last thing they have ever seen is having to take that
    lazy susan and spin it around and decide who gets paid this
    month. Some of us still do that who have this job. So I don't
    come at this like we are going to go out there and squeeze
    every penny out of folks out there.
        But I start off with the proposition that something is
    rotten in Denmark, as the old expression used to be. An awful
    lot of people are discharging debt who shouldn't. This
    voluminous increase in filings--it is exponential what has
    happened. Something is up, and that happened when the economy
    was booming, absolutely booming.
        Now, I am not a real smart fellow maybe, but there is
    something wrong. Something is going on here, and it says to me
    it has got to be tightened, for a simple reason, and the
    gentleman on the end made the comment, as did Mr. Sheaffer.
    Guess what? People who come from my economic class where I grew
    up pay more now; they pay more. They pay more in the cost of
    the product at Boscov's and other places where we shop, not
    where a lot of the people who are getting out of the big
    bankruptcies shop. Nobody who has a big bankruptcy shops at
    Boscov's.
        [Laughter.]
        Senator Biden. I am not joking. I am not trying to be funny
    here. This is serious, this is serious.
        So what happens? I ask my colleagues, try to think back to
    the time when you were just starting. You just got out of law
    school, you just got out of college and you are trying to buy
    the car and you are trying to get the first bit of credit. All
    that is going on here is the people it is hurting is not the
    wealthy people. As bankruptcies increase astronomically like
    this and in geometric proportion, it is hurting people where I
    come from.
        So I am so sick of this self-righteous sheen put on anybody
    who wants to tighten up bankruptcy is really anti-debtor.
    People are getting hurt, people are getting hurt. Again, I very
    much want to work out the two big provisions relating to
    Chuck's initiative--and I give him great credit for that--and
    also on your initiative, which is homesteading. We ought to be
    able to force this issue.
        So my message to the creditors out there who want this
    tightened up is get on the team, join the band wagon, put as
    much pressure on the folks who won't do that as you put on
    people who are opposed to any change. I hope that message goes
    out clearly.
        The second piece of this is there has got to be a way--
    Brady, if you are right, and if you are right, Judge, that on
    the extreme, at the end of the day, even though we put women
    and children first, like in sinking ships--even if they are
    first, there ought to be a way where we can make them the first
    among equals.
        And we are not putting any new categories of debt in here,
    but maybe as we expand categories, and marginally, I might add,
    marginally--as we expand those categories, maybe we can still
    come up with a provision that says women and children cannot,
    even after they fail in 13, be subject to it, or even after
    they lose their job.
        I find that one a hard one, Judge. I was a family court
    lawyer. I did these things. I wasn't a big-time lawyer. I was
    just a plain old trial lawyer, and I spent a lot of time as a
    public defender and a lot of time in family court going after
    those support payments and going after that stuff.
        I didn't know anybody I ever ran across in my experience
    who would quit their job, because this legislation exists, in
    order to spite their circumstances than would do it now. I
    mean, I find that a real leap. But I hope there is a good-faith
    way we can try to fine-tune this, if you still think you have
    got to fine-tune it.
        But something is wrong with a system that allows guys like
    me getting out of law school discharging our law school debt
    front-end, guys like me getting out of medical school
    discharging their medical school debt.
        Judge Newsome. You would never be able to do that.
        Senator Biden. Like heck you can't.
        Judge Newsome. Not under this system you can't, not the one
    we have got right now. You can't get out of a medical debt. It
    is a HEELS loan most of the time, and you can't get out of
    those for love or money.
        Senator Biden. By the way, that is not the only debt people
    acquire going through school.
        Judge Newsome. And as to the law school debt, if those are
    educational loans, those are presumed non-dischargeable.
        Senator Biden. No, no, they are not educational loans. I
    graduated $100,000 in debt and they were commercial loans. I
    didn't get one of those. I didn't qualify. My sons still have
    $120,000 they are paying off. You are full of malarkey, Judge.
        Judge Newsome. They probably still would be under the
    statute.
        Senator Biden. Well, then I had better let my sons know
    that. Maybe they can get moving before this gets changed.
        [Laughter.]
        Senator Biden. Anyway, I just think this is--
        Judge Newsome. By the way, there is a new category of debt.
    It is 523(a(19) and it deals with loans that you take from your
    pension plan.
        Senator Biden. Protected?
        Judge Newsome. No, non-dischargeable.
        Senator Biden. Non-dischargeable. That is what I mean.
        Judge Newsome. OK.
        Senator Biden. And that wasn't pushed by creditors, by the
    way.
        Judge Newsome. I think it is a good provision.
        Senator Biden. I do, too, and the other one, drunk driving,
    is too, and this one is, too. Anyway, I just hope we get a
    little bit of sanity into this debate here and stop the games.
        Senator Sessions. I thank the Senator.
        Senator Biden. Thank you.
        Senator Sessions. The Senator from New York.
        Senator Schumer. Thank you, Mr. Chairman. First, I want to
    thank my colleague from Delaware not only for the passion which
    he brings to this--we disagree on some of the issues--but
    particularly for his understanding of why the amendment I am
    proposing is so important, which you brought out, Ms. Vullo.
        I certainly would hope that we could get people to accept
    at this time his call for the creditor community to use their
    suasion with people who have opposed this amendment. It would
    be very helpful because we do have majority support. It is
    simply that we couldn't get it through because a few people
    didn't want it to be part of it.
        Coming from New York, of course, I get lots of calls from
    people who want this bill, heads of big financial institutions,
    and they say can't you withdraw your amendment? I say, well, if
    you get your wife to call me, I might consider that. Not a
    single wife has called me because they know that our amendment
    is the right amendment.
        I just wanted to clarify a couple of things with Ms. Vullo.
    Let's just go over the sense of time that it has taken you to
    do this. First, how long did it take you to litigate the
    Nuremberg Files case, start to finish?
        Ms. Vullo. From October 1995--the jury verdict was February
    2, 1999, so 3\1/2\ years before trial and verdict.
        Senator Schumer. OK, and now how many more years has it
    taken with bankruptcy?
        Ms. Vullo. It is now 2 years, last week.
        Senator Schumer. Have your plaintiffs collected a nickel?
        Ms. Vullo. A little bit more than that, a couple of
    thousand dollars by a garnishment of a corporate entity, not
    from any of the individuals because the individuals filed for
    bankruptcy when the--
        Senator Schumer. So in none of the individual cases have
    they gotten any money yet?
        Ms. Vullo. That is correct.
        Senator Schumer. And if this group whom you represented--if
    the plaintiffs didn't have a top-notch pro bono lawyer, what do
    you think would have happened?
        Ms. Vullo. I don't think the case would have been brought
    in the first instance, which is another reason, Senator, for
    why the amendment to the Bankruptcy Code relates very directly
    to the importance of the FACE statute itself, because you won't
    bring the FACE claim if you know that they are just going to,
    after the verdict, file for bankruptcy.
        Senator Schumer. Right, and the amount of money in most of
    the settlements and judgments so far--yours is a particularly
    notorious case--would not compensate a lawyer even on a
    contingency fee basis in general. Is that right?
        Ms. Vullo. That is correct.
        Senator Schumer. Thank you, Mr. Chairman.
        Senator Sessions. On the question of reaffirmations, I was
    asked to meet, Mr. Williamson, with Senator Reid, the White
    House and the Department of Justice. We hammered out
    reaffirmation language that did have some political give-and-
    take in it. It is not perhaps law review style, but it
    satisfied the Department of Justice and the Clinton White
    House, and it provided more protections, as Senator Biden said,
    clearly than were in existence before the law.
        Senator Biden. Would you yield for a question? Didn't the
    White House push this?
        Senator Sessions. Yes, they pushed this kind of language
    and we agreed to it.
        Senator Biden. Brady has always been to the left of Clinton
    anyway, so it doesn't matter.
        Senator Sessions. But more than that, reaffirmation is
    nothing but one of these arguments, in my view, that has
    nothing to do with it of importance here fundamentally. A
    person can go out and buy a room full of furniture or a washing
    machine and he or she signs a note at whatever interest rate
    the parties agree to. There is no lawyer present most of the
    time under those circumstances. Instead they sign it, and that
    is it.
        But under bankruptcy law, they do have lawyers and the
    lawyer signs off on the reaffirmation. So at least they have
    had legal counsel. But that is not enough. They want to have
    the judge approve it. So we provided a method in which the
    information is provided to the judge and some standards that
    would say that if it was unfair or abusive to the debtor who is
    reaffirming the debt so they could keep the washing machine,
    there would be less problems. I think we made a good stop
    without creating a hearing for every doggone reaffirmation that
    goes on.
        Mr. Williamson, the Bankruptcy Commission never formally
    voted on a means test, is that correct?
        Mr. Williamson. That is correct, Senator.
        Senator Sessions. And they didn't take a formal position on
    it one way or the other?
        Mr. Williamson. That is correct, Senator.
        Senator Sessions. With regard to homestead, it is an area
    of abuse, in my view, and I believe that bankruptcy law is
    Federal law. It is provided for in the U.S. Constitution and
    bankruptcy court judges are Federal judges.
        Now, I am a States'-righter, and sometimes Senator Biden is
    a fierce States'-righter, too. This is a Federal law that is
    litigated in Federal court, but somewhere along the line
    Congress decided it couldn't reach an agreement on what the
    homestead limitations ought to be, so they punted it to the
    States and let the States decide what homestead limits would
    be. Some said none, and as a result people have the ability of
    abusing the system, while other States have set varying limits.
        I don't think it violates States' rights to do so, but our
    Senators from Kansas and Texas and Florida and some other
    States have even agreed to the homestead fix contained in this
    bill--note that these laws override their States' laws, even
    their constitutions. Despite that's though, we were able to
    work out a solution that they were amendable to and that was
    fairer to everyone involved. So we have made substantial
    progress in eliminating abuses. If somebody ran from Mobile to
    Pensacola, and filed bankruptcy within 2 years, they could not
    protect but $100,000 of equity in their home.
        Also, we provided that you could go back 7 years if you
    could establish an abuse scheme--and it is not always
    impossible to establish an abusive scheme--and then take that
    equity, except for $100,000.
        Senator Biden. Mr. Chairman, I wonder how many people plan
    2 years ahead of time they are going to declare bankruptcy
    before they declare it and that is why they buy the home. I
    mean, that is a lot of foresight. That is pretty good.
        Senator Sessions. But if they did it by calculation and
    deviousness and delayed it for 2 years, then you could still go
    back under the fraud exception. So I think we made real
    progress in homestead.
        I think the benefits for children and alimony are clearly
    superior, and I believe that justice in America must hold that
    a person who is making an average income in America and who can
    pay at least a part of his or her debts ought to pay them. Some
    say, well, we don't want to pay medical debts, but hospitals
    are people, too, in a sense. They serve people, they have
    needs.
        Why should somebody who is capable of paying a part of
    their hospital bill, pay nothing? Other people work very hard
    to pay their hospital bills and sacrifice to maintain good
    insurance. Oftentimes, it is an irresponsible person who wants
    to ride on the responsible person.
        I think bankruptcy, at its core, has the potential to be
    unfair to the responsible American citizen. That is who we most
    should affirm, the one who does right. We do allow, however,
    historically--and there will be no problem in this quarter--to
    maintain the right of a person in need who cannot pay his or
    her debts to wipe them out completely. That is not being
    changed. The needs-based issue is important for justice, basic
    morality and fairness. If a person can pay, they should pay.
        Senator Biden. Mr. Chairman, would you yield me 60 seconds?
        Senator Sessions. Yes.
        Senator Biden. I want to make two points. With regard to
    the safe harbor provisions in here, just to set the record
    straight, I didn't draft this bill. This is not my
    subcommittee. I did not get involved in this. But when it was
    pointed out to me over a year ago that there was concern about
    poor people being subject and women and children being at the
    end of the line, I asked for a meeting with some of the largest
    creditors out there.
        I told them that I wouldn't support this legislation unless
    there was a safe harbor provision put in and women and children
    went to the head of the line, expecting there to be an
    argument. Not one single bit of opposition; total, immediate
    support; zero opposition, none. One of them representing a
    large non-Delaware credit card company made the following
    comment: we don't want to be put in the position where we are
    going after so little money for so high a public relations
    cost, we don't want any part of that. So I just hope people
    understand that piece.
        The second piece is I want to make the point I was for
    States' rights in Bush v. Gore and I don't know what happened.
        Thank you.
        Senator Sessions. Let me say this. Thank you all. It was an
    excellent discussion. As you can tell, we have discussed many
    of these issues before. They have been wrestled with, and
    sometime in the sausage-making process of laws being passed,
    certain compromises get made.
        I must say, finally, Dr. Manning, on credit cards, that is
    really a banking issue. What kind of regulations should be
    placed on a credit card company offering credit to a poor
    person is really, I think, not part of creating a Federal
    system of bankruptcy law. I think we should be cautious about
    what we do in that regard.
        In fact, the Chairman of the Banking Committee has asserted
    aggressively his belief that this is outside of our
    jurisdiction. So I think fundamentally concerns about credit
    cards should be directed to that committee. I would not want to
    pass a law that made it more difficult for a poor person to be
    able to get a credit card, because if they don't have ready
    cash and they are on the margin--anytime they have a flat tire,
    for example, and can't afford to fix their care without credit,
    that would be a bad thing. Credit cards are not evil things,
    per se. They have great advantages in many circumstances for
    poor people, and I would just caution everyone to remember
    that.
        Senators Grassley and Kennedy have submitted written
    statements which we will include in the record.
        [The prepared statements of Senators Grassley and Kennedy
    follow:]

    Statement of Hon. Charles E. Grassley, a U.S. Senator from the State of
                                      Iowa

        Senator Sessions, thank you for chairing this hearing on bankruptcy
    reform, which we all consider to be unfinished business from the 106
    th Congress. As you know, the issue of bankruptcy reform is
    familiar to all of us here in the Senate. For the past 4 years, we've
    debated the fundamental rights of both borrowers and creditors, for the
    greater good of individuals, society, and the economy. We've looked at
    this issue at great length an in excruciating detail. The Judiciary
    Subcommittee on Administrative Oversight and the Courts held, I
    believe, eleven hearings over the past two Congresses, and heard
    testimony from almost 90 witnesses on all aspects of bankruptcy. We
    debated bankruptcy reform extensively on the floor in both the 105
    th and 106 th Congresses, and last December we
    passed a bipartisan, compromise bill by a vote of 70 to 28. That piece
    of legislation received overwhelming support of Senators on both sides
    of the aisle.
        Unfortunately, President Clinton pocket-vetoed that good
    legislation, and we here in the Senate did not have the opportunity to
    override it. We had the votes to do so. That was too bad, because we
    need bankruptcy reform. But I'm hopeful that we'll be able to move
    swiftly in this Congress and get the job done. That is why Senators
    Hatch, Sessions and Johnson joined me in reintroducing the exact same
    conference report that was approved by the Senate with overwhelming
    bipartisan support. I know many other members on both sides of the
    aisle support this bill and want to see it passed into law.
        I repeat, this bill is unfinished business. This is not new stuff.
    We are not covering new ground. In fact, we don't even need to be in
    Committee. But in the interest of addressing Senator Leahy's concerns
    that new Senators on the Committee have a chance to familiarize
    themselves with this issue, we're holding this hearing today with the
    hope of proceeding quickly to this bill on the floor.
        The current bankruptcy system needs to be reformed. Presently, when
    individuals file for bankruptcy under Chapter 7, a court proceeding
    takes place, and their debts are simply erased. We must realize that
    every time a debt is wiped away through bankruptcy, someone loses
    money. When someone loses money in this way, he or she has to decide to
    either assume the loss as a cost of business, or raise prices for other
    customers to make up that loss.
        When bankruptcy losses are infrequent, lenders can just swallow the
    loss. But when they are frequent, lenders need to raise prices to other
    consumers to offset their losses. These higher prices translate into
    higher interest rates for future borrowers. You'll recall that former
    Treasury Secretary Larry Summers--a liberal Democrat--testified before
    the Senate Finance Committee that bankruptcies tend to drive up
    interest rates. With the possibility of the economy slowing down, we
    need to fix a bankruptcy system that inflates interest rates and
    threatens to make a slowdown even worse. Bankruptcy reform will help
    the economy.
        So, the result of the bankruptcy crisis is that hardworking, law
    abiding Americans have to pay higher prices for goods and services. S.
    220 would make it harder for individuals who can repay their debts from
    filing bankruptcy under Chapter 7, thus lessening the upward pressure
    on interest rates and higher prices. It's only fair to require people
    who can repay their debts to pull their own weight. But under current
    bankruptcy law, one can get full debt cancellation in Chapter 7 with no
    questions asked. Our bill asks the question of whether repayment is
    possible by an individual, and if it is, then he or she will be
    channeled into Chapter 13 of the Bankruptcy Code, which requires people
    to repay a portion of their debt as a pre-condition for limited debt
    cancellation.
        Let me be clear, people who don't have the ability to repay their
    debt can still use the bankruptcy system as they would have before. S.
    220 specifically provides that people of limited income can still file
    under Chapter 7. But the bill makes it so that people who have higher
    incomes and who can repay their debts, their free ride is over.
        Personal responsibility has been one of the main themes of the
    bankruptcy reform bill. I say this because since 1993, in the midst of
    prosperity and with a booming economy, the numbers of Americans who
    declared bankruptcy has increased over 100 percent. While no one knows
    all the reasons underlying the bankruptcy crisis, the data shows that
    bankruptcies increased dramatically during the same time frame when
    unemployment was low and real wages were at an all-time high. I believe
    that the bankruptcy crisis is a moral crisis. We need to stop people
    from looking at bankruptcy as a convenient financial planning tool
    where honest Americans will have to foot the bill.
        So, it is clear to me that our lax bankruptcy system must bear some
    of the blame for the bankruptcy crisis. A system where people are not
    even asked whether they can pay off their debts obviously contributes
    to the fraying of the moral fiber of our nation. Why should people pay
    their bills when the system allows you to walk away with no questions
    asked? Why should people honor their obligations when they can take the
    easy way out through bankruptcy? I think the system needs to be
    reformed because this is fundamentally unfair. Our bankruptcy reform
    bill will promote personal responsibility among borrowers and create a
    deterrence for those hoping to cheat the system.
        Our bill does more than just provide for a flexible meanstest that
    gives judges discretion to consider the individual circumstances of
    each debtor to determine whether they truly belong in Chapter 7. It
    also contains tough new consumer protections, like new procedures to
    prevent companies from using threats to coerce debtors into paying
    debts which could be wiped away once they are in bankruptcy. The bill
    requires the Justice Department to concentrate law enforcement
    resources on enforcing consumer protection laws against abusive debt
    collection practices. The bill contains significant new disclosures for
    consumers by mandating that credit card companies provide key
    information about how much they owe and how long it will take to pay
    off their credit card debt by only making a minimum payment. Consumers
    will also be given a toll-free number to call where they can get
    information about how long it will take to pay off their own credit
    card balances if they make only the minimum payments. This will educate
    consumers and improve consumers' understanding of their financial
    situation. And credit card companies that offer credit cards over the
    internet will be required for the first time to fully comply with the
    Truth in Lending Act.
        Moreover, our bill makes changes which will help particularly
    vulnerable segments of our society. Child support claimants are given
    the highest priority when the assets of a bankruptcy estate are
    distributed to creditors. Bankruptcy trustees and creditors of
    bankrupts will be required to give information about the location of
    deadbeat parents who owe child support.
        I also want to touch on another important section of the bill. S.
    220 makes Chapter 12 of the Bankruptcy Code permanent. This means that
    America's family farms are guaranteed the ability to reorganize. But
    the bill goes further. It makes improvements to Chapter 12 so it will
    be more accessible and helpful for farmers. For example, the definition
    of the family farmer is widened so more farmers can qualify for Chapter
    12 bankruptcy protection. S. 220 also reduces the priority of capital
    gains tax liabilities for farm assets sold as a part of a
    reorganization plan, which will allow cash-strapped farmers to sell
    livestock, grain, and other farm assets to generate cash flow when
    liquidity is essential to maintaining a family farm operation. These
    reforms will make Chapter 12 even more effective in protecting
    America's family farms during difficult times. I think it's a crying
    shame that the opponents of bankruptcy reform have prevented Chapter 12
    from being reauthorized and modernized. It was an outrage that
    President Clinton pocket-vetoed the bankruptcy bill and denied the
    farmers in my state of Iowa and across the country the bankruptcy
    protections they really need.
        Over the last ten years our economy has enjoyed unprecedented
    success. But as we have seen, economic stagnation can occur just as
    quickly as an upswing. On a macro-economic level, enacting bankruptcy
    reform will help stimulate the economy by lessening upward pressure on
    interest rates. So, by passing meaningful bankruptcy reform, we can
    help our economy and simultaneously contribute to rebuilding our
    nation's moral foundations. I look forward to hearing from our
    witnesses this morning.

     Statement of Hon. Edward M. Kennedy, a U.S. Senator from the State of
                                 Massachusetts

        I welcome this hearing to consider this important issue once again.
        In the past four years, supporters and opponents of bankruptcy
    legislation have disagreed many times about this legislation. Many of
    us feel strongly that Congress should not pass sweetheart legislation
    for the credit card industry. We do need to pass a bill to reduce fraud
    and abuse--but it should also maintain the long-standing safety net for
    vulnerable Americans who deserve it. Scores of bankruptcy scholars,
    advocates for women and children, labor unions, consumer advocates, and
    civil rights organizations agree with our position.
        For weeks, President Bush has warned the nation about the potential
    problems of the current economic downturn. Pointing to layoffs and
    rising unemployment, decreasing consumer confidence, and low economic
    growth, President Bush is urging Congress to pass legislation to
    strengthen the economy. But punitive bankruptcy reform legislation
    doesn't fall in that category. Now more than ever, we need to ensure
    that Americans losing their jobs or struggling with medical debt have
    the second chance for economic security that bankruptcy laws are
    intended to provide. This is especially no time to pull the rug out
    from under them.
        We know the circumstances and market forces that often push middle
    class Americans into bankruptcy.
        A rising unemployment rate and company layoffs are a major part of
    the problem. The slowing economy led to an unemployment rate of 4.2% in
    January--the highest level in 16 months--and every week brings reports
    of new layoffs that may well lead to bankruptcy for many families in
    coming months.
        Divorce is another major cause of bankruptcy. Divorce rates have
    soared in recent decades--and the financial consequences are
    particularly devastating for women. Divorced women are four times more
    likely to file for bankruptcy than married women or single men. In
    1999, 540,000 women--540,000--who head their own households filed for
    bankruptcy to try to stabilize their lives. 200,000 of them were also
    creditors trying to collect child support or alimony. The rest were
    debtors struggling to make ends meet.
        Another major factor in bankruptcy is the high cost 43 million
    Americans have no health insurance, and many more are under-insured.
    Each year, millions of families spend more than 20 percent of their
    income on medical care. Older Americans are hit particularly hard. A
    1998 CRS Report states that even though Medicare provides generally
    good health coverage for older Americans, half of this age group spend
    14 percent or more of their after-tax income on out-of pocket health
    costs, including insurance premiums, co-payments and prescription
    drugs.
        These Americans are not cheats and frauds--but they do constitute
    the vast number of Americans in bankruptcy. Two out of every three
    bankruptcy filers have an employment problem. Two out of every five
    bankruptcy filers have a health care problem. Divorced or separated
    people are three more likely than married couples to file for
    bankruptcy. Yet, the credit card industry and the Republican Congress
    determined to deny them the bankruptcy safety. net in order to ensure
    larger and larger profits for itself.
        This legislation is an undeserved windfall for one of the most
    profitable industries in America. Credit card companies are engaged in
    massive and unseemly nation wide campaigns to hook unsuspecting
    citizens on credit card debt. They sent out 2.87 billion--2.87
    billion--credit card solicitations in 1999. In recent years, the
    industry has even begun to offer new lines of credit targeted
    specifically at people with low income--even though the industry knows
    full well that these persons cannot afford to pile up such debt.
        Supporters of the bill argue that it is not a credit card industry
    bill. But, to deal effectively and comprehensively with the problem of
    bankruptcy, we have to deal with the problem of debt. We must see that
    the credit card industry does not abandon fair lending policies to
    fatten its bottom line, or ask Congress to become the collector for its
    unpaid credit card bills.
        Proponents of the bill also say that it ensures that alimony and
    child support will be the number one priority in bankruptcy. That
    rhetoric hides the complexity of the bankruptcy system--but it doesn't
    hide the fact that women and children will be the losers if this bill
    becomes law.
        Under current law, an ex-wife trying to collect support has special
    protection. But under the pending bill, credit card companies are given
    a new right to compete with women and children for the husband's
    limited income after bankruptcy.
        It is true that the bill moves support payments to the first
    priority position in the bankruptcy code. But that only matters in the
    limited number of cases where the debtor actually has assets to
    distribute to a creditor. In most bankruptcy cases--over 95 percent--
    there are no assets, and the list of priorities has no effect.
        As 116 professors of bankruptcy and commercial law have stated,
    ``Granting `first priority' to alimony and support claims is not the
    magic solution the consumer credit industry claims, because `priority'
    is relevant only for distributions made to creditors in the bankruptcy
    case itself. Such distributions are made in only a negligible
    percentage of cases. More than 95% of bankruptcy cases make NO
    distributions to any creditors because there are no assets to
    distribute. Granting women and children first priority for bankruptcy
    distributions permits them to stand first in line to collect nothing.''
        Similarly, thirty-one organizations that support women and children
    have stated, ``Some improvements were made in the domestic support
    provisions . . . however, even the revised provisions fail to solve the
    problems created by the rest of the bill, which gives many other
    creditors greater claims--both during and after bankruptcy--than they
    have under current law.''
        This legislation unfairly targets middle class and poor families--
    and it leaves flagrant abuses in place. Any credible bankruptcy reform
    bill must include two important provisions--a homestead provision
    without loopholes for the wealthy, and a provision that requires
    accountability and responsibility from those who unlawfully--and often
    violently--bar access to legal health services. The current bill
    includes neither provision.
        The bill does include a half-hearted loophole-filled homestead
    provision that will do little to eliminate fraud. With a little
    planning--or in some cases, no planning at all--wealthy debtors will be
    able to hide millions of dollars in assets from their creditors.
        Last year, the Senate passed a worthwhile amendment to eliminate
    this inequity. But that provision was stripped from the conference
    report. Surely, a bill designed to end fraud and abuse should include a
    loophole-free homestead provision.
        I urge my colleagues to stop peddling legislation to increase the
    profits of the credit card industry--already one of the most profitable
    industries in the country--at the expense of working families. It's
    time to pass true bankruptcy reform legislation that fairly balances
    the needs of both creditors and debtors.
        I look forward to the testimony of today's witnesses.

        Senator Sessions. We also have several letters and
    statements which have been submitted and we will include those
    in the record at this point.
        The record will be open for further statements until
    Friday.
        [The prepared statement and attachments of Senator Durbin
    and the prepared statement of Senator Thurmond follow:]

     Statement of Hon. Richard J. Durbin, a U.S. Senator from the State of
                                    Illinois

        Mr. Chairman, thank you for holding today's hearing on bankruptcy
    reform. Although we have debated bankruptcy legislation for several
    years, the last time I participated in hearings on the subject was in
    the 105 th Congress, when I first served on this Committee.
    That was approximately three years ago. A lot has changed in three
    years.
        Three years ago, bankruptcy filings were not only up, they had
    reached record setting levels. According to the Administrative Office
    of the U.S. Courts, there were 1,436,964 bankruptcy filings in fiscal
    year 1998, of which 1,389,839 (96.7%) were consumer bankruptcies. Now,
    three years later, bankruptcy filings are down.
        In fact, the 1998 numbers seemed to be the peak. Bankruptcy
    filings--especially personal filings--dropped significantly in 1999--
    down to 1,315,751 personal bankruptcies--and dropped again in 2000,
    when the figure fell even further to 1, 226,037. That's 163,000 fewer
    personal bankruptcy filings in 2000 than in the peak year, 1998. This
    represents a 12% reduction in just two years.
        Chapter 7 bankruptcies--``fresh start'' filings--are coming down at
    an even faster pace, from 1,026,134 in 1998 to just under a million--
    959,292--in 1999, with a further decrease to 870,805 in fiscal year
    2000--a 15% reduction in only two years.
        Three years ago, I worked with Senator Grassley to develop a
    bipartisan balanced bankruptcy bill that addressed both irresponsible
    debtors and irresponsible creditors.
        Ninety-seven Senators supported this bill and agreed to legislation
    that would have eliminated both debtor and creditor abuses while
    ensuring the availability of information that permits consumers to make
    informed financial decisions. Unfortunately, the bill was decimated in
    conference and I could not support it in the end.
        This year, we have before us last year's bankruptcy bill. It is the
    same bill that, as written last year, failed to meet the basic test of
    fairness and balance. I opposed this unbalanced bill last year.
        President Clinton recognized the lack of balance and wisely pocket
    vetoed the bill last Congress.
        Our bill in the 105 th Congress included debtor specific
    information that would enable cardholders to examine their current
    credit card debt in tangible terms, driving home the seriousness of
    their financial situation.
        The bill before us today permits banks with less than $250 million
    in assets to have the Federal Reserve provide its customers with a
    tollfree phone number to review their credit card balances for the next
    two years. It is unclear whether the banks would be required to provide
    the service themselves after the two years are complete.
        This exemption would cover 4,000 banks holding about $3 billion in
    consumer credit card debt. This is a departure from a balanced
    approach.
        The bill also fails to close the homestead loophole. Under this
    bill, a renter or someone with less wealth will get to keep nothing,
    but a homeowner who has equity in her home that existed prior to the
    two year cut off can keep all the equity. By failing to include a hard
    cap, this provision only benefits the rich.
        The current bankruptcy bill also fails to include an amendment
    sponsored by the senior Senator from New York, Senator Schumer, which
    would prevent documented abuse of the bankruptcy system by those who
    violate the Freedom of Access to Clinic Entrances Act (FACE) or an
    equivalent state law. In most cases where a defendant is held liable
    under the FACE Act, there is no finding that the action was ``willful
    and malicious'' and the FACE Act often includes acts which may not be
    classified as ``acts of violence'' (e.g., an act of intimidation or
    verbal harassment). Without Senator Schumer's amendment, this bill
    would continue to allow many perpetrators of clinic violence to seek
    shelter in the nation's bankruptcy courts.
        For these reasons, although I am all for bankruptcy reform, I
    cannot support the bankruptcy bill in its current form. It is
    unbalanced.
        One hundred and sixteen nonpartisan law professors also recognized
    this in their letter to Congress last year. In their letter, the law
    professors noted how ``deeply flawed'' the bankruptcy bill is and its
    adverse affect on women and children.
        Mr. Chairman, I ask for unanimous consent that the letter from the
    116 nonpartisan law professors be entered into the record.
        Mr. Chairman, I just received a letter from the American Academy of
    Matrimonial Lawyers, also expressing their ``deep concern'' about the
    reintroduction of this bankruptcy bill. In it they say, ``We believe
    that children should come before credit card companies.'' I ask
    unanimous consent that this letter also be entered into the record.
        ``Balance'' is certainly the order of the day. We're in a new
    Congress, with a balanced, 50/50 Senate. We also have a new President,
    faced with the challenge of uniting an evenly-divided electorate. And
    we have a new and real opportunity to work together and pass balanced
    and meaningful bankruptcy reform.
        While there are some positive aspects to this bill, we could, and
    we should, do much better. I look forward to working with my colleagues
    both here in this Committee and on the Senate floor to improve this
    bill and give all American people and businesses balanced meaningful
    bankruptcy reform.

                                                    HARVARD LAW
                                                       October 25, 2000

        Re: The Bankruptcy Reform Act Conference Report (H.R. 2415)

        Dear Senators:
        We are professors of bankruptcy and commercial law. We have been
    following the bankruptcy reform process with keen interest. The 75
    undersigned professors come to every region of the country and from all
    major political parties. We are not a partisan, organized group, and we
    have no agenda. Our exclusive interest is to seek the enactment of a
    fair and just bankruptcy law, with appropriate regard given to the
    interests of debtors and creditors alike, Many of us have written
    before to express our concerns about the bankruptcy legislation, and we
    write again as yet another version of the bill comes before you- This
    bill is deeply flawed, and we hope the Senate will not act on it in the
    closing minutes of this session.
        In a letter to you dated September 7, 1999, 82 professors of
    bankruptcy law from across the country expressed their gave concerns
    about some of the provisions of S. 625, particularly the effects of the
    bill on worsen clad children. We wrote again on November 2, 1999, to
    reiterate our concerns. We write yet again to bring the same message:
    the problems with the bankruptcy bill have not been resolved,
    particularly those provisions that adversely affect women end children.
        Notwithstanding tire unsupported claims of the bill's proponents,
    H.R. 2415 does not help women and children. Thirty-one organizations
    devotee! exclusively to promoting the best interests of Women; and
    children continue to oppose the pending bankruptcy bill. The concerns
    expressed in our earlier letters showing how S. 625 would hurt woman
    and children have not been resolved. Indeed, they have not event been
    addressed.
        First, one of the biggest problems the bill presents for worsen and
    children was stated in tile September 7, 1999, letter:
    ``Women and children as creditors will have to compete with powerful
            creditors to collect their claims after bankruptcy,''
        This increased competition for women and children will come from
    many quarters: from powerful credit card issuers, whose credit card
    claims increasingly will be excepted from discharge and remain legal
    obligations of the debtor after bankruptcy; from large retailers, who
    will have an easier tinge obtaining reactions of debt that legally
    could be discharged; and from creditors claiming they bold security,
    even when the alleged collateral is virtually worthless. Atone of the
    changes made to S. 625 and none being proposed in H.R. 2415 addresses
    these problems. The truth remains: if H.R. 2415 is enacted in its
    current form, women, and children will face increased competition in
    collecting their alimony and support claims after the bankruptcy case
    is over. We have pointed out this difficulty repeatedly, but no charge
    has been made in the bill to address it.
        Second., it is a distraction to argue- as do advocates of the
    bill--that the bill will ``help'' women and children--and that it will
    ``make child support and alimony payments the top priority--no
    exceptions.'' As the law professors pointed out in the September 7,
    1999, letter:
    ``Giving `first priority' to domestic support obligations does not
            address the problem.''
        Granting ``first priority'' to alimony and support claims is not
    the magic solution the consumer credit industry claims because
    `priority'' is--relevant only for distributions made to creditors in
    the bankruptcy case itself. Such distributions are made in only a
    negligible percentage of cases. More than 95% of bankruptcy cases make
    NO distributions to airy creditors because there are no assets to
    distribute. Granting women and children a first priority for bankruptcy
    distributions permits them to stand first in line to collect nothing.
        Woman's hard-fought battle is. over reaching the ex-husband's
    income after bankruptcy. Under current law, child support and alimony
    share a protected post-bankruptcy position with only two other
    recurrent collectors of debt-taxes and student loans. The credit
    industry asks that credit card debt and other consumer credit share
    that position, thereby elbowing aside tile women trying to collect on
    their own behalf. The credit industry carefully avoids discussing the
    increased post-bankruptcy competition facing women if H.R. 2415 becomes
    law. As a matter of public policy, this country should riot elevate
    credit card debt to the preferred position of taxes and child support.
    Once again, we have pointed out this problem repeatedly, and nothing
    has been changed in the pending legislation to address it.
        In addition to the concerns raised on behalf of the thousands of
    women who are straggling now to collect alimony and child support after
    their ex-husband's bankruptcies, we also express our concerns on behalf
    of the more than half a million women heads of household who will file
    for bankruptcy this year alone. As the heads of the economically most
    vulnerable families, they have a. special stake in the pending
    legislation. Women heads of households are now the largest demographic
    group in bankruptcy, and according to the credit industry's owndata,
    they are the poorest. The provisions in this bill, particularly the
    many provisions that apply without regard to income, will fall hardest
    on them. Under this bill, a single mother with dependent children who
    is hopelessly insolvent and whose income is far below the national
    median income would have her bankruptcy case dismissed if she does not
    present copies of income tax returns for the past three years--even if
    those returns are in the possession of her ex-husband. A single mother
    who hoped to work through a chapter 13 payment plan would be forced to
    pay every penny of the entire debt owed on almost worthless items of
    collateral, such as used furniture or children's clothes, even if it
    meant that successful completion of a repayment plan was impossible.
        Finally, when the Senate passed S. 625, we were hopeful that the
    final bankruptcy legislation would include a meaningful homestead
    provision to address flagrant abuse in the bankruptcy system. Instead
    the conference report retreats from the concept underlying the Senate-
    passed homestead amendment.
    The homestead provision in the conference report will allow wealthy
            debtors to hide assets from their creditors.
        Current bankruptcy law yields to state law to determine what
    property shall remain exempt from creditor attachment and levy.
    Homestead exemptions are highly variable by state, and six states
    (Florida, Iowa, Kansas, South Dakota, Texas, Oklahoma) have literally
    unlimited exemptions while twenty-two states have exemptions of $10,000
    or loss. The variation among states leads to two problems--basic
    inequality and strategic bankruptcy planning- The only solution is a
    dollar cap on the homestead exemption. Although variation among states
    would remain, the most outrageous abuses--those in the multi-million
    dollar category--would be eliminated.
        The homestead provision in the conference report does little to
    address the problem. The legislation only requires a debtor to wait two
    years after the purchase of the homestead before filing a bankruptcy
    case. Well-counseled debtors will have no problem timing their
    bankruptcies or tying-up the courts in litigation to skirt the intent
    of this provision. The proposed change will remind debtors to buy their
    property early, but it will not deny anyone with substantial assets a
    chance to protect property from. their creditors. Furthermore, debtors
    who are long-time residents of states like Texas and Florida will
    continue to enjoy a homestead exemption that can shield literally
    millions of dollars in Value.
        These facts are unassailable: H.R. 2415 forces women. to compete
    with sophisticated creditors to collect alimony and child support after
    bankruptcy. H.R. 241.5 makes it harder for women to declare bankruptcy
    when they are in financial trouble. H.R. 2415 fails to close the
    glaring homestead loophole and permits wealthy debtors to hide assets
    from their creditors. We implore you to look beyond the distorted
    ``facts'' peddled by the credit industry. Please do not pass a bill
    that will hurt vulnerable Americans, including women and children.
        Thank you for your consideration.

    Peter A Alces
    Professor of Law
    College of William and Mary
    Williamsburg, Virginia

    Peter C. Alexander
    The Dickinson School of Law
    Penn State University
    Carlisle, Pennsylvania

    Thomas B. Allington
    Professor and Associate Dean for Technology
    Indiana University School of Law
    Indianapolis, Indiana

    Allan Axelrod
    William J. Brennan Professor Emeritus Of Law
    Rutgers Law School
    Newark, New Jersey

    Douglas G. Baird
    Harry A. Bigelow Distinguished Service Professor
    University of Chicago Law School
    Chicago, Illinois

    Laura B. Batten
    Associate Professor of Law
    Wayne Sate University Law School

    Andrea Coles Bjerre
    Visiting Assistant Professor of Law
    University of Oregon School of Law
    Eugene, Oregon

    Susan Block-Lieb
    Professor of Law
    Fordham University School of Law
    New York, New York

    Amelia H. Boss
    Charles Klein. Professor of Law
    Temple University School of Law
    Philadelphia, PA

    William W. Bratton
    Samuel Tyler Research Professor of Law
    The George Washington University Law School
    Washington, D.C.

    Jean Braucher
    Roger Henderson Professor of Law
    University of Arizona

    Ralph Brubaker
    Associate Professor of Laws
    Emory University School of Law
    Atlanta, Georgia

    Mark B. Budnitz
    Professor of Law
    Georgia State University
    Atlanta, Georgia

    Daniel J. Bussel
    Professor of Law
    UCLA School of Lawn
    Los Angeles, California

    Marianne B. Culhane
    Creighton Law School
    Omaha, Nebraska

    Jeffrey Davis
    Professor and Louis G. Sohn Research Scholar
    University of Florida Law School
    Gainesville, Florida

    Susan DeJarnatt
    Assistant Professor of Law
    Temple University School of Law
    Philadelphia, Pennsylvania

    Paulette J. Delk
    Professor of Law
    Cecil C. Humphreys School of Law
    The University of Memphis
    Memphis, Tennessee

    A. Mechele Dickerson
    Professor of Law
    William & Mary Law School
    Williamsburg, Virginia

    Thomas L. Eovaldi
    Professor of Law
    Northwestern University School of Law

    David G. Epstein
    Professor of Law
    University of Alabama Law School
    Tuscaloosa, Alabama

    Christopher W. Frost
    Brown, Todd & Heyburn Professor of Law
    University of Kentucky
    College of Law
    Lexington, Kentucky

    Nicholas Georgakopoulos
    Professor of Law
    University of Connecticut School of Law
    visiting Indiana University School Of Law
    Indianapolis, Indiana

    Michael A. Gerber
    Professor of Law
    Brooklyn Law School
    Brooklyn, New York

    Marjorie L. Girth
    Professor of Law
    Georgia State University College of Law

    Ronald C. Griffin
    Professor of Lain
    Washburn University School of Law
    Topeka, Kansas

    Professor Karen Gross
    New York Law School
    New York, New York

    Matthew P. Harrington
    Professor of Law
    Roger William University
    Bristol, Rhode Island

    Joann Henderson
    Professor of Law
    University of Idaho College of Law
    Moscow, Idaho

    Adam Hirsch
    Professor of Law
    Florida State University

    Margaret Howard
    Professor of Law
    Vanderbilt University Law School
    Nashville, Tennessee

    Sarah Jane Hughes
    University Scholar arid Fellow in Commercial Law
    Indiana University School of Law
    Bloomington, Indiana

    Kenneth N. Klee
    Acting Professor of Law
    University of California at Los Angeles School of Law
    Los Angeles, California

    Don Korobkin
    Professor of Law
    Rutgers-Camden School of Law
    Camden, New Jersey

    Edward J. Jangar
    Associate Professor
    Brooklyn Law School
    Brooklyn, New York

    Lawrence Kalevitch
    Professor of Law
    Shepard Broad Law Canter
    Nova Southeastern University
    Fort Lauderdale, Florida

    Allen Kemp
    Professor of Law
    John Marshall Law School

    Professor Lawrence King
    Charles Seligson Professor of Law
    New York University School of Law
    New York, New York

    John W. Larson
    Associate Professor of Law
    Florida State University
    Tallahassee, Florida

    Robert M. Lawless
    Professor of Law
    University of Missouri-Columbia
    Columbia, Missouri

    Leonard J. Long
    Professor of Law
    Quinnipiac University School of Law
    Hamden, Connecticut

    Lois R. Lupica
    Associate Professor of Law
    University of Maine School of Law
    Portland, Maine

    William H. Lyons
    Richard H. Larson Professor of Tax Law
    College of Law
    University of Nebraska
    Lincoln, Nebraska

    Bruce A. Markell
    Professor of Law
    William S. Boyd School of Law, UNLV

    Nathalie Martin
    Assistant Professor of Law
    University of New Mexico School of Law

    Judith L. Maute
    Professor of Law
    University of Oklahoma Law Center

    Juliet Moringiello
    Associate Professor
    Widener University School of Law
    Harrisburg, Pennsylvania

    Jeffrey W. Morns
    Professor of Law
    University of Dayton School of Law

    Spencer Neth
    Professor of Law
    Case Western Reserve University
    Cleveland, Ohio

    Gary Neustadter
    Professor of Law
    Santa Clara University School of Law
    Santa Clara, California

    Nathaniel C. Nichols
    Assoc. Professor of Law
    Widener at Delaware

    Scott F. Norberg
    Visiting Professor of Law
    University of California
    Hastings College of the Law
    San Francisco, California

    Dean Pawlowic
    Professor of Law
    Texas Tech University School of Law
    Lubbock, Texas

    Lawrence Ponoroff
    Vice Dean and Mitchell Franklin Professor of Law
    Tulane Law School
    New Orleans, Louisiana

    Doug Rendleman
    Huntley Professor
    Washington and Lee Law School
    Lexington, Virginia

    Alan N. Resnick
    Benjamin Weintraub Professor of Law
    Hofstra University School of Law
    Hempstead, New York

    Alan Schwartz
    Professor of Law
    Yale University
    New Haven, Connecticut

    Steven L. Schwartz
    Professor of Law
    Duke Law School
    Durham, North Carolina

    Charles J. Senger
    Professor of Law
    Thomas M. Cooley Law School

    Stephen L. Sepinuck
    Professor of Law
    Gonzaga University School of Law
    Spokane, Washington

    Charles Shafer
    Professor of Law
    University of Baltimore Law School
    Baltimore, Maryland

    Melvin G. Shimm
    Professor of Law Emeritus
    Duke University Law School
    Durham, North Carolina

    Charles J. Tabb
    Professor of Law
    University of Illinois

    Walter Taggert
    Professor of Law
    Villanova University Law School
    Villanova, Pennsylvania

    Marshall Tracht
    Professor of Law
    Hofstra Law School
    Hampstead, New York

    Bernard Trujillo
    Assistant Professor
    U. Wisconsin Law School
    Madison, Wisconsin

    William T--Vukowich
    Professor of Law
    Georgetown University Law Center
    Washington, D.C.

    Thomas M. Ward
    Professor of Law
    University of Maine School of Law
    Portland, Maine

    Elizabeth Warren
    Leo Gottlieb Professor of Law
    Harvard Law School
    Cambridge, Massachusetts

    John Weistart
    Professor of Law
    Duke University School of Law
    Durham, North Carolina

    Elaine A. Welle
    Winston S. Howard Distinguished Professor of Law
    University of Wyoming
    College of Law
    Laramie, Wyoming

    Jay L. Westbrook
    Benno Schmidt Chair of Business Law
    University of Texas School of Law
    Austin, Texas

    William C. Whitford
    Emeritus Professor of Law
    Wisconsin Law School
    Madison, Wisconsin

    Mary Jo Wiggins
    Professor of Law
    University of San Diego Law School
    San Diego, California

    Peter Winship
    Professor of Law
    SMU School of Law
    Dallas, Texas

    William. J. Woodward, Jr.
    I. Herman Stein Professor of Law
    Temple University
    Philadelphia, Pennsylvania

                                            American Academy of
                                            Matrimonial Lawyers
                                        Chicago, Illinois 60601
                                                       February 7, 2001

    Senator Edward M. Kennedy
    315 Russell Senate Office Building
    United States Senate
    Washington, DC 20510

    Representative Jerald Nadler
    B336 Rayburn House Office Building
    United States House of Representatives
    Washington, DC 20515

        Dear Senator Kennedy and Representative Nadler;
        As president of the American Academy of Matrimonial Lawyers (AAML),
    I am writing to express the deep concern of the Academy over the re-
    introduction and fast-tracking of the bankruptcy ``reform'' legislation
    5.220 and H.R.333 and it's adverse effect on children and families
    receiving child support payments.
        The Academy believes credit card debts should retain their
    unsecured status, because their nondischargeability will affect the
    debtor's ability to pay child support, alimony and property
    settlements.
        The bill as written will change existing law in a way that is
    extremely harmful to women and children. While at first reading it
    appears that.support payments have ``priority,'' the reality is that
    protection exists only for a limited amount of time.
        In a Chapter 7 case the non-dischargeability of the credit card
    debt will mean that the debtor does not truly have a ``fresh start' and
    will be unable to pay all his remaining obligations; most specifically
    support obligations and potentially a property settlement payment.
        In a Chapter 13 case the credit card debts are treated equally with
    support obligations when devising a payment plan, .thus the support
    obligationreceives.a pro-rata payment only while under existing law
    they have a priority.
        We believe that children should come before credit card companies.
        We urge the defeat of this legislation.

                Respectfully yours,

                                           Charles C. Shainberg

      Statement of Hon. Strom Thurmond, a U.S. Senator from the State of
                                 South Carolina

        Mr. Chairman:
        I am pleased that we are holding this hearing today on bankruptcy
    reform.
        There is a great need to reform our Bankruptcy Code to address the
    abuse of the system that is widespread today. At one time in America,
    the vast majority of people were determined to pay their debts and
    there was a stigma attached to filing for bankruptcy. However, today,
    filing for bankruptcy is much more accepted in society, and it has
    become much more routine, even in the booming economy of recent years.
        In 1999 alone, about 1.4 million Americans filed for bankruptcy.
    These numbers represent more than a four-fold increase in the past
    twenty years. The huge number of filings is a serious, national problem
    that effects all Americans. We cannot allow bankruptcy to be used as a
    tool for financial planning.
        The Bankruptcy Reform Act, which passed the Congress last year and
    has already been reintroduced, would target the abuses. The bill would
    require people to reorganize their debts when they can afford to repay
    them. It would prevent the much too common practice today of people
    choosing to discharge their debts in bankruptcy rather than repay what
    they can over time.
        In addition, the bill contains special provisions to protect women
    who depend on child support to provide for their families. It would
    make child support payments the top priority for payment in bankruptcy.
        Finally, the bill would reauthorize many important bankruptcy
    judgeships, including one in my home state of South Carolina, and make
    special bankruptcy protections for farmers permanent in the law.
        The problems in bankruptcy are not new, and neither are our efforts
    to solve them. In recent years, this Committee has held numerous
    hearings and has extensively debated legislation to provide
    comprehensive, needed changes to the current outdated system. The
    Bankruptcy Reform Act that we passed late in the last Congress was a
    good, compromise bill. It passed both houses of the Congress by wide
    margins with bipartisan support. Unfortunately, President Clinton chose
    not to sign the bill. However, I am confident that the current
    Administration will be more receptive to the Congress's bankruptcy
    reform agenda.
        I hope the new Congress can act quickly on this critical
    legislation. It is a serious problem that must be addressed without
    further delay.
        We are adjourned.
        [Whereupon, at 12:46 p.m., the committee was adjourned.]
        [Questions and answers, and submissions for the record
    follow:]
        [Additional material is being retained in the Committee
    files.]

                             QUESTIONS AND ANSWERS

         Responses of Philip L. Strauss to Questions from Senator Biden

                           Department of Child Support Services
                                                San Francisco, CA 94105

    Hon. Joseph R. Biden, Jr.
    Senate Judiciary Committee
    U.S. Senate
    Dirksen Senate
    Building, Room 224
    Washington, D.C. 20510

    ATTN: Kristen A. Cabral, Esq.

        Re: Response to Memorandum of the National Bankruptcy Conference:
    Erosion of the Discharge and the Myth of ``Special Protection'' for
    Domestic Support Obligations

    Dear Senator Biden:

        On February 21, 2001 a facsimile transmission was received by my
    office requesting a response to a memorandum of the National Bankruptcy
    Conference entitled ``Erosion of the Discharge and the. Myth of Special
    Protection'' for Domestic Support Obligations. I was attending a
    conference the week this request was received so I am submitting the
    answers somewhat late. I apologize for the delay.
        In three and one-half single spaced pages the memorandum made two
    points. One, that giving first priority status to domestic support
    obligations will have little effect on collecting support. The argument
    made is that to have an effect the estate must have assets and the vast
    majority of cases filed are no asset Chapter 7 cases. The second point
    was that support creditors would be severely hampered in their efforts
    to collect support after bankruptcy because of the existence of debt
    which was previously dischargeable
        In answer to the first issue I make three points:
        1. The ``vast majority of cases'' in general appears not to reflect
    the profile of domestic support cases. It has been said that 95% of
    bankruptcy petitions filed are no asset Chapter 7. cases. I ask whether
    anyone has attempted to profile the typical domestic relations debtor
    to determine what percentage of this population files Chapter 13 cases
    (which, by definition, have assets) as opposed to Chapter 7 cases?
        This morning I had our office run a report of all bankruptcy cases
    in the San Francisco Department of Child Support Services. The results
    indicated that 530 of the bankruptcy cases on our system are Chapter 13
    cases. Thus, among child support debtors, 53% of the cases have assets.
    I cannot believe that San Francisco differs that much statistically
    from the general support-debtor population which files bankruptcies.
        This result is not surprising to me since I see every bankruptcy
    case coming into my office and know that a very high percentage are
    Chapter 13 filings. Since support debtors have already been found to
    have the ability to pay support by a domestic relations court, it is
    not unreasonable to conclude such debtors have assets to protect and
    therefore file under Chapter 13 more frequently than the population at
    large. And, lest we forget, S. 220 will require a greater percentage of
    bankruptcy debtors to file Chapter 13 cases, thus substantially
    increasing the use of support enforcement enhancements of S. 220 to
    collect support.
        2. Priority for all child support debts is enormously important in
    Chapter 13 cases. Since a debtor in a Chapter 13 case must repay all
    arrears during the term of the Chapter 13 plan, unless the creditor
    agrees otherwise, the priority status will insure that, to the extent
    feasible, all debts in the nature of support will be paid. Thus, the
    distribution of assets to priority creditors is not illusory at all.
        In addition S. 220 makes all support debts enforceable against the
    debtor's exempt property. Thus, support creditors may be able to
    satisfy their support obligations even in no asset cases when the
    debtor has exempted property from the estate.\1\
    ---------------------------------------------------------------------------
        \1\ See the amendment to 11 U.S.C. Sec. 522(c)(1) contained in
    section 216 of the bill.
    ---------------------------------------------------------------------------
        3. Enormous benefits for support creditors, other than receiving
    first priority are contained in the bill. The National Bankruptcy
    Conference memorandum did not address the various and considerable
    benefits support creditors receive in other sections of the bill.
    Section 212 deals with priorities, but other provisions do a great deal
    more good than section 212.
            a. Section 213 prevents confirmation of plans and discharge of
            debts when postpetition support is not paid in full.
            b. Section 214 excepts numerous support collection devices from
            the reach of the automatic stay, thus allowing support
            collection to proceed without interruption from the bankruptcy
            stay.
            c. Section 215 prevents the discharge of non-support divorce
            debts, which in far too many cases are necessary for the
            maintenance and well-being of an exspouse.
            d. Section 216 prevents the debtor from removing liens securing
            support from his property and subjects the debtor's exempt
            property to the enforcement of support debts.
            e. Section 217 prevents the recovery by the trustee of support
            payments actually paid by the debtor to the support creditor
            before the bankruptcy was filed.
            f. Section 219 requires the trustee to provide important notice
            to support creditors in order to insure that their debts will
            be collected.
        All in all, criticizing this bill because the priority provision in
    section 212 in not helpful is like burning down a house because the
    chimney doesn't work. But the chimney does work here. While the
    priority status in Chapter 7 cases may not provide wide spread
    benefits, it certainly will in Chapter 13 cases.
        The second issue raised by the memorandum is that, with all
    this'newly nondischargeable-debt, support will be harder to collect. No
    professional support collector sees the existence of newly
    nondischargeable debt as an impediment to support collection! The
    argument advanced is that credit card companies ``are institutionally
    well suited to use the courts to collect their claims'' while the ex-
    spouse is ``not institutionally established to collect these debts.''
    One wonders, of course, how cost effective it will be for a credit card
    company to use the courts in the first place to commence the collection
    process.
        I submit, however, that if a support creditor wants the debt
    collected, this creditor will have to take some action to get the debt
    collected, unless the creditor wishes to rely on the good faith of the
    debtor to pay the debt voluntarily. In my experience this collection
    technique is nearly worthless.
        The federal child support enforcement program \2\ provides an easy
    solution to this problem for generally needy and dependent mothers. It
    is an institutionally established means to collect support debts after
    bankruptcy. It exists in every jurisdiction of every state in this
    country. It is provided free or for a nominal fee. And information
    regarding this service must, under section 219 of the bill, be provided
    to every support creditor by the bankruptcy trustee.
    ---------------------------------------------------------------------------
        \2\ Social Security Act, Title IV-D, Sec. Sec. 451-469 (42 U.S.C.
    99651-669).
    ---------------------------------------------------------------------------
        Once the support creditor obtains either private or government
    provided support collection assistance, the competitive advantages
    available to the support collector over financial institutions are
    staggering. For this reason I do not believe that credit card debt,
    either before or after bankruptcy, stands in the same. position as
    support debt with respect to its collectibility. Support collection
    advantages outside of (or after) bankruptcy competitively overwhelm
    financial institutions. For example the following post-bankruptcy
    collection advantages are available to support creditors, and not to
    credit card or other financial institutions:
            a. Priority wage withholding to collect support. This advantage
            is stunning. It means that whenever a wage garnishment is filed
            by a support creditor, it will assume immediate priority over
            any other garnishment, no matter when filed. And since the S.
            220 allows wage withholding to continue or be implemented after
            the bankruptcy has been filed, the collection of support in the
            normal case will never be held hostage to bankruptcy, before,
            during, or after the case is completed.
            b. Interception of state and federal tax refunds to pay child
            support arrears.
            c. Garnishment or interception of Workers' Compensation or
            Unemployment Insurance Benefits.
            d. Free or low cost collection services, provided by the
            government.
            e. Use of interstate processes to collect support arrearage,
            including interstate earnings withholding orders and interstate
            real estate liens.
            f. Revocation or suspension of driver's, professional and
            recreational licenses of support delinquents.
            g. Criminal prosecution and contempt procedures for failing to
            pay support debts.
            h. Federal prosecution for nonpayment of support and federal
            collection of support debts.
            i. Denial of passports to support debtors.
            j. Automatic treatment of support debts as judgments which are
            collectible under state judgment laws, including garnishment,
            execution, and real and personal property liens.
            k. Collection of support debts from exempt assets.
        While this list is not exhaustive, it is certainly illustrative of
    the vastly superior advantages of support creditors over commercial
    creditors. For these reasons I do not consider S. 220 as a mechanism
    for aggravating the problem of collecting post-bankruptcy support
    debts.
        Agencies, such as mine, operating the federal child support
    enforcement program are funded in part by incentives based on
    collections. We would hardly be advocating a bill which had the
    potential of reducing post-bankruptcy collections and consequently
    funding incentives. It is for this reason that the following national
    organizations, whose membership consists mostly of persons employed in
    or funded by the federal support enforcement program, support this
    bill.
            a. The National Child Support Enforcement Association
            b. The National District Attorneys Association
            c. The National Association of Attorneys General
            d. The Western Interstate Child Support Enforcement Council
        The National Child Support Enforcement Association, alone,
    represents over 60,000 child support professionals in this country. I
    attach their letter of support asking the President to sign last year's
    version this bill.
        One final note. The National Bankruptcy Conference contrasts the
    96% success rate in collection by credit card companies with the rather
    dismal support collection rate for women. On its face this statistic is
    absurd because it deals with two distinct populations. To be fair we
    would have to ask what the credit card company collection rate is for
    persons already in economic trouble and not paying support. What
    percentage of people owing child support even have credit cards. And
    since support agencies must report support delinquents to credit
    reporting agencies, persons with significant support debt will not be
    issued credit cards in the first place. What's more, even as to those
    ``deadbeats'' who could, but are not, paying support but who are paying
    credit card debt to retain their cards, I have the strongest doubts
    that they would commence paying their support debts simply because
    their credit card debt was extinguished. If history has any
    significance, those credit cards would simply be reloaded with consumer
    debt.
        Therefore I am not at all impressed by the significance that the
    general credit card population pays its bills. I am more concerned that
    this comparison makes tacit assumptions which are just illogical, if
    not, in fact, dead wrong. The most ill advised assumption being the
    supposition that the payment characteristics of the general credit card
    population have any relevance to the general support debtor population.
        I hope this letter answers the issues raised by the National
    Bankruptcy Conference. If you have any other questions please do not
    hesitate to contact me.
                Yours very truly,
                                             Philip L. Strausss
                                             Principal Attorney
                                   Department of Child Support Services

        cc. Hon. Orrin Hatch, Chairman, Senate Judiciary Committee

       Responses of K.H. Beine to Questions submitted by Senator Feingold

                                         Shoreline Credit Union
                                              Two Rivers, WI 54241-0233
    Jane Butterfield, Committee Liaison
    US Senate Judiciary Committee

    FROM: K H Beine

    Re: Written Questions from Senator Russ Feingold, Bankruptcy Abuse
    Prevention Legislation

        Question 1: Testimony focused on means test, reaffirmations and
    mandatory credit counseling. Reaction to other provisions of S. 220.
        While my testimony focused on three specific issues as CUNA's
    priorities in S. 220, we recognize that the bill is the product of many
    years of debate and compromise. Because it is balanced between many
    interests, it is not perfect for any particular group. And because of
    that balance, CUNA is reluctant to pick apart individual parts of the
    bill at this stage of the legislative process.
        I assume your question regarding the nondischargeability of credit
    cards refers to section 310 of the bill. This is a fairness issue. We
    are unusually careful with respect to granting credit including credit
    card limits. In addition we bend over backwards to assist members in
    trouble. Yet despite those efforts we often times loose along with
    everyone else when someone decides that it is no longer convenient to
    repay their debts. A debt is a debt. If the person has the ability to
    repay, then whether something was purchased on time payments or viii a
    check that bounces or via a credit card, the debt should be repaid.
        Regarding your question on section 311 of the bill, credit unions
    are sympathetic to the needs of housing for people. There are practical
    difficulties, however, with this issue. Experience has shown that some
    people, as a planning tool, file bankruptcy just to stop eviction
    proceedings. Somehow this doesn't seem fair.
        With respect to the provision on cramdowns, if it does not remain
    in the bill it would make auto credit terms for future borrowers that
    much tougher.

        Question 2: Testimony regards Shoreline Credit Unions banlauptcy
    experience.
        Before I answer your questions, I both have to commend you for your
    astute observation and apologize for an incorrect number on the Pact
    Sheet that accompanied the written testimony. Shoreline Credit Unions
    losses due to bankruptcy for the 2000 calendar year were $64,186.
        Shoreline's losses due to bankruptcy are very low and are not
    material at the present time. However they have never the less doubled
    each of the last three years. And yes, (and I thank you for your kind
    comments) that is despite the fact that indeed we are careful lenders
    and do evaluate our loan applicants with great care.
        So, doubling or not, if below the national average, why am I
    concerned? We can absorb one more doubling within our present operating
    cost structure. However if losses double twice rnore we will be at
    $250,000. That is hs1f our credit unions net earnings in recent years.
    Game over.
        We are a $50M credit union. Our deposit base on average grows about
    10% per year. Credit unions, like banks, have minimum regulatory
    capital requirements. However our earnings are our only source of
    additions to capital. We cannot sell stock to bring in outside capital
    as other financials. We therefore need to earn a ROA, Return on Assets,
    of approx 1.00% per year to maintain a reasonable 8-12% capital ratio.
    If losses reach the $250k mark as noted above, I will have no choice
    but to increase general loan interest rates to recover this ``cost of
    doing business''.
        Who will pay those increased rates? Everyone to a certain extent,
    which is not fair, but for the most part those members who can least
    afford it. How will it be done? By applying ``risk: lending''
    procedures, i.e. charging higher rates to those debtors who because of
    past credit problems and already high debt ratios present a higher risk
    and have a propensity to generate losses.
        With respect to your position that perhaps the private sector could
    fix the current ``bankruptcy crisis'' with more careful lending, T do
    not believe that is possible. First of all the general ``tightening''
    of credit across the country that would be necessary to accomplish that
    would, in my opinion, be detrimental to the economy. (And in all
    probability hurt many in the lower income areas who most need ready
    access to credit.) And second the comfortable and repeated use of
    bankruptcy as a financial management tool has become so pervasive that
    I do not think drat the private sector can stem the tide on its own.

        Question 3: Reaffirmation agreements.
        While credit unions continue to enjoy a substantially higher
    reaffirmation rate than other financial entities, the number of rations
    is on the decrease. For example, in our case, prior to the mid 1990's
    Shoreline enjoyed an almost 100% reaffirmation rate. Reaffirmations are
    now running approx 50%. Why the drop? Often times the debtor's anorney
    argues against reaffirmation or flat out refuses to sign the agreement.
    And it takes a rare individual, regardless of what we may have done for
    them; to voluntarily repay a debt that has been discharged.
        CUNA has no objection to a standardized form that assures debtors
    are getting full disclosure. And credit unions, like all other
    creditors, will be required by the bill to provide a reaffirmation
    disclosure to their members who agree to reaffirm a debt that would
    otherwise be discharged in bankruptcy. This provision was added at the
    insistence of the Clinton Administration to address concerns about
    abusive and coercive reaffirmations.
        But credit unions have not been found to be part of the problem, so
    S. 220 recognizes the unique relationship between credit unions and
    their members in negotiating reaffirmation agreements in good faith.
    Therefore, a reaffmnation agreement filed with the court between a
    member represented by counsel and the credit union will not have to
    include a specific schedule of income and expenses, and will never
    raise a presumption of an undue hardship for a credit union member
    reaffirming a credit union debt, which would be subject to review by
    the bankruptcy court. This exception for credit union reaffirmations is
    appropriate because credit unions don't seek reaffirmation agreements
    unless they feel the member is able to repay the loan and the member
    will benefit by receiving future financial services from the credit
    union, rather than have to seek them elsewhere at a steep premium.
        Regarding the inquiry of whether abusive reaffirmation agreements
    would put credit unions at a disadvantage, we are confident that with
    the changes in this bill and with the numerous laws already on the
    books, there is ample protection for the consumer in this area. There
    are legal firms as well as the various consumer watchdog groups that
    stand ready, willing and able to make any transgressor pay an onerous
    price for noncompliance.
        1 thank you for the opportunity to be able to assist you with
    respect to your position on this important legislation. Please contact
    me if you have any additional questions.
        [Note: Revised Fact Sheet attached.]

                         FACT SHEET [Revised 2-19-2001]

           Total Assets:          $50.5 million (data as of December 2000)
                Members:                                            11,700
                  Total Loans:                                38.0 million

                            Losses Due to Bankruptcy:

              2000           522,375         s/b $64,186     [khb 2/19/01]
              1999           534,577
              1998            15,309
              1997             9,883
              1996             1,875

        Number of
         Filings:          Chapter 7          Chapter 13          Total

              2000                 10                  0               10
              1999                  7                  1                8
              1998                  5                  0                5
              1997                  3                  0                3
              1996                  1                  0                1

       Responses of Randall J. Newsome to Questions submitted by Senator
                                    Feingold

                                 United States Bankruptcy Court
                                Northern District of California
                                              Oakland, California 94612

    Senator Russ Feingold
    506 Hart Senate Office Building
    Washington, DC 20510-4904

        Dear Senator Feingold,

        This letter will serve as my response to the written questions you
    submitted to me on February 20, 2001. Your first question asks whether
    S. 220 ``will essentially destroy Chapter 13 as an option for debtors
    who wish to keep their cars.  .  .  '' As I stated in both my written
    and oral testimony, I believe that the ``anti-cramdown'' provision in
    Sec. 306(b) of the bill will destroy the incentive for many debtors to
    file a chapter 13 case. When Sec. 306(b) is combined with Sec. 314(b),
    which eliminates the enhanced discharge presently afforded by chapter
    13, only those debtors seeking to save a home from foreclosure will
    find chapter 13 a reasonable option.
        A hypothetical will illustrate why Sec. 306(b) will hurt both
    debtors and creditors. Suppose in 1998 Mr. Jones, who is single and
    lives in an apartment, purchased a 1994 Dodge for $15,000 on credit. At
    the time he bought the car, its fair rnarket value was only $12,000,
    but because of his poor credit rating, he was forced to pay
    substantially over market Because he can't afford the payments on the
    Dodge along with his other monthly payments, he files a chapter 13 case
    in 2001. At the time he files, he still owes $10,000 on the car, and he
    has other unsecured debts totaling $4000. Without counting payments on
    his debts, his monthly income exceeds his monthly expenses by $240 per
    month. The real fair market value of the car at the time of filing is
    $5000. Under present law Mr. Jones could write down the value of the
    Dodge to $5000 in his chapter 13 plan. Assuming he proposes a plan to
    pay $240 a month over 36 months, be would be able to pay $5000 plus
    interest to the secured creditor, and repay a meaningful portion of his
    unsecured debt over the life of the plan. But under Sec. 306(b) of S.
    220, Mr. Jones would be forced to pay all $10,000 of the remaining
    contract price on the car, because he bought it within five years of
    filing his chapter 13 case. This is true even though the car is now 7
    years old, and the creditor would get substantially less than its
    present value of $5000 if the car were repossessed and sold. Depending
    on the interest rate on the Dodge debt and the chapter 13 trustee's
    commission, Mr. Jones might not even be able to propose a plan that
    would pay off the car, pay nothing to his unsecured creditors, and be
    completed within the 60-month time limit for chapter 13 plans. He would
    be much better off allowing the secured creditor to repossess the
    lodge, tile a chapter 7 case, and attempt to buy a newer car, even
    though the interest rate undoubtedly would be exorbitant. 'thus,
    neither the secured nor the unsecured creditors are paid what they're
    owed, and the debtor is back in a debt trap. No one benefits.
        Your second question concerns the problem of repeat filers. I view
    this as one of the most serious abuses of the bankruptcy system. It has
    been most severe in the Central District of California. Nonetheless, I
    would urge cautioxl in attempting to correct it. No one would seriously
    argue against amending the bankruptcy code to target those who file
    repeatedly just to stop a foreclosure or an eviction. But many repeat
    filers are forced to file a second petition because their first case
    was dismissed for reasons beyond their control, such as the
    incompetence of a bankruptcy petition preparer. I have read your
    proposed amendment to S. 220, and believe it strikes the appropriate
    balance. It protects the rights of imocent tenants, while preserving
    the right of a landlord to rid themselves of a bad tenant without the
    legal expense of seeking relief from the automatic stay in bankruptcy
    court.
        Please don't hesitate to contact me if I can be of further
    assistance.
                Very truly yours,
                                             Randall J. Newsome

       Responses of Philip L. Strauss to Questions submitted by Senator
                                    Feingold

                           Department of Child Support Services
                                                San Francisco, CA 94105

    Honorable Orrin G. Hatch, Chairman
    Senate Judiciary Committee
    U. S. Senate
    Dirkson Senate Building, Room 224
    Washington, D.C. 20510

    ATTN: Jane Butterfield

    Re: Questions Submitted By Senator Russ Feingold For Phillip L. Strauss

    Dear Senator Hatch:

        A facsimile transmission was received by my office requesting
    answers to three questions submitted by Senator Feingold February 22,
    2001. I was attending a conference the week these questions were
    submitted so I am submitting the answers somewhat late.

        Question 1. Are you aware that in 95% of bankruptcy cases there are
    no distributions to any creditors at all because there are no assets to
    distribute?
        Answer: That statistic is generally considered to be accurate for
    Chapter 7 cases, which overall constitute about two thirds of all
    bankruptcy filings. However, in Chapter 7 the debtor's earnings, after
    he files bankruptcy, are not part of the distributions in the case. It
    is from those earnings that the spouse or children will normally
    receive their support payments. Therefore, that statistic is somewhat
    irrelevant for support collection purposes in Chapter 7 cases. In
    Chapter 13 cases, which comprise almost all of the remaining one third
    of bankruptcy petitions, the filings do directly affect the debtor's
    ongoing wages which are estate assets. The proposed amendments would
    specifically require that the debtor provide for full payment of
    ongoing support obligations and satisfaction of all arrears in order to
    have a plan confirmed, unless the spouse agrees otherwise.
        In San Francisco our actual experience is quite different from the
    statistic you cite. This morning I had our office run a report of all
    bankruptcy cases in the San Francisco Department of Child Support. The
    results indicated that 530 of the bankruptcy cases our system are
    Chapter 13 cases. Thus, among child support debtors, 53% of the cases
    have assets. I cannot believe that San Francisco differs that much
    statistically from the general support-debtor population which files
    bankruptcies.
        Chapter 13 cases give us the most trouble because of the severe
    collection limitations placed even on support creditors during
    bankruptcy. In Chapter 13 cases we truly are placed in unfavorable
    competition with other creditors and must wait until secured. creditors
    and administrative costs are paid before priority and then unsecured
    debts are paid. Much child support consists of general unsecured debts
    as of the petition date, and consequently it is the last paid, if paid
    at all. S. 220 will insure that all child support is treated as a
    priority debt, insuring its full payment during the term of a chapter
    13 plan, as set forth above.
        In addition, S. 200 would cause more debtors to file Chapter 13
    cases and thus give support creditors the additional protections
    afforded by many of the child support provisions of the bill.

        Question 2. Do you understand that this bill will elevate some
    unsecured credit card debt, namely a debt which is found to be
    nondischargeable and debt that is reaffirmed, to the same position
    after bankruptcy as child support and alimony?
        Answer: I do not believe that credit card debt, either before or
    after bankruptcy, stands in the same position as support debt. Also,
    this bill does not change the relative position of support debt and
    reaffirmed debt, since discharged debt can now be reaffirmed.
        In trying to determine whether the existence of postbankruptcy
    credit card debt will affect the collection of support debt adversely,
    I can only say that no professional support collector believes this to
    be a problem. Your question asserts that credit card debt will be
    ``elevated'' to the same position as support after bankruptcy. If by
    this statement you mean that some limited additional amount of debt may
    be held nondischargeable, in addition to the amounts that may already
    be so held, then you are correct. But support collectors have enormous
    advantages in collecting their debts, compared to other unsecured
    creditors in the nonbankruptcy arena. Nonsupport debts will not,
    however, be elevated to an equal collection status with support debts.
    As I have said many times, professional support collectors are not
    concerned with the existence of other debt. Support collection
    advantages outside of (or after) bankruptcy competitively overwhelm
    financial institutions. For example the following post-bankruptcy
    collection advantages are available to support creditors, but not to
    credit card or other financial institutions:

            a. Priority wage withholding to collect support.
            b. Interception of state and federal tax refunds to pay child
            support arrears.
            c. Garnishment or interception of Workers' Compensation or
            Unemployment Insurance Benefits.
            d. Free or low cost collection services provided by the
            government.
            e. Use of interstate processes to collect support arrearage,
            including interstate earnings withholding orders and interstate
            real estate liens.
            f. Revocation or suspension of driver's, professional and
            recreational licenses of support delinquents.
            g. Criminal prosecution and contempt procedures for failing to
            pay support debts.
            h. Federal prosecution for nonpayment of support and federal
            collection of support debts.
            i. Denial of passports to support debtors.
            j. Automatic treatment of support debts as judgments which are
            collectible under state judgment laws, including garnishment,
            execution, and real and personal property liens.
            k. Collection of support debts from exempt assets.

        while this list is not exhaustive, it is certainly illustrative of
    the vastly superior advantages of support creditors over commercial
    creditors. For these reasons I do not consider S. 220 as a mechanism
    for ``elevating'' credit card debts to the position of support debts
    after bankruptcy in any sense of the word. Moreover, absent passage of
    the changes contained in S. 220, the government is currently precluded
    from using many of these techniques while a bankruptcy case is
    pending--a fact that currently makes bankruptcy a haven for
    recalcitrant spouses and parents.

        Question 3. Explain what is wrong with the position taken by 116
    law professors who wrote the Senate last year, that the most important
    issue for women and children raised by this bill is that it will make
    is much more difficult for them to reach an ex-husband's income after
    that ex-husband goes through bankruptcy?
        The short answer is that nothing about 5.220 makes it more
    difficult to reach the husband's income post-bankruptcy in that nothing
    about the bill affects post-bankruptcy activities in that regard.
    Rather, as described above in question 2, support creditors continue to
    enjoy substantial advantages in being able to collect from the former
    spouse's post-discharge income. Perhaps, a more salient question is how
    many of these law professors have ever actually enforced a support
    obligation? I, and thousands of my colleagues, do it every day and take
    pride in obtaining that support, under difficult circumstances, for the
    children who are entitled to it. We know where the problems lie and
    would hardly be supporting legislation which would make the collection
    of that support more difficult. The support provisions of this bill are
    supported by:

            a. The National Child Support Enforcement Association
            b. The National District Attorneys Association
            c. The National Association of Attorneys General
            d. The Western Interstate Child Support Enforcement Council

        With respect to the effect of this bill on support collection, if
    we are just counting numbers of supporters and adversaries, one need
    look no further than the National Child Support Enforcement Association
    which urged the President to sign it last year. This organization
    represents over 60,000 child support professionals in this country with
    the daily hands-on experience to know where the problems lie and what
    changes they would like to see made to address those problems. While no
    bill is perfect, we believe the changes made to the domestic support
    provisions of the Bankruptcy Code by this bill are an overwhelming
    improvement over the current law.
        If you have any other questions please do not hesitate to contact
    me.
                Yours very truly,
                                              Philip L. Strauss
                                                     Principal Attorney
                                   Department of Child Support Services

        Responses of Todd I. Zywicki to Questions from Senator Feingold

        Question 1: Concerning the proposed means test in S. 220, you
    stated that ``we've identified about 7 to 10 percent of filers who
    would be affected by the means test.  .  .  .We're talking about
    recovering $3 billion, roughly, that would otherwise be discharged [in
    Chapter 7].''
        (A) What is the source of your statement?
        Answer: My statement is based on a composite assessment of the
    various studies that have been done to try to estimate the impact of
    means-testing generally. It is difficult to establish a precise figure,
    as the various studies were conducted according to different versions
    of means-testing that have been proposed over the past several years.
    Nonetheless, the February 1998 Ernst & Young study using 1992-93 data
    concluded that about 15% of filers would be affected by means-testing.
    The March 1998 Ernst & Young study again concluded that about 15% of
    filers would be affected. A study by the Credit Research Center in 1997
    concluded that 5% of the filers in its study could have repaid 100% of
    their debts over five years and that approximately 25% of filers could
    have repaid 30% or more of their debts. A study by Marianne Culhanne
    and Michaela White that was sponsored by the American Bankruptcy
    Institute concluded that approximately 7% of the debtors in their
    sample would have been affected by means-testing. It has been reported
    that this last study found that only 3% of filers would be affected,
    but that conclusion was based on a patent misunderstanding of the IRS
    guidelines that will apply to means-testing. In particular, it is based
    on the erroneous belief that the IRS guidelines would actually allow a
    debtor to buy a new car while in bankruptcy, an interpretation of the
    IRS guidelines that is simply incorrect. Once this error in the
    interpretation of the automobile exception is corrected, the final
    figure, as noted rises to approximately 7% of the sample. Also, the ABI
    study was of substantially poorer quality than the other studies, as
    that study was smaller in size, drawn from fewer districts, and based
    on older data than the other studies. As a result, the results of the
    ABI study are not as probative as the other studies. Nonetheless, its
    conclusions are consistent with the findings of the other studies once
    its erroneous assumptions are corrected. I chose the figure of ``about
    7 to 10%'' as a conservative assessment to convey that the estimates
    were tentative but that most of them fell within this range or above.
        (B)  What did you do to ``identify'' the 7 to 10 percent of Chapter
    7 cases that would be ``affected by the means test''?
        Answer  As noted, I relied upon a composite of studies conducted by
    researchers and did not conduct my own study.
        (C)  Particularly, with respect to the $3 billion that you say
    would be recovered under the proposed means test, where can we find the
    statistical evidence for that claim?
        Answer: A 1998 study by the WEFA Group concluded that means-testing
    would recover $3.6 billion to $7.4 billion that is currently discharged
    in bankruptcy. The March 1998 Ernst & Young study concluded that the
    WEFA, study likely underestimates the amount of debt discharged in
    Chapter 7 and that is also underestimates the amount that would be
    recovered by means-testing. Those studies were both based on assuming
    that those. making 75% of the national median income would be eligible
    for means-testing, rather than the current standard of 100% of state
    median income. This adjustment might exclude a handful of filers with
    some modest repayment capacity, but would not likely have a large
    effect on the overall amounts recoverable. Given this, I chose the
    figure of $3 billion as a conservative estimate of what these studies
    suggest could be recovered in bankruptcy according to the current
    version of the means-test.

     Responses of Dean Sheaffer to Questions submitted by Senator Feingold

        Dear Chairman Hatch:

        I am in receipt of your February 20, 2001 correspondence forwarding
    written questions submitted by Senator Feingold regarding my recent
    testimony in support of S. 220. My responses follow.
        Question 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.
        Question 1 A: Has your company engaged in any postbankruptcy
    collection acti vity without filing reaffirmation agreements?
        Answer: Boscov's maintains policies that require compliance with
    local, state and federal statutes and regulations, including federal
    bankruptcy taw.
        Question 1B: Do you think that the current laws suporvising
    reaffirmation agreements have been adequate?
        Answer: Yes. The sufficiency of the current supervision is
    evidenced by the fact that retailers accused of reaffirmation
    violations have been identified and fined up to approximately one-third
    of a Billion dollars.
        Question 1C: Do you have a problem with requiring court review of
    all reaffirmation agreements, rather than only those that are made by
    debtors who don't have counsel?
        Answer: With over one million bankruptcy filings each year, we view
    this is an unnecessary burden to the court system. Debtors' counsel
    have a clear obligation to protect their chonts' interests.
        Question 2: In your testimony you conclude that our current
    bankruptcy laws cost the average American family hundreds of dollars
    each year.
        Question 2A: How do you arrive at that figure?
        Answer: Total annual bankruptcy losses are more than $40 Billion.
    There are approximately 100 million U.S. households; thereforc, the
    average annual loss per household is approximately $400.
        Question 2B: Assuming that it is simply based on the amount of debt
    discharged in bankruptcy, do you agree that if the laws are changed and
    fewer Americans file for bankruptcy and less debt is dischargoablc, the
    cost the bankruptcy laws to the American consumer may not necessarily
    drop? In other words, do you recognize that them are other costs and
    effects of the laws that ought to be considered by policy makers?
        Answer: We recognize that there are other factors that may effect
    the ``net'' benefit of bankruptcy reform to American consumers. We
    believe that these have been--fully considered by Congress over the
    course of the last five years. S. 220 carefully balances these factors.
        Question 3: You said in your testimony that ``over $40 billion was
    written off in banlauptcy losses last year, which amounts to the
    discharge of at least $110 million every single day.'' Please provide
    us with the documentation or source for the statistics in your
    statement.
        Answer: It has been widely reported that annual bankruptcy losses
    are between $40 Billion and $45 Billion. $42.5 Billion divided by 365
    days is greater than $110 Million.
        Question 4: Your testimony focuses on the importance of the means
    test. As you know, S. 220 which you endorse in your testimony contains
    many other provisions.
        Question 4A: Are the bill's provisions that expand the
    nondischargeability of credit card debt important to your support of
    the bill?
        Answer: Retailers see many cases where unnecessary purchases of
    luxury goods are made in preparation for bankruptcy. The marginal
    changes in the existing nondischargeability provisions will prevent the
    costs of such abuse from being ``transferred'' to American consumers as
    a whole.
        Question 4B: Do you think that the bill's provision that deny the
    bankruptcy stay to tenants who are facing eviction and would actually
    be able to pay their rent during the bankruptcy are necessary to
    address the retailers' concem with the bankruptcy system?
        Answer: Retailers have not advocated in favor or against this
    provision. We understand that there are strongly felt, and well
    founded, views on both sides. The current provision is part of a
    heavily negotiated and carefully balanced bill which attempts to
    address the interests of debtors, creditors, and the public at large.
    The NRF supports swift passage of S. 220 without additional amendment.
        Question 4C: To get your support, does the bankruptcy reform bill
    have to contain the provisions of S. 220 that inflate the value of
    secured debt by denying cramdown or stripdown of car loans taken out
    within 5 years of a bankruptcy filing?
        Answer: This provision is part of a heavily negotiated and
    carefully balanced bill which attempts to weigh not only the interests
    of both debtors and creditors, but the competing interests among
    creditors as well. The NRF supports swift passage of S. 220 without
    additional amendment.
        Question 4D: Could you support a bankruptcy bill that includes a
    means test and reaffirmation provisions, even if it didn't contain all
    of these provisions mentioned above, about which consumer advocates and
    law professors have been so concerned?
        Answer: The provisions mentioned above address genuine misuses of
    the current law in a reasonable and balanced fashion. While some
    individuals believe that the final product does not go as far as they
    would like, others believe it goes too far. Retailers believe that
    whatever the bill's alleged shortcomings, it is a significant
    improvement over the present abuse-prone system.

             Responses of Brady C. Williamson to Written Questions

        Question 1: How would the means test in the bill affect families
    with extraordinary medical expenses?
        Answer: The means test in the bill does not provide any flexibility
    in its application to take into account extraordinary medical expenses.
    The bill, in section 102, establishes a means test that applies
    regardless of the reason for a family's financial difficulty. It
    applies with equal force, in this regard, to the honest but unfortunate
    debtor and to the debtor determined to defraud creditors. The bill
    should be amended to provide an exemption from the means test for
    families forced into bankruptcy by extraordinary medical expenses.

        Question 2: What is your view of the reaffirmation provisions in S.
    220? Are there improvements to be made to these provisions that will
    make them more effective in combating creditor abuse?
        Answer: While the bill makes slight improvements in the
    reaffirmation process, it does not address the more fundamental,
    problems, problems that became painfully evident with the criminal and
    civil penalties imposed on several of the country's leading retailers
    for reaffirmation abuse. Some creditors use the ``carrot'' of
    additional credit to turn dischargeable debt into nondischargeable debt
    whether or not the debtor can afford to continue to make payments.
    Others use the ``stick'' by threatening to ask the court to declare the
    debt nondisehargeable, litigation the debtor cannot afford to defend.
        The reaffirmation process does not involve parties with equal
    bargaining power or equal sophistication. The 1975 bankruptcy
    commission recognized this when it recommended the abolition of
    reaffirmation agreements. The 1997 commission essentially reiterated
    this recommendation.
        Some of the provisions in the bill actually increase the need .for
    stronger reaffirmation protection. With more debt nondischargeable
    under the bill than under current law, the post-bankruptcy burdens of a
    debtor will be greater. That decreases the debtor's ability to make
    post-bankruptcy payments on debt that has been. reaffirmed,
    jeopardizing the prospects for a successful Chapter 13 proceeding. New
    provisions in the bill provide additional opportunities For aggressive
    creditors to threaten actions against debtors, which they can
    ``settle'' by taking reaffirmation agreements. The bill's reaffirmation
    provisions, as written, do not curb abuses. Rather, they only
    standardize reporting and procedures.
        Yes, improvements can and should be made in the bill. The
    bankruptcy courts should have to evaluate reaffirmation agreements, as
    they did from the enactment of the bankruptcy code in 1978 through
    1984, asking whether the debtor has the capacity to meet his/her
    obligations and still give preferential treatment to one creditor in a
    reaffirmation agreement. The law should require the court particularly
    to determine if the debtor can make reaffirmation payments and still
    satisfy his or her obligations to a current or former spouse and their
    children. In addition, other creditors who are entitled to depend on
    the debtor's income for payment in a Chapter 13 or after a Chapter 7
    bankruptcy also should be protected.
        At the very least, the bill should be amended to require court
    approval for reaffirmation agreements with any debtor who has spousal
    or child support or other family obligations. While this would not
    restore the reaffirmation provisions of the code to their 1978 status,
    it would protect those most vulnerable to an improvident reaffirmation
    agreement and their other creditors.

       Responses of the Administrative Office of the Courts to Questions
                           submitted by Senator Leahy

        Question 1: I recall last year the Congressional Budget Office
    estimated that it would cost $218 million over the 2000-2004 period to
    implement the new bankruptcy--provisions of S. 625. Have you or the
    Administrative Office of the Courts made any estimates about how many
    millions of taxpayer dollars would be required to meet the mandates of
    this year's bill, S. 220?
        Answer: The Congressional Budget Office (CBO) estimate of $218
    million to implement the provisions of S. 625 is a government-wide cost
    estimate. We defer to CBO with regard to the estimate of government-
    wide costs to meet the mandates of S. 220. Extrapolating from the
    analysis of S. 625 by the Congressional Budget Office, the
    Administrative Office has estimated that implementation of S. 220 would
    cost the judiciary approximately $104 during the five-year period
    following enactment of the bill, and in some instances, following a
    delayed effective date. This figure is obtained as follows:

    Data collection....................   ...............  $30 million
    Maintaining income tax returns.....   ...............  9 million \1\
    New judgeships--...................
        discretionary costs............  $51 million.....
          (administrative costs).......
        mandatory costs................  $14 million.....
          (salaries and expenses)......
     ..................................   ...............  65 million \2\
                                        ------------------------------------
    Increased cost.....................   ...............  $104 million

        Although your question does not specifically raise the issue of
    lost revenue, the bill as introduced would revise filing fees in
    chapter 7 and chapter 13 cases and re-allocate a portion of the
    revenues derived from those fees from the judiciary to the United
    States Trustee program. We estimate this loss in revenue to exceed $25
    million over the next five years. This is as ``real'' a cost as a
    required increase in outlays, When this figure is added to the direct
    cost imposed by the bill, our total cost approaches $130 million, all
    of which will require an increase of judiciary appropriations.
    ---------------------------------------------------------------------------
        \1\ The provision in S. 625 regarding the maintenance of tax
    returns would have required all chapter 7 and chapter 13 debtors to
    file three-years tax returns with the bankruptcy court. CBO estimated
    this cost to the judiciary to be approximately $34 million over five
    years. The analogous provision of S. 220 requires a debtor to file tax
    returns only upon request of a creditor. CBO estimates that.this
    provision, when compared to its predecessor, could result in savings of
    as much as $25 million, depending upon the number of cases in which
    creditors seek access to the returns. Thus, assuming a best case
    scenario, the pending bill would impose a cost of approximately $9
    million upon the judiciary.
        \2\ Analyzing the judgeship provision of S. 625, CBO determined
    that the creation of 18 new bankruptcy judgeships would cost $40
    million in discretionary spending and $11 million in mandatory spending
    over the next five years. Extrapolating these figures to determine the
    cost of 23 new judgeships, as would be created by S. 220, yields $51
    million in discretionary spending and $14 million in mandatory
    spending, for a total of $65 million.

        Question 2: Do you have any other legislative proposals to improve
    provisions in the current bankruptcy reform legislation besides the
    direct appeal provision?
        The bill as introduced would create 23 new temporary judgeships and
    extend the terms of four existing temporary judgeships. The Judicial
    Conference recommends creation of the 23 judgeships currently in the
    bill as well as two others--one in the district of Maryland and one in
    the district of South Carolina. It further recommends that 13 of these
    judgeships be created on a permanent basis and the other 12 on a
    temporary basis; that the existing temporary judgeships in the district
    of Delaware, district of Puerto Rico and northern district of Alabama
    be converted to permanent positions; and, that the temporary judgeship
    in the eastern district of Tennessee be extended for a period of five
    years.
        Reason: Creating temporary judgeships where permanent judgeships
    are clearly needed detracts from the most efficient administration of
    the bankruptcy code. Extending temporary judgeships for very short
    periods of time is also bad policy. The fact that South Carolina lost a
    judgeship in January 2000 although that judgeship is needed points up
    this problem. Congress has not created a new bankruptcy judgeship since
    1992. Future Congresses should not be ``forced'' to frequently pass
    ``temporary judgeship extension'' bills, particularly when the failure
    to act is not in the public interest.
        We recommend deletion of the provision that would revise filing
    fees (which were revised only 14 months ago) and re-allocate revenues
    derived from those fees from the judiciary to the United States Trustee
    program. This provision would have the effect of depriving the
    judiciary of approximately $25 million over the next five years.
        Reason: The judiciary expends significant funds administering the
    bankruptcy code. In recognition of this fact, in 1999, Congress, acting
    on the decision of the Senate and House Appropriations Committees,
    increased certain bankruptcy filing fees and allocated the revenues
    derived from those fees with due regard to the costs of both the
    judiciary and the United States Trustee program. S. 220 re-opens that
    decision by again revising fees, reducing judiciary revenues, and
    significantly increasing income to the United States Trustee program.
    The decision to reduce judiciary revenues disregards the rationale
    underlying current law and ignores the $104 million five-year cost
    increase that the enactment of S. 220 will levy upon the judiciary.
        We recommend re-assigning the responsibility for collection of
    financial data on debtors from the judiciary to the United States
    Trustee program as an adjunct to its responsibility to conduct audits
    under the bill.
        Reason: Having financial data collected by United States Trustees
    would have two significant benefits. First, it would yield audited, and
    thus accurate, data. By contrast, having bankruptcy clerks collect the
    data from schedules and statements filed by debtors at the outset of
    cases will result in unreliable data. Data filed by debtors, in many
    instances without the assistance of a lawyer, frequently inaccurately
    values assets and liabilities; further, some debt simply cannot be
    valued definitively at the outset of a case because it is unliquidated,
    contingent or disputed. Second, since data would be collected by
    Trustees as part of its audit system, it would be collected at a
    fraction of the cost of C5tab11tshlng a new system for this purpose in
    each clerk's office.
        We recommend re-assigning the responsibility to maintain income tax
    returns from the bankruptcy clerks to the United States Trustees.
        Reason: In order for the courts to meet this new responsibility, it
    will be necessary to establish a new filing system in each clerk's
    office, separate and apart from public case files, in order to
    safeguard the security of the records and control access to them as
    required by the bill. Since the Trustees' files, unlike court files,
    are not publicly available, the Trustees would be able to meet this
    responsibility without the costs and administrative burdens associated
    with establishing and maintaining new filing systems.
        We recommend extending the date for initiating collection and
    reporting of case event statistics.
        Reason: Docket sheet information in bankruptcy cases is reported to
    the Administrative Office through the electronic case management
    systems of the courts. The current systems are nearing the end of their
    useful lives and are an a schedule to be replaced. These systems cannot
    collect additional information of the sort required by this bill
    without costly upgrades that would divert resources from the new
    replacement system that is in the process of being deployed in the
    bankruptcy courts. Since the new system will not be deployed in every
    court for three and a half years, this provision should be revised to
    take effect 48 months after enactment of the legislation.
        Finally, we recommend deletion of provisions regarding revision of
    bankruptcy rules.
        Reason: Two provisions of the bill, sections 102 and 319,
    inappropriately impact Bankruptcy Rule 9011 and, if enacted, would
    cause confusion and needless satellite litigation. Six other provisions
    require the Supreme Court or the Judicial Conference or the Advisory
    Committee on Bankruptcy Rules to promulgate a rule or official form.
    Directing the Judicial Conference or one of its committees to amend a
    particular rule or form bypasses the Rules Enabling Act process and
    needlessly undercuts the proper role of the Judicial Conference and its
    committees, the bench and bar, the public, and the Supreme Court in
    that process. Furthermore, these provisions are unnecessary because the
    Advisory Committee on Bankruptcy Rules automatically reviews any
    legislation amending the bankruptcy code to identify and prescribe
    necessary amendments to rules and forms.

     Responses of Robert D. Manning to Questions submitted by Senator Leahy

        As per your request, the following is my response to your questions
    regarding recent trends in consumer bankruptcy. This information is a
    follow-up to my testimony before the Serrate Judiciary Committee on
    February 8, 2001. I respectfully request that these questions and
    answers be added as an addendum to my testimony.

        Question 1, Part A: ``Over the last 15 years, how have the
    marketing and lending practices of the credit card industry changed in
    regard to college students?''

        Question Part B: ``Have these policies contributed to greater
    student credit card debt? ''
        Answer: Due to the onset of banking deregulation (beginning in
    1980, e.g. elimination of Regulation Q) and massive loan losses of the
    major money center banks due to questionable underwriting policies with
    `third World countries as well as U.S. commercial/residential loan
    losses during the 1989-91 recession, the banking industry found that
    credit cards were one of their most profitable lending activities after
    doubledigit inflation subsided following the 1981-82 recession. As
    banks began expanding the marketing focus of revolving credit cards
    after the recession, such as soliciting lower income, blue-collar
    households that were coping with un- and underemployment during the
    restructuring of manufacturing industries, they realized that the most
    neglected and potentially profitable market niche was middle-class
    college students.
        Until the late 1980s, the standard industry practice required that
    students had to have their parents or guardians co-sign the credit
    cardholder agreement, unless the student demonstrated sufficient income
    to pay for the modest line of credit. At the same time, the first
    exclusive marketing agreements were being negotiated for modest sums
    with college administrators, beginning with MBNA and its agreement with
    Georgetown University in the early 198Os, but this was solely for
    employed alumni.
        As credit card and retail companies sought to expand from college
    alumni into the college student market, they began soliciting to
    college seniors who were 21 years old and soon to enter the job market.
    That is, the lending risk was relatively low with the assumption that
    college seniors had one foot in school and the other foot looking for a
    job. Typically, these student ``kiddie'' cards offered credit in the
    $200-$500 range, most were around $300. Hence, the industry was
    concerned about lending money to unemployed students based on the
    uncertainty of--the student cardholders' ability to repay. By ensuring
    repayment through parental co-signature, the industry faced the trade-
    off of low risk in its underwriting standards and limited profits since
    students' consumption would be monitored by their parents and thus
    their behavior would still be influenced by ``family values'' and
    parental authority.
        By the late 1980s and especially during the 1989-91 recession, the
    credit card industry discontinued its requirement of parental co-
    signature anal aggressively marketed credit cards on campus. In 1990,
    Citibank was nearly insolvent (low Tier 1 capital reserve levels) due
    to its unperforming.Third World and commercial/residential lending
    loans and end of cheap capital due to the phase-out of Reg Q. However,
    credit cards in general and college students in particular were
    yielding sharply rising profits. As a result, students were directly
    solicited through the mail, campus bulletin boards, inserts in book
    store bags, and the growing presence of direct marketers such as
    application booths or on-campus fundraisers such as fraternity and
    sorority programs. Significantly, my research shows that few students
    graduated in the early 1990s with high credit card debts; rare was a
    student with $5,000 in debt and most in the $500 to $2,000 range. These
    students were far more likely to accumulate their credit card debt
    after graduation while they encountered difficulty finding employment
    in a tight job market. So, the seeds of mounting credit card debt were
    planted during college but harvested after graduation.
        During the early 1990s, as credit card companies raised credit card
    lines of credit--due to rising debt levels--of students rather than hi
    student incomes, credit card companies sought to reduce their risk by a
    policy of having debt collectors contact parents and demand payment and
    even pursue legal suits for debt collection against parents of college
    students--even if they were not co-signatories of the cardholder
    agreement. The success of this policy emboldened credit card companies
    to continue to increase the lines of credit to students as parents and
    family members found themselves unexpectedly paying off student credit
    card debts. Also, as the cost of college education rose with the sharp
    decline in public financial support, student loans routinely replaced
    federal grants axed family loans in the 1990s.
        The increasingly common strategy of financing one's college
    education with borrowed money contributed to the credit card industry's
    realization that its risk was further reduced by students paying their
    credit card debts with student loans. This trend also minimized the
    perception of the growing problem of student credit card debt since
    reports focused on current credit card balances rather than total,
    accumulated credit card debt that was amassed through private bank
    lows, family loans, and shifting credit card debt into student loans.
    As a result, students that charged up to their limits on their credit
    cards were actually rewarded with higher lines of credit or even
    additional credit cards. This policy continued even after the credit
    card industry lost its law suits in the early 1990s in an effort to
    force parents to repay their children's credit card debts even though
    they were not co-signers of the credit card agreement. The credit card
    industry's response, which continues today, is to have debt collectors
    pressure the parents of college students to repay the credit card debts
    of their children. The punitive threat is that the failure to pay
    delinquent credit card debts will lead to serious consequences for
    their children in the future: bad credit reports/scores, much higher
    interest rates and insurance premiums, loan denials such as auto and
    mortgages, and even job rejection.
        By the mid-1990s, credit card companies began to double their
    marketing budgets, including more aggressive campaigns on college
    campuses. This was because the risk of defaults diminished for banks
    (due to student loans, family loans, greater available of part--time
    jobs during economic expansion) while the demand for credit cards on
    campus soared due to escalating consumption pressures on campus and the
    rising cost of college matriculation which led to greater reliance on
    borrowed money to finance college expenses. With the optimism of the
    economic expansion of the 1990s spurring the consumer-driven economy,
    the highly profitable student credit card portfolios led banks to an
    intensifying competition over prize college accounts. Indeed, banks
    began to realize that credit cards provided entire to middle class
    households during their most formative years and thus offered future
    additional, lending/proft opportunities: auto, home mortgage,
    investment, insurance, and even college loans. With the end of the
    recession, the consolidation of the credit card. industry began to
    accelerate which. led to more lucrative exclusive marketing agreements
    with universities and their alumni associations (especially the largest
    250 universities). In, addition, this expanded marketing campaign
    resulted in a larger on-campus presence through sponsored events
    (spring fairs, athletic events, spring break activities, campus
    newspaper advertisements) and subcontracted solicitors who boldly
    established tables and booths in student centers, outside cafeterias,
    in dormitory ``commons'' areas, and along classroom walkways. Not
    incidentally, the increasing use of subcontracted marketing companies
    led to increased pressure tactics and illegal policies such as
    submitting applications with forged signatures and altering the age of
    applicants (e.g. high school students visiting college campuses or
    underage freshmen). Daily fees paid to colleges in order to ``rent''
    on-campus booths or tables typically range from $50 to $250. However,
    an increasingly common practice is to solicit without authorization or
    simply to ``crash'' a campus. Robert Bugai, President of College
    Marketing Intelligence and an investigative journalist, has documented
    hundreds of cases of marketing abuses on college campuses in the 1990s.
        The more aggressive marketing of credit cards on campus, together
    with the implicit assent of university administrators who saw greater
    access to credit as a revenue generator by enabling students to pay for
    the higher cost of educational expenses plus million dollar marketing
    agreements, led to marketing not just to alumni and upper classmen but
    then to freshmen and sophomores. Not only had solicitations become
    commonplace in book bags but they had become an accepted feature of
    freshman orientation. More importantly, the lines of credit offered to
    student soared. From an initial $300 to $500 lime of credit, students,
    found that they could request or were automatically offered lines of
    credit of from $2500 to $5000 within a year, Furthermore, students were
    now offered multiple credit cards; if they exhausted their credit on
    one card then they could receive two or three others. As the
    underwriting standards eroded, students became a distinct market niche
    for banks. In only a decade, the required co-signature with parents was
    replaced with only some proof of enrollment in college.
        By the mid-1990s, some students were amassing $5,000 to $15,000 in
    credit card debt and parents were finding themselves in the dilemma of
    ``loaning'' their children the money to pay off their debts or teaching
    them a lesson in financial responsibility. With the booming economy,
    students could easily find part-time jobs and/or their parents were
    more likely to have savings or access to lower interest loans to payoff
    these debts. Increasingly, students in public schools used larger
    portions of their student loans to pay down their credit cards while
    private school students began resorting to private bank loans or
    college credit union loans; at Georgetown University, I was informed
    that the most common use of the $10,000 loan available to students at
    the university credit union is to pay for their credit cards.
    Increasingly, students that ``mixed-out'' their credit cards were
    rewarded with higher hues of credit or other credit card applications.
    By the end of the decade, college campuses have become filled with
    anxiety ridden students whose request for holiday gifts were often
    ``please pay may credit card debt.'' More importantly, credit card
    debts of the most indebted, mixed out students jumped from $10,000
    $15,000 range to $20,000-$25,000. In a few cases, financial aid offers
    have communicated to me that they have had students from disadvantaged
    backgrounds report that they have accumulated over $30,000 in credit
    card debt. More recently, attention has focussed on the medical,
    educational, employment, and financial impacts (even suicides)
    associated with escalating student credit card debt.
        Today, the most striking feature of credit card marketing is how
    young students are when then receive their first credit card. In 2000,
    an industry sponsored survey reported that 25% of college seniors
    reported receiving credit cards before starting college compared to 55%
    of college freshmen. In some cases, students have simply applied for
    bank credit cards while in high school while others have been solicited
    due to their use of retail credit cards or are secondary account
    members of their parents' credit cards. In fact, the new VISA BUXX
    credit card program, which requires parental co-signature, is designed
    for teenagers. Most importantly, as the marketing of credit cards has
    shifted from employed alumni and then college seniors to college
    freshmen arid now high school students, there has not been a
    corresponding increase in financial education as credit increasingly is
    being allocated to consumers before they begin full-time employment.
    Unlike driving a car, young people are being given the ``keys'' to the
    consumer lifestyle but not required to learn the necessary defensive
    ``driving'' skills.
        Lastly, the interest rates and penalty fees are among the highest
    levels in the college student market. More importantly, credit card
    companies recognize that college students are mobile and have crisis
    periods which commonly lead to cash advances and penalty fees that
    quickly lead to sharp increases in credit card finance charges: from
    22.8% to 27.9% APR. For instance, a student that forgets to pay his/her
    credit card bill during final exam week may then wait until the
    forwarded mail arrives at parents' home or summer job. Often, the
    student is now two (2) payments late which invokes the ``escalator''
    clause and thus requires the student to pay the highest finance charge
    rate.
        In sum, the last decade has seen a dramatic rise in the extension
    of credit to increasingly younger students without any accompanying
    financial educational programs. As the cost of higher education has
    risen and the cost of the student lifestyle has escalated, it is not
    surprising that the highest credit card debt levels of students have
    jumped sharply over the last 10-12 years: from less than $5,000 to over
    $25,000. And, the proportion of students with credit cards is now
    between 75 and 80 percent.

        Question Part C: ``Are these policies different for young adults of
    the same age that are not college students? ''
        Answer: The different status and underwriting standards of college
    students is revealed by the policies of the credit card industry as
    they apply to .non-students in the 18-23 year-old age range. For this
    age group, proof of employment and total income are required as well as
    a consumer credit investigation. Young adults that report typical
    student incomes of $3,000 to $8,000 per year are routinely rejected for
    bank credit cards or offered ``subprime'' credit cards with low credit
    limits and high mandatory fees. For instance, a typical subprime credit
    card offers from $300 to $900 in credit with the highest interest rates
    (19.9%-36% APR) as well as requires membership fees ($20-$50),
    processing fees ($10-$25), and educational materials ($75-$199). In
    addition, they may be offered more costly ``secured'' cards that
    require a bank deposit that determines the amount of credit offered.
    For example, a $100 deposit will result in a credit line of from $100
    to $250 and often a high membership fee. Even more instructive is the
    experience of students after graduation that do not get credit cards in
    college or accept only low credit limits. Commonly, recent graduates
    with relatively low-wage, entry-level jobs (and typically high student
    debt levels) are offered low credit limits and even rejected for new
    credit cards. In sum, there is clearly a ``double standard'' in
    offering unsecured consumer loans via credit cards to students versus
    non-students of the same age. Ironically, young adults with relatively
    low-wage, full-time jobs ate more likely to be rejected for bank credit
    cards and/or offered low credit limits than their peers who are
    unemployed and may have never had a fell-time job.

        Question 2, Part A: ``Are young adults the fastest growing
    bankruptcy filers today? ''
        Answer: Yes, young adults 25 years-old and younger have experienced
    a dramatic rise in their bankruptcy rates. In 1995, with the number of
    bankruptcies at a near record of almost 900,000, less than 1 percent or
    under 9,000 bankruptcy filers were 25 years old oar younger. When U.S.
    personal bankruptcies peaked at 1.4 million in 1998, this included
    about 68,000 young adults or approximately 4.9 percent of the total. In
    2000, it appears that the proportion of bankruptcy filers 25 years old
    or younger has jumped to over 10 percent of the total--over 100,000
    people. According to bankruptcy expert Professor Elizabeth Warren
    (Harvard Law School), who is the director of a national survey of
    bankruptcy filers and co-author of The Fragile Middle Class (Yale,
    2000), bankruptcies among young adults are continuing to increase
    today.

        Question Part B: ``What are the primary factors responsible for
    this new trend of the late 1990s? ''
        Answer: As the cost of a college education has soared over tine
    last two decades, the average debt levels of college graduates has
    similarly increased; federal grants have been increasingly replaced
    with federal loans. At the end of the 1990s, student loans of public
    school graduates averaged over $13,000 and student loans of private
    school graduates averaged over $16,000. With shorter deferment periods
    (typically 6 months), higher finance: rates plus increasing amounts of
    unsubsidized loans, and the end of income tax averaging as well as
    deductibility of interest on student loans (interest deductibility was
    re-instituted in 1998-to a maximum of $2,000), recent graduates with
    modest incomes from their entry level jobs found themselves squeezed by
    their substantial education and credit card debts.
        Furthermore, the consumption-oriented lifestyle that is being
    promoted on college campuses bias been viewed by students as an
    entitlement that is expected to be continued after graduating anal
    obtaining a full-time job. Indeed, this is a generation that has not
    experienced a recession and has been encouraged to accept debt as a
    middle-class entitlement rather than `saving for a rainy day.'
    Unfortunately, this short-sighted attitude has been reinforced in
    college by encouraging the use of `plastic money,' the CitibankSony
    Visa--`the currency of fun,' and the self-deprecating reference to
    credit cards as `yuppie food stamps.' In addition, the recent
    employment volatility of hi-tech sector companies has pushed more young
    adults into debt-counseling/debt refinance programs. Since they are the
    least likely to have accumulated equity through homeownership, unlike
    their parents, a larger proportion of heavily indebted young adults are
    funding few financial ``life lines'' and thus no other recourse but to
    file for bankruptcy.

        Question Part C: ``How will the proposed bankruptcy reform
    legislation affect them? ''
        Answer: In many ways, as the fastest growing group of bankruptcy
    filers, young adults are the most disadvantaged by the proposed
    bankruptcy legislation. This could have serious long-term consequences
    to the nation since these age cohorts currently have the lowest
    (negative) savings rate.
        First, for many of these bankruptcy filers, their college debts are
    the first or second largest debts. Since student loans normally can not
    be discharged, many young filers will find relatively little relief
    from the bankruptcy process-especially with the difficulty in obtaining
    future credit when they are so early in their consumer lifecycle. This
    situation is especially difficult for those with student loans that did
    not graduate from. college or whose vocational training did not offer
    marketable job skills.
        Second, the much higher finance rates of consumer credit card debts
    encourages students to pay for them with low-interest college education
    loans. For many young adults that file for bankruptcy, this decision
    means that they are required to pay for past credit card bills since
    these debts have been shifted into student loans. As the credit card
    industry demands that a larger proportion of credit card debt be
    repaid, they fail to acknowledge that a substantial portion is not
    dischargeable and must be repaid after it has been ``revoted'' into
    student loan debt. Since this was not an option for undergraduate
    students a decade ago, the deleterious impact is primarily assumed by
    young adults under 30 and especially under 25 years old.
        Third, this age group is least likely to own their residences and
    thus have the ability to protect personal assets through home
    ownership. Proposed changes in consumer bankruptcy law that help
    households protect some of their accumulated assets via home ownership
    do not affect most young adults filing for bankruptcy.
        Fourth, the most common form of start-up capital/financing for
    small businesses especially young entrepreneurs-is bank credit cards.
    Since these young adults are the least likely to have accumulated much
    equity through home ownership and thus have the option of ``home
    equity'' loans, business failure could push them into personal
    bankruptcy since they have few opportunities to secure small business
    loans.
        Fifth, with a slowdown in the economy and the accompanying rise in
    employment disruptions, the inability to discharge any student loan
    debts may lead to a greater likelihood of multiple bankruptcies by the
    youngest age cohorts of bankruptcy filers whose only option will be to
    increase the length of time of their loan repayment period.
        Question 3. Part A.: ``How do the lending and underwriting policies
    of small banks and regional retailers compare with the major credit
    card companies.''
        Answer: One of the most striking trends of banking deregulation is
    the increase in providing consumer loans in the form of ``evolving'' or
    unsecured credit cards rather than the traditional ``installment'' loan
    that dictates a fixed term of repayment at a specified monthly payment
    and interest rate. At the conclusion of the contract, the consumer has
    accumulated equity in the purchased item (auto, furniture, appliance)
    and the merchant or bank rewarded responsible consumers with more
    credit in the future.
        Small banks and regional retailers require a more extensive
    application process for consumer loans and tend to be more cautious in
    their underwriting criteria. Also, they have the option of repossessing
    the defaulted consumer goods (computers, stereos, autos) whereas
    unsecured credit cards are more likely to be used for purchases on
    consumer services that can not be repossessed. Unfortunately, credit
    cards have turned upside down the logic of financial lending: the most
    profitable loans are those that are not repaid. As a result, the most
    desired clients of the credit card companies are consumers that
    dutifully remit payments on their loans (especially late!) bust do not
    pay in full. In fact, in some cases, credit card companies may cancel
    the accounts of clients that payoff all of their charges each month
    arid disdainfully refer to them as ``dead beats.'' The result is that
    small banks and retailers tend to have more stringent lending criteria,
    encourage installment loans, and offer consumers lower lines of credit.
        Question 3. Part B: ``Do consumer defaults on loan contracts affect
    retailers the salve as large credit card companies? ''
        Answer: One of the major problems with the dramatic increase in the
    amount of consumer lending through bank credit cards is that it has
    shifted more financial risk to retailers and smaller banks. For
    example, a regional furniture store company that carefully limits the
    size of its consumer installment loans has no control over the
    additional amount of debt that its clients may obtain through bank or
    other retail credit cards. 'this is important because a default on a
    consumer loan means that the furniture company and/or its bank partner
    lose the amount of the consumer's financial delinquency. For the
    furniture company, this means that it has to absorb some portion of the
    defaulted consumer loan or it may lose its banking partner and thus
    financing source for future sales. For the consumer, the loss of modest
    cost financing may mean higher costs by obtaining a loan through a
    dance company.
        The link between. prudent installment credit by small banks and
    retailers and the weak underwriting criteria of major credit card
    companies (top ten credit card companies control \3/4\ of the market)
    merits greater attention. That is, ``good'' installment loans may end
    up in bankruptcy court because of future ``bad'' credit card debts.
    And, because of this relatively new shift in the relative allocation of
    consumer credit through ``installment'' loans versus unsecured
    ``revolving'' credit cards, both types of loans are treated equally
    whereas the risk to retailers has increased substantially. This is
    because major credit card companies sell much of their credit card debt
    in secondary markets (U. S., Europe, and Asia) as ``securitized''
    financial instruments. Higher default rates on credit cards often
    simply means that the ``bundle'' of credit card debt sells at a lower
    premium rather than producing a direct loss such as a default on a loan
    for the purchase of a stereo system.
        In sum, requiring bankruptcy petitioners to repay a portion of
    unsecured credit card debt could encourage banks to increase high
    interest consumer loans to financially insecure or distressed
    households that have the greatest likelihood of not being able to repay
    the loans. This, of course, would create a greater financial burden on
    low-income households and especially single, female-headed households
    with children. This impact has been previously discussed and
    documented. What has been generally neglected is how this proposed
    change in the bankruptcy law could seriously hurt retailers in general
    and smaller companies in particular. That is, these most recent trends
    suggest that a more effective change in consumer bankruptcy law should
    require more prudent lending policies by major credit card companies in
    the marketing of relatively large amounts of credit to low and middle-
    income households.
        Please contact me if you require any additional information.

       Responses of Todd Zywicki to Questions submitted by Senator Leahy

        Question 1: You testified that the current bankruptcy system is
    ``threatening to spiral out of control'' and ``suffers from a crisis of
    both real and perceived abuse.'' But over the last two years, Chapter 7
    filings have dropped 15 percent and personal bankruptcy filings overall
    have declined by 12 percent across the nation. How can the current
    system be out of control and in crisis when personal bankruptcy filings
    have declined so dramatically in the last two years?
        Answer: After a brief respite in bankruptcy filing rates,
    bankruptcy filings have begun to rise again this year. I am not aware
    of any bankruptcy analyst who believed at the time that the two-year
    decline in bankruptcies presaged a permanent, rather than a temporary
    drop. Moreover, despite these slight reversals, the fact remains that
    despite a decade of unprecedented economic prosperity, consumer
    bankruptcies are almost twice as high as 1990, and are five times
    greater than in 1980. Most analysts expect at least a 15% increase in
    bankruptcy filings this year. Moreover, recent history suggests that
    bankruptcies tend to rise during a recession. Thus, if it is true that
    an economic slowdown portends, then this augurs a continuing rising
    tide of bankruptcy filings and threatens to cause the bankruptcy system
    to ``spiral out of control.''

        Question 2.: You testified that S. 220 should be enacted into law
    to stop the ``bankruptcy tax'' caused by bankruptcy abuses, which ``is
    reflected in shorter grace periods for paying bills, and higher penalty
    fees and late-charges for those who miss payments.'' What guarantee is
    in S. 220 that any savings to the credit industry from the passage of
    the bill will be passed down to consumers in longer grace periods for
    paying bills, and lower penalty fees and late charges for those who
    miss payments?
        Answer: As I testified, bankruptcy losses are a cost of doing
    business for firms that extend credit. As such, they are no different
    from other business expenses, whether rent, employee salaries, taxes,
    electricity bills, theft, or gas prices. The government provides a
    system of courts to enforce contracts in the belief that making valid
    contracts enforceable decreases the costs of doing business, which in
    turn favors all buyers and sellers, including consumers. Does anyone
    believe that eliminating the enforceability of contracts would not
    cause prices to rise? By limiting opportunistic use of the bankruptcy
    system, the bankruptcy reform bill similarly reinforces the
    enforceability of contractual promises; after all, no one doubts that
    there is actually a contractual obligation involved. As such, it will
    have the same effect as increasing the enforceability of contracts
    generally. Most people believe that making contracts more easily
    enforceable tends to benefit all parties, including consumers. Thus, if
    one believes that greater enforcement of valid contracts generally
    reduces costs and benefits consumers, then it is equally obvious that
    consumers as a whole will benefit from greater enforcement of consumer
    credit contracts through restrictions on opportunistic bankruptcy use.
        In a competitive market, consumer prices reflect changes in
    business costs. Consumer creditors unquestionably operate in
    competitive industries, thus changes in their costs will be reflected
    in changes in the bundle of price and non-price terms that they offer
    to consumers. See Todd J. Zywicki, ``The Economics of Credit Cards,'' 3
    Chapman L. Rev. 79 (2000). For instance, when interest rates were
    capped in the pre-Marquette era, issuers of consumer credit responded
    in a number of ways, including the imposition of substantial annual
    fees on consumers. These annual fees amounted to a redistribution from
    convenience users who paid their bills in full every month to those who
    revolved balances at below-market interest rates. Retailers who ran
    credit operations, such as large department stores, imposed the costs
    through charging higher prices for the goods they sold, sometimes
    offering ``cash discounts'' to those who did not buy the item on
    credit. In short, changes in the cost structure of credit issuers are
    reflected in the price and nonprice terms they charge.

        Question 3: Should Congress include a trigger mechanism in S. 220
    to make sure that consumers will benefit from lower credit costs as a
    result of bankruptcy reform legislation that will clearly benefit the
    credit industry by lowering its costs of doing business?
        Answer: No. It would be impossible to predict how the consumer
    credit industry will respond to reductions in its bankruptcy losses and
    it would be unwise to force them to respond in a way calculated to
    satisfy political pressures rather than consumer preferences.
    Attempting to draft such a trigger would throw a blanket of uniformity
    over a market characterized by dynamic competition and strong consumer
    choice. Recent history indicates, for instance, that market competition
    has been driven by consumer demand for greater benefits, rather than
    reductions in credit prices. In the credit card industry alone, these
    benefits have included such a diverse array of services as cobranding
    benefits, frequent flyer miles, 24-hour customer service, anti-fraud
    protection, and car rental insurance. It is evident that these services
    are being supplied in response to customer demand, and that consumers
    have demanded these benefits in lieu of reductions in price terms. To
    paraphrase a recent observation from an article I with Judge Edith H.
    Jones, ``Using [cost savings] as the only proxy for vigorous
    competition is tantamount to saying that the automotive industry is
    noncompetitive because car manufacturers increase quality through
    improved safety, comfort, or gas milage, rather than simply cutting
    prices.'' Edith H. Jones and Todd J. Zywicki, ``It's Time for Means-
    Testing,'' 1999 Brigham Young University L. Rev. 177.

        Question 6: You testified that there is a ``growing sophistication
    among lawyers and the public about the opportunities for fraud and
    abuse--both legal and illegal--in the bankruptcy system.'' Please
    provide specific examples of these opportunities for, fraud and abuse--
    both legal and illegal.
        Answer: It is generally understood by bankruptcy analysts that
    there is a substantial degree of abuse in the system. Many of the
    reforms included by the legislation are responsive to concerns
    identified by the National Bankruptcy Review Commission in its Report.
    This includes such abuses as improper serial filings and such things as
    the use of so-called ``fractional interests'' to frustrate the
    legitimate exercise of creditors' rights (see NBRC Recommendation
    1.5.6). NBRC Recommendation 1.1.2 reflects the widespread concern about
    the inaccurate and misleading information provided by debtors on their
    schedules. Recommendation 1.1.4 expresses the concern that lawyers are
    not providing adequate oversight as to their clients behavior.
    Recommendation 1.4.4 evidences the Commission's concern that bankruptcy
    was being used improperly to avoid performance of spousal and child-
    support obligation. Even though many of the Recommendations of the
    National Bankruptcy Review Commission were quite contentious, there has
    been a broad consensus that these particular Recommendations are rooted
    in real-world concerns about fraud and abuse in the bankruptcy system.
    I am not aware of anyone who has questioned the NBRC's concerns about
    inaccurate schedules, fractional interests, and the like.
        Moreover, it is evident that there are at least some individuals
    filing bankruptcy and receiving a discharge in chapter 7 that could
    repay some of their debts. Even if the figure is as low as 3%, this
    number is still greater than the current number of filers who have
    their cases dismissed for substantial abuse. For instance, Judge
    Newsome testified during the hearing that he has dismissed for
    substantial abuse less than 1% of the cases he has seen, which is
    substantially smaller than even the most modest estimates of what
    meanstesting would do. Professor Jack F. Williams, for instance, has
    observed that many perceive the anti-abuse provisions of Sec. 707(b) to
    be a ``dismal failure.'' See Jack F. Williams, ``Distrust: The Rhetoric
    and Reality of Means-Testing,'' 7 Am. Bankr. Inst. L. Rev. 105 (1998).
        In addition to this abuse, it appears that illegal activity has
    also increased in the bankruptcy system. In the past two years there
    has been large-scale criminal prosecutions in certain areas of the
    country that have demonstrated the presence of substantial illegal
    activity that is present in the consumer bankruptcy system. Consider
    some recent stories from the past year or so that have been reported in
    Bankruptcy Court Decisions:

     ``Sixteen Charged in Bankruptcy Abuse Cases,'' Volume 35,
            Issue 8 (Jan. 11, 2000). ``In the fourth bankruptcy fraud sweep
            in four years, 16 individuals from across Southern California
            have been charged with a variety of criminal violations arising
            form alleged misdeeds in bankruptcy cases.''
     ``Bankruptcy Fraud a Growing Problem Nationwide-In Maryland,''
            Volume 36, Issue 2 (June 6, 2000). ``Maryland U.S. Attorney
            Lynne A. Battaglia said her office is pursuing an increasing
            number of criminal bankruptcy fraud cases because this crime is
            a growing problem nationwide-and in Maryland.''
     ``L.A. Landlord Convicted on Three Counts of Bankruptcy
            Fraud,'' Volume 35, Issue 20 (April 4, 2000). ``Bernard Gross
            of Los Angeles was convicted Feb. 16, after a two-week jury
            trial, on three counts of bankruptcy fraud for making false
            statements in his bankruptcy papers. `Gross' false statements
            prevented the bankruptcy court from learning about other
            potentially related bankruptcy cases, and about properties and
            businesses that may have been connected with other bankruptcy
            filings,' said U.S. Trustee Maureen Tighe.''
     ``New Mexico Man Pleads Guilty to Wire Fraud in Connection
            with His Chapter 7,'' Volume 35, Issue 16 (March 7, 2000).
            ``Gaylen Hindeldey, currently residing in Palm Sptings, Calif.,
            pleaded guilgy Feb. 22 in district court in New Mexico to one
            count of wire fraud in connection with his 1992 Chapter 7.
            `Hinkeldey attempted to use wire communications to hide more
            than $55,000 from his creditors,' said U.S. Trustee Brenda
            Moody Whinery.''
     ``Administrative Law Judge Convicted of Bankruptcy Fraud,''
            Volume 35, Issue 15 (February 29, 2000). ``Simona Flores
            Rosales, an administrative law judge for the California State
            Unemployment Insurance Appeals Board, was convicted Feb. 4 by a
            Federal District Court jury of five felony criminal counts,
            three counts of bankruptcy fraud, one count of money laundering
            and one count of filing a false income tax return. The jury
            found Rosales guilty of concealing assets and making false
            statements under oath during her bankruptcy proceedings.''

        These stories are merely illustrative and chosen at random, but are
    suggestive of the concerns over fraud and illegality in the system.

        Question 5: Which provisions, if any, should be improved in S. 220?
    If there are provisions in S. 220 that should be improved, do you have
    any proposals, including legislative language, for the Committee?
        Answer: The only possible improvement to the bill that I can
    identify would be an elimination of the broad safe harbor provisions of
    the means-test provisions of the legislation. This provision could
    potentially allow high-income debtors with substantial repayment
    capacity to escape the means-test.

        Question 6: You testified that: ``means-testing will have no effect
    on those making less than the minimum income threshold provided. Thus,
    for the 80% of filers whose income lies beneath the state median,
    means-testing will have no effect whatsoever.'' Is it not true that the
    new paperwork requirements in S. 220 that are intended to implement the
    bill's means-test apply to all personal bankruptcy filings?
        Answer: Read in context, I believe it is clear that my testimony
    refers to the substantive elements of means-testing, not the procedural
    elements. Substantively, means-testing does not affect those who make
    less than the state median income. As for the question of whether
    increased paperwork will be required, I am not sure what specific
    paperwork the question refers to, nor am I aware of specific new
    paperwork that is supposedly the result of administering the means-
    test, as opposed to preventing other forms of fraud and abuse. Current
    bankruptcy schedules I and J already require the information on the
    debtor's income and expenditures that are required by the means-test.
    Thus, it is not clear what additional paperwork would be required to
    administer the means-test.

                           SUBMISSIONS FOR THE RECORD

                                       American Bar Association
                                    Governmental Affairs Office
                                              Washington, DC 20005-1022
    The Honorable Orrin G. Hatch
    Chairman
    Committee on the Judiciary
    United States Senate
    Washington, D.C. 20510

    Re: Bankruptcy Appellate Structure

    Dear Mr. Chairman:
        On behalf of the American Bar Association (``ABA ''), I would like
    to thank you for the opportunity to submit the ABA's views regarding
    the bankruptcy appellate reform provisions contained in Section 1235 of
    S. 220, the ``Bankruptcy Reform Act of 2001,'' and we request that the
    following comments be included in the record of the Committee's hearing
    scheduled for February 8, 2001.
        The ABA, which has over 400,000 members throughout the country,
    strongly supports legislative provisions like Section 1235 that would
    allow direct appeals from orders of bankruptcy judges to the existing
    circuit courts of appeals. This is a non-partisan proposal which would
    significantly improve the bankruptcy system. As Chair of the Business
    Bankruptcy Committee of the ABA Section of Business Law, I have been
    authorized to express the ABA's views to you on this important matter
    in an effort to improve the administration of the bankruptcy laws.
        Direct appeal of bankruptcy matters to the regional circuit courts
    of appeals has also been recommended by the National Bankruptcy Review
    Commission (``Commission''), which studied the matter in depth. The
    Commission was composed of three members appointed by the President
    (then President Clinton), two members appointed by the Senate, two
    members appointed by the House of Representatives, and two members
    appointed by the Chief Justice.
        Although the Commission was split on a number of the bankruptcy
    issues addressed in its Report, the recommendation for direct appeals
    of bankruptcy matters received the unanimous support of all of the
    Commission's members.
        Under the current system of bankruptcy appeals, a bankruptcy order
    (unlike other federal trial court orders) is subject to an additional
    level of review: an appeal must go first to either a district court or
    a bankruptcy appellate panel (``BAP '') before the appeal may go to a
    circuit court. The two-level bankruptcy appellate process is extremely
    unusual. The ABA believes that this multi-tiered bankruptcy appellate
    structure works poorly. It imposes unnecessary delays and costs on all
    parties. In addition, as stated in the Judicial Conference's 1995 Long
    Range Plan for the Federal Courts: ``Under current practice, district
    courts and BAY decisions are not treated as stare decisis in other
    cases--resulting in a `patchwork' of differing legal interpretations
    that encourage forum shopping and undermine the national system of [a
    uniform] bankruptcy law.'' (p.48)
        The ABA believes that a direct appeals system, designed to closely
    parallel the track of nonbankruptcy civil appeals, will result in:

     Faster final decisions;
     Greater certainty, uniform interpretation and decisions of
            precedential value with respect to key bankruptcy issues; and
     Reduction in unnecessary bankruptcy litigation.

        The ABA believes that direct appeals will aid in achieving the
    important goal of reducing the time and costs associated with the
    bankruptcy process and will also assist in harmonizing bankruptcy laws
    and nonbankruptcy commercial laws generally.
        When members of the National Bankruptcy Review Commission appeared
    before Congress on November 13, 1997, after submitting its Final
    Report, the Honorable Edith H. Jones of the U.S. Court of Appeals for
    the Fifth Circuit testified that: ``Congress should adopt the
    Commission's unanimous recommendation that appeals from bankruptcy
    courts should be routed directly to the U.S. Court of Appeals, rather
    than through an intermediary such as the district courts or bankruptcy
    appellate panels.  .  .(and) the importance of this measure cannot be
    overstated.'' (emphasis in original).\1\
    ---------------------------------------------------------------------------
        \1\ ``The current system which provides two appeals, the first
    either to a district court or a bankruptcy appellate panel and the
    second to the U.S. Court of Appeals, as of right from final orders in
    bankruptcy cases, should be changed to eliminate the first layer of
    review.'' National Bankruptcy Review Commission, Final Report,
    Recommendation 3.1.3 at 752-53 (1997).
    ---------------------------------------------------------------------------
        As noted in its commentary on the Recommendation: ``The
    Constitution authorizes Congress to establish a uniform law of
    bankruptcies. Despite this clear constitutional mandate, the current
    bankruptcy appellate structure has yielded results which are far from
    uniform.*  *  *Concerns over costs and efficiency also support the
    Recommendation. Under the current system, every bankruptcy appeal is an
    expensive excursion for both debtor and creditor who must work through
    two layers of appeal for a final resolution of their disputes. Final
    Report at 753-54.
        Both the ABA and the National Bankruptcy Review Commission
    recognize, and are sensitive to, the possibility of increased workload
    for the circuit court judges. After examining and analyzing the issue,
    however, the Commission concluded that, while direct appeals may
    temporarily increase the workload by approximately 9%, ``over time.  .
    .this number should decrease as more issues are settled within the
    circuit and fewer uncertainties linger, necessitating fewer appeals.''
    (A copy of the relevant portions of the Commission's Final Report to
    Congress is enclosed for your convenience.) The Commission concluded
    that the substantial long-term benefits of a direct appeals system
    significantly outweigh any modest short-term burdens, and the ABA
    agrees with this conclusion.\2\
    ---------------------------------------------------------------------------
        \2\ In its 1995 Long Range Plan for the Federal Courts, the
    Judicial Conference stated that the appellate review of orders of
    bankruptcy judges should be studied to ``ensure prompt, inexpensive
    resolution.  .  .and foster coherent, consistent development of
    bankruptcy precedents.'' Recommendation 21 at 47. It was recommend that
    statutory change ``should await the [National Bankruptcy Review
    Commission's] report in that respect. Id at 48. As noted above, the
    Commission unanimously recommended direct appeals.
    ---------------------------------------------------------------------------
        Section 1235 of S. 220 would allow for direct appeals in most
    bankruptcy cases. Under this provision (which is identical to the
    corresponding provision in H.R. 2415, the bill approved by Congress
    last year but vetoed by President Clinton), bankruptcy appeals
    initially would be routed to the district courts for a 30-day period.
    After the 30-day period, the appeals would automatically proceed to the
    regional court of appeals if the district court had not ruled or
    entered an order extending such 30-day period or if the parties had not
    consented to the retention of the appeal in the district court beyond
    the 30-day period.
        Section 1235 was designed to address concerns that some litigants
    may prefer to keep the appeal in the district court and that the
    district court should be given some latitude to keep the appeal.
    Although the ABA prefers a pure direct appeal system for the bankruptcy
    courts that is the same as the system used in the other federal trial
    courts, the proposed alternative is acceptable to the ABA and we view
    it as a clear improvement over current law. In essence, this
    alternative would permit direct appeals to the circuit courts in most
    cases, except where the district court ruled during the 30-day period,
    the parties otherwise consented, or the district court extended the 30-
    day period.\3\
    ---------------------------------------------------------------------------
        \3\ Several other provisions of the present Judicial Code relating
    to bankruptcy jurisdiction already hinge on the consent of the
    litigants or orders entered for cause. For example, if a circuit has
    established a bankruptcy appellate panel, appeals can go to the BAP
    only with consent of the parties. 28 U.S.C. Sec. 158(c)(1). A jury
    trial can be conducted by a bankruptcy judge only with the consent of
    the parties. 28 U.S.C.

        Question 1157(e). Also, a district court may withdraw the reference
    to a bankruptcy judge for cause. 28 U.S.C. Sec. 157(d).
        The bankruptcy system affects the lives of many Americans, whether
    as debtors or as creditors or as employees of companies undergoing
    reorganization. The ABA believes that direct appeals to the regional
    circuit courts of appeals is an important component of bankruptcy
    reform. It is fair and beneficial to all parties; it will help achieve
    uniformity; and it will help harmonize bankruptcy and nonbankruptcy
    commercial law. For these reasons, the ABA urges the Committee to
    support Section 1235 of S. 220.
        Thank you for your consideration, and if you would like to discuss
    the ABA's views on the bankruptcy appellate structure in greater
    detail, please feel free to contact me at (212) 4557140 or Larson
    Frisby in the ABA Governmental Affairs Office at (202) 662-1098.
                Sincerely,
                                               M. O. Sigal, Jr.

        cc: Members, Committee on the Judiciary

    Statement of Hon. Richard S. Arnold, U. S. Circuit Judge for the Eighth
                                    Circuit

        Mr. Chairman and Members of the Committee:
        I make this statement at the request of your staff, who got in
    touch with me by telephone on the afternoon of Monday, February 5. I
    understand that the Committee is holding hearings on pending bankruptcy
    legislation, including a provision that would allow for direct appeal
    from bankruptcy courts to the courts of appeals, instead of the current
    appellate structure, which is three-tiered, including bankruptcy
    courts, either district courts or bankruptcy appellate panels, and
    courts of appeals.
        I understand that the Judicial Conference of the United States is
    not in favor of the direct-appeal proposal. It is with some reluctance
    that I voice a different view, the more so as the position of the
    Judicial Conference is to be stated by Chief Judge Becker of the Third
    Circuit, whom I respect and admire as much as any judge in the country.
    Nevertheless, you have asked my opinion, and I believe that, as a
    citizen and an officer of the United States, I should respond to such a
    request from Congress.
        Some time ago, during the deliberations of the National Bankruptcy
    Review Commission, I was asked to appear before the Commission and give
    my views on certain subjects. Among other things, I expressed the
    opinion that the current complicated appeal process should be replaced
    by a simple system of direct appeals from bankruptcy courts to the
    courts of appeals, with further discretionary review by the Supreme
    Court, of course. I have not changed my opinion since that time, and
    desire to state briefly the reasons why. The statement will be very
    brief indeed, as I have not had much time to prepare it.
        For a litigant to have two appeals as of right is very unusual in,
    the federal system. It has always seemed odd to me that such a
    provision should obtain in bankruptcy cases, of all places, where, by
    hypothesis, assets are limited. Most litigants in bankruptcy fall into
    one of two broad categories: people who cannot pay their debts, and
    creditors who are destined to receive less than full payment. Every
    dollar that goes into litigation is a dollar that the creditors will
    not receive. For this reason, it seems to me that, in bankruptcy above
    all other areas, simplicity and reduction of expense should be the
    order of the day. Yet, largely for historical reasons, this is not the
    case.
        The best solution to any problem is usually the simplest one. In
    this instance, the simplest solution is to provide for appeals from
    bankruptcy courts directly to the courts of appeals. Under the current
    system, appeals from bankruptcy courts go either to the district courts
    or to bankruptcy appellate panels. Thereafter, unhappy litigants are
    given a second appeal, as of right, to the courts of appeals. Cases are
    prolonged, and expense is multiplied. I suggest that a direct appeal to
    the court of appeals is the best solution to this problem, because the
    courts of appeals, after all, are in the appellate business all the
    time. If there is anything we know how to do, this is it.
        I do not for a moment depreciate the work done by the district
    courts and the bankruptcy appellate panels in bankruptcy appeals. I
    have no criticism of the quality of their work. I have never
    understood, however, why bankruptcy appeals should be so much more
    complicated than appeals in other kinds of cases. If the Congress is
    not inclined to create a single system of direct appeals to the courts
    of appeals, perhaps it could leave in place the existing appellate
    system, but make the second step discretionary. Under such a system,
    the courts of appeals would have discretion, akin to that exercised now
    by the supreme Court on petitions for certiorari, to hear, or not,
    appeals in bankruptcy cases that have already received one appeal as of
    right.
        The downside of the direct-appeal idea, of course, is that it would
    load more cases into the courts of appeals, which are already
    overloaded. The solution, I suggest, is more judgeships. If more judges
    are needed to do the appellate work in an orderly and thorough fashion,
    and I believe they are, then Congress should create them. The addition
    of direct bankruptcy appeals to the work load of the courts of appeals
    would furnish one more reason for the creation of these new judgeships.
        Mr. Chairman, I appreciate your allowing me to submit this
    statement in writing. If there is any way in which I can be of further
    service to you or to the Committee, please don't fail to let me know.

                                              Richard S. Arnold

            Statement of Association of Financial Guaranty Insurors

        Mr. Chairman, the Association of Financial Guaranty Insurors
    (AFGI), a trade association of financial guaranty insurors \1\,
    appreciates the opportunity to submit testimony to the Committee on
    suggested revisions to the United States Bankruptcy Code related to
    asset-backed securities. AFGI fully supports H.R. 220, but we would
    like to limit our remarks to the provisions included in Title IX,
    Section 912 that relate specifically to asset-backed securities.
    ---------------------------------------------------------------------------
        \1\ The members of AFGI are AMBAC Indemnity Corporation, AXA Re
    Finance S.A., Capital Reinsurance Company, Enhance Reinsurance Company,
    Financial Guaranty Insurance Company, Financial Security Assurance,
    Inc, and MBIA Insurance Corporation.
    ---------------------------------------------------------------------------
        AFGI has supported the revisions incorporated in Title IX, Section
    912 of S. 220 for several years. Through outside counsel, our
    Association submitted recommendations to the National Bankruptcy
    Commission in 1997; submitted testimony for the hearing record when the
    House Committee on the Judiciary's Subcommittee on Commercial and
    Administrative Law held hearings in the 105 th and 106
    th Sessions of Congress; and testified before this
    Committee's Subcommittee on Administrative Oversight and the Courts in
    1998.
             Purpose of the Proposed Change to the Bankruptcy Code
        AFGI believes that the suggested revisions incorporated in Title IX
    of S. 220 relating to asset-backed securities reduces uncertainty under
    the Bankruptcy Code as it applies to the almost $200 billion per year
    of asset-backed securities issued in the United States. By reducing
    uncertainty, the proposed amendment will increase stability in the
    capital markets and thereby facilitate asset-backed financings and
    eliminate certain risks which otherwise indirectly increase interest
    rates for millions of consumers, small business and others seeking
    financing from the capital markets. The proposed revision is
    constructed to achieve these benefits without impairing any of the
    reorganization and fairness policies underlying the Bankruptcy Code.
                       Application of the Proposed Change
        The proliferation of asset-backed securities in the United States
    over the past two decades has dramatically increased both the number of
    lenders and the lending capacity of existing financial institutions.
    This increased capacity has, in turn, created intense competition for
    borrowers.
        Today, consumers and small businesses have more choices when
    looking for a home, auto loan, a new credit card, or financing for a
    small business. More significantly, consumers and small businesses
    whose credit posed too great a risk to qualify for financing are now,
    in many cases, able to do so. This is because, in an asset
    securitization, loans and other receivables are sold by lenders to a
    company formed to sell securities in a structure which takes into
    account the credit risks posed by these receivables. The sale proceeds
    paid to the lender enable it to fund the ``securitized assets'' to make
    additional loans to consumers and small businesses.
        The company to which lenders sell their loans or other receivables
    (the ``Securitized Assets ''), will typically be a ``bankruptcy remote
    entity.'' The company's activities are restricted to the purchase and
    ownership of the Securitized Assets and issuance of the securities.
    Following its acquisition of the loan assets or other receivables, the
    bankruptcy remote entity will typically issue debt or other
    securities--the asset-backed securities--backed by Securitized Assets.
    By bankruptcy-remote, we simply mean that the company is required to
    maintain an existence that is completely separate from its affiliate
    companies such that it will not be affected by the bankruptcy of an
    affiliate.
        Generally, the cash flow or other proceeds generated by the
    Securitized Assets are sufficient to pay the amounts due on the asset-
    backed securities. In certain instances credit enhancement is provided
    by third parties, including members of AFGI, guaranteeing the timely
    payment of amounts due to the holders of the asset-backed securities.
        Under current law, uncertainty can arise when the transfer of the
    Securitized Assets by the lender or its operating company to the
    bankruptcy remote entity is deemed to be something other than a sale.
    If the transfer is not a sale and if the seller of the loan assets
    seeks relief under Chapter 11 of the Bankruptcy Code, the Securitized
    Assets purported to have been transferred to the bankruptcy remote
    entity may be included in the seller's bankruptcy estate. In that
    event, the cash flow or other proceeds generated by the Securtized
    Assets (i) would be subject to the automatic stay provision of the
    Bankruptcy Code and would not be available to pay the holders of the
    asset-backed securities until relief was obtained from the automatic
    stay, and (ii) could be subject to cramdown or collateral substitution
    that would further impair the bankruptcy remote entity's ability to pay
    amounts due on the asset-backed securities.
        Any interruption or impairment of the cash flow or proceeds
    resulting from the application of the automatic stay, cramdown or
    collateral substitution, impairs the market value of the asset-backed
    securities and, in the case of insured asset-backed securities,
    requires the insurer of these securities to pay the amounts due the
    holders thereof which would otherwise have been paid by the bankruptcy-
    remote entity.
        A ``true sale'' opinion is a fundamental requirement of every asset
    securitization. It is a ``reasoned'' opinion of legal counsel to the
    effect that the assets ``sold'' by an originator to the issuer of
    asset-backed securities will not be impaired in the event of the
    subsequent bankruptcy of the originator. The current Bankruptcy Code
    injects uncertainty into this opinion because it does not provide any
    clear guidance on what constitutes a ``true sale.'' Attached is a copy
    of a letter and an exhibit of a ``true sale'' opinion that was rendered
    in a recent asset-backed transaction rated by two rating agencies that
    the Association delivered to Senator Grassley following the 1998 Senate
    hearing (Appendix 1). Both our letter to Senator Grassley and the
    ``true sale'' opinion more fully describe and illustrate the pressing
    need for the asset-backed security provision set out in Section 912 of
    S. 220.
                             The Proposed Revision
        In order to address the situation, in which the seller of loans or
    other receivables commences a Chapter 11 case under the Bankruptcy
    Code, the proposed change in Title IX, Section 912 of S. 220 prevents
    the Securitized Assets transferred to the bankruptcy remote entity from
    being included in the seller's bankruptcy estate. This enables the
    bankruptcy remote entity to continue using the cash flow or other
    proceeds from the Securitized Assets to make payments to the holders of
    the asset-backed securities. To the extent, if any, that the bankruptcy
    remote entity owes any amount to the seller, that obligation remains
    valid and the seller can obtain payment of that amount in accordance
    with its original terms.
        The revision to Section 541 of the Bankruptcy Code contained in
    Title IX, Section 912 of S. 220 is limited in its application to
    preventing the Securitized Assets conveyed by the seller to the
    bankruptcy remote entity from being included in the seller's bankruptcy
    estate. Thus, the proposed amendment simply confirms that the transfer
    intended by the parties as a sale will not be unwound and the
    reorganization of the bankrupt seller will not be otherwise impaired.
    Furthermore, the proposed amendment is limited to transactions
    involving the issuance of investment-grade, asset-backed securities,
    since a primary purpose of Section 912 is to protect the legitimate
    expectations of investors in asset-backed securities sold in the
    capital markets. In addition, as explained in greater detail in the
    commentary at Appendix 2, limiting the application of the proposed
    amendment to securitized transactions in which one class or tranche of
    securities are rated investment grade substantially reduces the
    possibility that a lender or its operating company could transfer some
    or all of its loan assets or other receivables to a bankruptcy remote
    entity in an effort to defraud creditors of the company. In addition,
    Section 912 provides that securitized assets may be included in a
    debtor's bankruptcy estate to the extent such assets may be recoverable
    by the bankruptcy trustee under Section 550 of the Bankruptcy Code by
    virtue of evidence as a fraudulent conveyance under Section 548 (a).
        AFGI strongly supports the revisions to Section 541 of the
    Bankruptcy Code contained in Section 912 of H.R. S. 220 relating to
    asset-backed securities. We believe the proposal will provide increased
    certainty to investors and other participants in the asset-backed
    securities market which, in turn, will create further stability in the
    capital markets, and facilitate future asset-backed financings. All of
    this will help maintain and foster an efficient funding source for
    mortgage loans, credit card receivables, automobile loans, and other
    loans available to citizens in small rural communities as well as our
    nation's cities. Section 912 will ensure that consumers small
    businesses and others have the opportunity to access the least
    expensive source of financing, the capital markets.

                                             Fordham University
                                                           New York, NY

    The Honorable Orrin G. Hatch
    Chairman
    Committee on the Judiciary
    United States Senate
    224 Dirksen Building
    Washington, D.C. 20510

    Dear Mr. Chairman,
        Thank you for the opportunity to state my views regarding the
    bankruptcy appellate reform provisions contained in Section 1235 of S.
    220, the ``Bankruptcy Reform Act of 2001.'' I respectfully request that
    these remarks be included in the record of the Committee's hearing
    scheduled for February 8, 2001.
        Section 1235 would enlarge the jurisdiction of the courts of
    appeals to permit direct review of certain bankruptcy court orders.
    Providing a route for parties directly to appeal the final judgments,
    decisions, orders, and decrees of bankruptcy courts will improve
    substantially the expeditious administration of bankruptcy cases and
    the ability of the bankruptcy appellate system to develop binding
    precedent.
        Bankruptcy appeals should be resolved as quickly as
    administratively feasible since delay in the resolution of a bankruptcy
    case invariably reduces distributions to creditors.\1\ The opportunity
    for a direct appeal to the court of appeals provided under section 1235
    would enable litigants who would in any event desire circuit court
    review to avoid the needless delay and expense attendant to a dual
    appeal system.\1\
    ---------------------------------------------------------------------------
        \1\ As early as 1845, the Supreme Court indicated that the
    ``manifest object'' of the federal bankruptcy laws was to provide
    speedy proceedings, and the ascertainment and adjustment of all claims
    and rights in favor of or against the bankrupt's estate, in the most
    expeditious manner. Ex pane Christy, 44 U.S. (3 How.) 292, 314-15
    (1845); see also Bailey v. Glover, 88 U.S. (21 Wall.) 342, 346 (1874)
    (``It is obviously one of the purposes of the Bankrupt law [of 1867]
    that there should be a speedy disposition of the bankrupt's estate '').
        \2\ A recent study conducted by the Federal Judicial Center
    concluded that, [f]or cases that continue on through the court of
    appeals, the time spent at the district covet or BAP adds substantially
    to the total time on appeal--for cases terminated on the merits by the
    courts of appeals in fiscal 1998, the average time spent in the total
    appellate process was more than 27 months (826 days), and the median
    time was more than 22 months (663 days). Judith A. McKenna & Elizabeth
    C. Wiggins, ALTERNATIVE STRUCTURES FOR BANKRUPTCY APPEALS at 3 (Federal
    Judicial Center 2000).
    ---------------------------------------------------------------------------
        The existing two-tiered bankruptcy appellate system undermines the
    development of stare decisis--binding precedent--in the bankruptcy
    context.\3\ While it is clear that the decision of a court of appeals
    binds every federal court within the circuit, courts are irreconcilably
    divided as to whether the appellate decisions of federal district
    courts or bankruptcy appellate panels are binding precedent for the
    circuit. The inability to create binding precedent undoubtedly creates
    a substantial reduction in the benefits of appellate review. If lawyers
    and others cannot predict the state of the law on important bankruptcy-
    related topics, they may be unable to advise clients in structuring
    transactions or settling litigation. Enabling parties the ability to
    appeal certain bankruptcy court orders directly to the courts of
    appeals would improve significantly this lack-of binding-precedent
    problem in the bankruptcy system.\4\
    ---------------------------------------------------------------------------
        \3\ [Dan Bussel]
        \4\ (may not be the only method but probably the most politically
    feasible method] ASBA at 7-8.
    ---------------------------------------------------------------------------
        Two criticisms of proposals to enable direct review of bankruptcy
    appeals in courts of appeals have exaggerated the possible detrimental
    effects of this bankruptcy appellate reform.
        First, some argue that enactment of section 1235 would inundate
    courts of appeals with direct bankruptcy appeals. Careful studies of
    the likely effect of bankruptcy appellate reform on appellate filings
    predict relatively mild increases in the workload of courts of appeals,
    however. Specifically, the Federal Judicial Center, in its recent
    report on ALTERNATIVE STRUCTURES FOR BANKRUPTCY APPEALS, projected that
    proposals to eliminate intermediate level appellate review of
    bankruptcy court decisions (namely, the proposal made by the National
    Bankruptcy Review Commission) would affect total appellate filings by
    between 6.9 and 4.5 percent, with their ``best estimate'' at the low
    end of this range.\5\ These figures compare favorably to 9 percent
    increase in appellate filings estimated by the National Bankruptcy
    Review Commission in their Report to Congress.\6\
    ---------------------------------------------------------------------------
        \5\ Judith A. McKenna & Elizabeth C. Wiggins, ALTERNATIVE
    STRUCTURES FOR BANKRUPTCY APPEALS at 55-59 (Federal Judicial Center
    2000).
        \6\  National Bankruptcy Review Commission, Final Report at 753-54
    (1997).
    ---------------------------------------------------------------------------
        It is important to emphasize, moreover, that both the projections
    of the National Bankruptcy Review Commission and the Federal Judicial
    Center attempt to assess the effect on courts of appeals of eliminating
    intermediate levels of review for all bankruptcy appeals, a result that
    section 1235 of S. 220 does not seek to obtain. Section 1235 instead
    would permit direct review by court of appeals only of bankruptcy court
    orders as to which the district court has not, within a 30-day period,
    rendered an appellate decision or entered an order extending this
    period for cause. In addition, both of these projections estimate the
    immediate affects of bankruptcy appellate reform on the workload of
    courts of appeals. In the long term, however, direct filings should
    diminish as courts of appeals develop a clearer and more predictable
    body of stare decisis in bankruptcy.
        Second, some have argued that bankruptcy appellate reforms
    proposing to permit direct bankruptcy appeals to courts of appeals
    would subject bankruptcy courts' current exercise of jurisdiction to
    the claim that it is unconstitutional.\7\ Of course, any change to the
    complex balance of interests found in the existing bankruptcy
    jurisdictional provisions might invite spurious constitutional
    challenge, but I believe that section 1235 easily would withstand
    constitutional scrutiny.\8\ Supreme Court precedent clearly identifies
    de novo review, rather than ordinary appellate review, as critically
    important to the conclusion that an adjunct court's exercise of
    authority complies with constitutional requirements. For example, in
    U.S. v. Raddatz,\9\ the Supreme Court upheld the delegation of
    authority to untenured magistrates under 28 U.S.C. Sec. 636(c)(1) as
    constitutional and, in so doing, emphasized that ``Congress has
    provided that the magistrate's proposed findings and recommendations
    shall be subjected to de novo determinations `by the judge who.  .
    .then exercise[s] the ultimate authority to issue an appropriate
    order.'' Similarly, in Thomas v. Am,\10\ the Court rejected the
    argument that a rule viewing a failure timely to object to a magistrate
    judge's decision as a waiver of appellate review would violate Article
    III on these terms, emphasizing that
    ---------------------------------------------------------------------------
        \7\ During the 105th Congress, for example, the
    Department of Justice voiced its objection to section 411 of H.R. 3150
    (which would have eliminated all intermediate levels of review of
    bankruptcy court orders), urging Congress ``not to lessen district
    court review and remove this potentially significant basis for the
    constitutionality of the bankruptcy court's exercise of judicial
    power'' Letter from Ann N. Harkins, Acting Assistant Attorney General,
    to Rep. Henry J. Hyde (May 7, 1998). Section 411 did not survive the
    conference on H.R. 3150. See also John P. Hennignan, Jr., The Appellate
    Structure Regularized: The NBRC's Proposal, 102 DICK. L. REV. 839
    (1998) (``There is a plausible argument that the constitutionality of
    the present system depends upon classifying bankruptcy judges as
    adjuncts to the district courts and bypassing those courts on appeal
    obviates that classification.'').
        \8\ For a more detailed discussion of these constitutional issues,
    see Susan Block-Lieb, Assessing the Constitutionality of Proposed
    Reforms to the Bankruptcy Appellate Process, Appendix C to Judith A.
    McKenna & Elizabeth C. Wiggins, ALTERNATIVE STRUCTURES FOR BANKRUPTCY
    APPEALS at 93-107 (Federal Judicial Center 2000).
        \9\ 447 U.S. 667 (1980).
        \10\ 474 U.S. 140 (1985).
    ---------------------------------------------------------------------------
        [t]he waiver of appellate review does not implicate Article III,
    because it is the district court, not the court of appeals, that must
    exercise supervision over the magistrate.\11\
    ---------------------------------------------------------------------------
        \11\ Id. at 153-54. See also Briney v. Burley, 738 F.2d 981, 986
    (9th Cir. 1984) (``Because there is no constitutional right
    to an appeal,.  .  .a fortiori there is no constitutional right to two
    levels of appeal.  .  .by an Article III judge.'').
    ---------------------------------------------------------------------------
        Moreover, it is important to re-emphasize that section 1235 would
    not altogether eliminate intermediate appellate review of bankruptcy
    orders. It would provide for direct review by courts of appeals only in
    the event that a district court did not enter, within a 30-day period,
    either a decision on the appeal or an order extending such period for
    cause. Presumably, a significant percentage of district courts will be
    able to render their appellate decisions within this 30-day period. In
    addition, section 1235 would require all parties to the appeal to
    consent to direct review by the court of appeals. The Supreme Court
    repeatedly has emphasized the significance of litigant consent in this
    context in that, much like other constitutionally protected individual
    rights, an individual's interest in a fair and independent judiciary is
    subject to waiver.\12\
    ---------------------------------------------------------------------------
        \12\ See, e.g, Commodity Futures Trading Comm'n v. Schor, 478 U.S.
    833, 850 (1986).
    ---------------------------------------------------------------------------
        The process by which bankruptcy appeals are resolved is critically
    important to the administration of bankruptcy cases. Section 1235 of S.
    220 represents a cautious improvement over the existing arcane
    bankruptcy appellate provisions in that it would, under limited
    circumstances, permit courts of appeals directly to review certain
    bankruptcy court orders. Direct review would expedite resolution of
    bankruptcy appeals and strengthen both the quality and quantity of
    binding bankruptcy precedent. Direct review would not deluge courts of
    appeals with bankruptcy appeals and would not render the bankruptcy
    court system unconstitutional.
        Thank you for your consideration. Should you have further questions
    on my views regarding these or other bankruptcy appellate reforms,
    please feel free to contact me at (212) 636-6782.
                Sincerely,
                                               Susan Block-Lieb

                    Statement of the Bond Market Association

        The Bond Market Association appreciates the opportunity to comment
    on proposed reforms to the bankruptcy laws. The Bankruptcy Reform Act
    of 2001 (S. 220) includes several provisions that would help insulate
    the financial system from systemic risk-the risk that the failure of
    one market participant could ripple through the capital markets and
    bring down other participants. The Bond Market Association represents
    securities firms and banks that underwrite, trade, and sell debt
    securities both domestically and internationally. The Association's
    membership collectively accounts for approximately 97 percent of the
    nation's bond underwriting activity.
        We commend Senator Hatch for calling this hearing and for his
    commitment to comprehensive bankruptcy reform early in the current
    congressional session. Last year's bankruptcy bill passed both houses
    of Congress by wide margins, and we are hopeful that this year's bill
    will be enacted quickly.
        In this statement, the Bond Market Association focuses on
    provisions in S. 220 concerning cross-product netting, closeout rights
    and asset-backed securities (ABS).
                                I. Introduction
        Certain financial transactions involve ongoing economic
    relationships or commitments to be fulfilled in the future. For
    example, risk management tools such as forward contracts and swaps are
    based on contractual agreements between parties to transfer assets or
    payments at some future time. Repurchase agreements, which are
    important sources of liquidity in the debt markets and, to an
    increasing degree, in the equity markets, involve financial commitments
    that must be fulfilled at a later date. In these important market
    activities which can involve huge sums and concentrated exposures, the
    inability of one party to exercise its contractual ``self-help'' rights
    in the event of the insolvency of the other party could cause ripple
    effects by undermining the financial condition of the nonbankrupt party
    (and its counterparties) and the markets more generally.
        Recognizing the important role of these transactions in capital
    formation and market liquidity and the potential for a chain reaction
    of insolvencies should non-bankrupt parties' contractual self-help
    rights be impaired, Congress has included provisions in the Bankruptcy
    Code and the bank insolvency laws that expressly protect the exercise
    of such rights in the event of bankruptcy or insolvency. However, it
    has been almost ten years since the last legislative update to the
    safe-harbor provisions. The financial markets have evolved during that
    time in ways that leave various transactions and parties subject to
    legal uncertainty. As more types of market participants have engaged in
    a broader range of transactions, statutory inconsistencies have
    surfaced that make it difficult to conclude that Congress's goal of
    minimizing systemic risk has been fully achieved through the existing
    market safe harbors. Important technical corrections are needed to
    minimize systemic risk in light of market developments.
        The Bankruptcy Code should also be amended to protect and enhance
    the important role of the asset-backed securitization process. Asset
    securitizations, which provide a secondary market for mortgage,
    consumer, commercial and industrial loans and other debt obligations,
    are multi-stage transactions where the integrity of securities payment
    commitments rests on the finality of earlier transfers of underlying
    assets. An efficient secondary market for debt obligations lowers the
    cost and increases the availability of capital. This translates into
    more jobs for Americans. Amendments to increase market efficiency and
    provide comfort for investors will not only enhance the development of
    future asset-backed securitizations, they will provide a safeguard
    against market turmoil should a seller of financial assets become the
    subject of proceedings under the Bankruptcy Code and attempt to disrupt
    the cash flow on assets that were securitized.
        The comprehensive bankruptcy bills currently pending in Congress
    would substantially improve the statutory regime that governs financial
    transactions when a party fails to meet its payment obligations. The
    Bankruptcy Reform Act of 2001 (S. 220) and the Bankruptcy Abuse
    Prevention and Consumer Protection Act (H.R. 333) are identical to the
    bankruptcy conference report that was approved by a wide bipartisan
    majority in the House and Senate last year.
        This legislation would harmonize the Bankruptcy Code and bank
    insolvency laws governing swaps, repurchase agreements, securities
    contacts, forward contracts, and commodity contracts. They would also
    provide a safe-harbor in the Bankruptcy Code for ABS transactions. The
    Bond Market Association urges Congress to enact the full set of
    bankruptcy and insolvency law changes that are needed to protect modern
    financial markets. These proposed changes are entirely consistent with
    many statutory provisions that have already been enacted, and are in
    the nature of technical corrections.
                II. The Current Safe Harbors Need to be Updated
                               a. swap agreements
        Swap agreements are privately negotiated contracts between parties
    to exchange payments under specified conditions. The parties'
    obligations are linked to some index, commodity price, interest rate,
    currency or other indication of economic value. In an interest rate
    swap, for example, two parties agree to exchange payments based on some
    agreed upon notional principal amount. However, principal does not
    typically change
        hands in a swap contract. It merely serves as the reference for the
    calculation of the payments to be made.
        The primary purpose of swaps is risk management. The universe of
    parties actively engaged in swaps is expansive and growing: banks,
    securities firms, mutual funds, pension funds both public and private,
    manufacturing firms, and state and local governments, just to name a
    few. Virtually all significant commercial enterprises face certain
    risks that can be managed through the use of swaps. In the example that
    follows, Party B attempts to manage its exposure to changes in interest
    rates through the use of an interest rate swap:
    Example 1. Two parties to an interest rate swap agree to exchange
            payments based on a $1 million notional amount. Party A agrees
            to pay a fixed rate of seven percent, and Party B agrees to
            make floating payments based on some market index. If payments
            are exchanged once per year, Party A would pay Party B $70,000
            (seven percent of $1 million) and Party B would pay Party A
            $40,000 in the first year (four percent of $1 million),
            assuming that the floating rate index were four percent at the
            time of calculation. In practice, the payments are netted so
            that Party A simply pays Party B $30,000, or $70,000--$40,000.
            (In this example, Party B may have floating rate assets and
            fixed rate liabilities, and it desires to hedge that mismatch.
            In this example, the payment that Party B receives makes up for
            the reduced return Party B receives on its floating rate
            assets, allowing it to satisfy its fixed rate liabilities.
            Party A may be a dealer, who hedges its position by taking an
            offsetting position, either in the swaps market or in another
            fixed income market.)
        The fundamental contractual terms in a swap for the exercise of
    remedies in the event of bankruptcy or insolvency provide for ``close-
    out,'' ``netting'' and foreclosure. Close-out involves the termination
    of future obligations between the parties and the calculation of gain
    or loss. Netting involves offsetting the parties' gains and losses to
    arrive at a net outstanding amount payable by one party to the other.
    Foreclosure involves the use of pledged assets to satisfy the net
    payment obligation. The ability to execute this process swiftly is key
    to the financial markets and the solvency of its participants due to
    the potential exposure a counterparty in such transactions has to
    market risks and the possibility of changes in the values of financial
    contracts and collateral due to market movements. The inability of a
    financial market participant to exercise these remedies promptly could
    impair its liquidity and solvency.
        The following is a basic example of the close-out, netting and
    foreclosure process:
    Example 2. Party A and Party B enter into two interest rate swaps at
            different times (Swap X and Swap Y). Both contracts contain
            provisions that allow for close-out, netting and foreclosure
            and are in effect when Party A becomes insolvent. At the time
            of Party A's insolvency, Party A's mark-to-market loss under
            the terms of Swap X is $30 million and its mark-to-market gain
            under the terms of Swap Y is $20 million. Through the process
            of close-out and netting, the swaps are terminated and Party A
            owes Party B $10 million. If Party A had pledged $15 million of
            collateral to Party B, Party B would foreclose on the
            collateral, use $10 million to satisfy Party A's obligation,
            and return $5 million to Party A.
        If Party A became subject to a proceeding under the Bankruptcy
    Code, Party B would be entitled under current law (Sections 362(b)(17)
    and 560 of the Bankruptcy Code) to exercise its self-help close-out,
    netting and foreclosure remedies as described above. If Party A were an
    FDIC-insured bank that became subject to a receivership (and Swaps X
    and Y were not transferred to a successor entity), Party B would be
    entitled under the Federal Deposit Insurance Act to exercise its self-
    help close-out, netting and foreclosure remedies as described above. In
    either case, if Party B were unable to exercise such remedies, its
    liquidity and solvency could be impaired, creating gridlock and posing
    the risk of systemic problems.
        The swaps market has evolved since the protections for interest
    rate and other swaps were first put in place. Parties have learned to
    apply the principles of risk management in many different ways that are
    not expressly covered under the applicable definitions in the
    Bankruptcy Code and the Federal Deposit Insurance Act. As a result, the
    markets in some cases proceed under some degree of legal uncertainty
    regarding the enforceability of certain contracts, even though they are
    economically equivalent to other contracts that are expressly protected
    and pose the same risks that Congress has sought in the past to avoid.
        For example, if in the above hypothetical the two swaps were equity
    swaps in which the payments were calculated on the basis of an equity
    securities index, it is not entirely clear that the transactions would
    fall within the market safe harbor in the Bankruptcy Code or the
    Federal Deposit Insurance Act for ``swap agreements.'' If both of the
    parties were ``financial institutions'' under the Federal Deposit
    Insurance Corporation Improvement Act or the Federal Reserve Board's
    Regulation EE and the swap agreement were a ``netting contract,'' then
    Party B might (although it is not entirely clear) be able to exercise
    close-out, netting and foreclosure rights in respect to the equity swap
    transactions. If one of the parties were not a ``financial
    institution'' or the contract did not constitute a ``netting contract''
    (for example, because it was governed by the laws of the United
    Kingdom), then Party B could be subject, among other things, to the
    risk of ``cherry-picking''--the risk that Party A's trustee or receiver
    would assume Swap Y and reject Swap X, leaving Party B with a $30
    million claim (which would be undersecured because of the impairment of
    netting) and to the risk that its foreclosure on the collateral would
    be stayed indefinitely. This could impair Party B's creditworthiness,
    which in turn could lead to its default to its counterparties. The
    pending legislation would minimize these risks by making clear that an
    equity swap is a ``swap agreement,'' entitled to the same market safe
    harbors as interest swap agreements.
                            b. repurchase agreements
        Repurchase agreements, also known as ``repos,'' are contracts
    involving the sale and repurchase of securities or other financial
    assets at predetermined prices and times. Although structured and
    treated for legal purposes as purchases and sales, economically repos
    resemble secured lending transactions. In economic terms, one
    participant in the repo transaction (the ``seller'') is borrowing cash
    at the same time that the other participant (the ``buyer'') is
    receiving securities. The recipient of cash agrees to pay the cash-to
    repurchase the securities-at a predetermined time and price, including
    a price differential (the economic equivalent of interest). The buyer
    agrees to purchase and later resell the securities.
        According to published reports, on an average day in 2000, nearly
    $1.4 trillion in repos were outstanding between dealers of U.S.
    government and federal agency securities, up from a daily average of
    $310 billion in 1988. Parties also routinely engage in repo
    transactions involving non-agency mortgage-backed securities, whole
    loans and other financial instruments. As a result of recent
    legislative changes enacted as part of the National Securities Markets
    Improvement Act and recent changes to federal margin regulations, repos
    may now involve equity securities. Participants in the repo market are
    diverse, including commercial banks, securities firms, thrifts, finance
    companies, nonfinancial corporations, state and local governments,
    mutual and money-market funds and the Federal Reserve Banks, among
    others.
        In 1984, Congress acted to protect certain types of repos from the
    insolvency of market participants after the 1982 Lombard-Wall
    bankruptcy court decision cast uncertainty on the ability of market
    participants to close out their positions. According to the Senate
    Judiciary Committee report on the 1984 legislation, that decision had a
    distinct adverse effect on the financial markets. At that time,
    Congress granted protection only to repos involving certificates of
    deposit, eligible bankers' acceptances, and securities that are direct
    obligations of, or that are fully guaranteed as to principal and
    interest by, the federal government. In doing so, Congress expressly
    stated that repos serve a vital role in reducing borrowing costs in the
    markets for these securities and sought to encourage market
    participants to use repos with confidence.
        Unfortunately, the list of instruments protected by those 1984
    amendments to the Bankruptcy Code has grown outdated as market
    participants have entered into repos involving a wide range of
    financial assets. Besides repurchase agreements on government and
    federal agency securities, which are covered under the Bankruptcy Code
    and Federal Deposit Insurance Act definitions of ``repurchase
    agreement,'' firms now actively engage in repurchase agreements on the
    foreign sovereign debt of OECD countries, whole mortgage loans, and
    mortgage-backed securities of many types. Under H.R. 333 and S. 220,
    each of these types of repurchase agreements would be covered by the
    market safe harbors provided in the Bankruptcy Code (they are already
    covered by the Federal Deposit Insurance Act and regulations
    thereunder). Market participants could then enter into such
    transactions with greater confidence that they will be easily
    enforceable, improving the liquidity and cost of financing in the
    markets for the underlying instruments, and minimizing systemic risk.
       c. securities contracts, forward contracts and commodity contracts
        Market participants enter into contractual arrangements for the
    sale of securities and commodities where payment and delivery
    obligations are fulfilled at some future date. Securities contracts,
    forward contracts, and commodity contracts all can take many forms, but
    they can also be similar from an economic perspective. ``Securities
    contracts'' include forward purchases of securities, pursuant to which
    the parties agree to exchange payments and securities at a fixed date
    in the future. ``Forward contracts'' include privately negotiated
    arrangements where one party agrees to sell a commodity to another
    party at a fixed price for delivery at a future date. The terms of
    forward contracts can closely resemble those of futures contracts
    (which are ``commodity contracts''). However, forward contracts are not
    traded on commodity exchanges under standardized terms and the parties
    envision actual delivery of the underlying commodity. Despite the
    economic similarities of securities contracts, forward contracts and
    commodity contracts, the Bankruptcy Code and the Federal Deposit
    Insurance Act are inconsistent in their treatment of these
    transactions. Under the Federal Deposit Insurance Act, any counterparty
    can close out and net obligations under all securities contracts,
    forward contracts or commodity contracts it may have outstanding with
    the FDIC-insured bank in a liquidating receivership. However, if the
    failing counterparty is a debtor subject to the Bankruptcy Code, the
    enforceability of close-out provisions depends on a number of factors,
    including the type of counterparty, and the type of contract involved.
    In order to close out and net ``securities contracts,'' the non-
    bankrupt counterparty must be a ``stockbroker,'' ``financial
    institution'' or ``securities clearing agency.'' In order to close out
    and net ``forward contracts,'' the non-defaulting party must qualify as
    a ``forward contract merchant.'' A few examples illustrate these
    differences:
        Example 3. Party A, a mutual fund, and Party B, a securities
    dealer, have two outstanding contracts for the purchase of securities,
    one that is in-the-money to Party A, one that is out-of-the-money to
    Party A. If Party B becomes the subject of proceedings under the
    Bankruptcy Code, Party A would not be able to close out the contracts
    and net its obligations to Party B under the out-of-the-money contract
    against Party B's obligations under the in-the-money contract (unless
    it had acted through a bank agent). However, if it is Party A that
    becomes the subject of proceedings under the Bankruptcy Code, Party B
    would be able to close out the transactions and net its obligations.
    This is because Section 555 of the Bankruptcy Code allows liquidation
    of securities contracts only by stockbrokers, financial institutions
    and securities clearing agencies, none of which includes the mutual
    fund (unless it had acted through a bank agent).
        Example 4. Now assume that in the above example Party B is an FDIC-
    insured depository institution. If Party B becomes the subject of
    receivership proceedings and the securities contracts with Party A are
    not transferred to a successor institution, Party A will be able to
    close out the transactions and net the obligations thereunder. This is
    because the Federal Deposit Insurance Act, since 1989, contains no
    counterparty restrictions.
        Example 5. Party A, the mutual fund, and Party B, an affiliate of a
    securities dealer, have two outstanding forward foreign exchange
    contracts. If Party B becomes the subject of proceedings under the
    Bankruptcy Code, Party A would be able to close out and net the foreign
    exchange transactions. This is because Section 556 of the Bankruptcy
    Code allows liquidation of ``forward contracts'' (the foreign exchange
    transactions) by forward contract merchants, a classification that
    includes the mutual fund. (Note that the forward foreign exchange
    contracts would also be ``swap agreements,'' and the mutual fund, as a
    ``swap participant,'' could exercise its rights on that basis as well.
    Other ``forward contracts'' would not qualify as ``swap agreements.'')
        Thus, parties of similar size who enter the markets with equal
    frequency and in the same manner enjoy different degrees of protection
    under the Bankruptcy Code and the Federal Deposit Insurance Act. This
    makes no sense from the point of view of the reduction of systemic
    risk--the failure of these market players could trigger the same kind
    of chain reaction that a bank, broker-dealer or clearing agency failure
    could trigger. The pending legislation would improve the current
    situation by making certain technical definitional changes under the
    Bankruptcy Code (to bring it closer to the Federal Deposit Insurance
    Act). The amendments would expand the universe of counterparties whose
    contractual rights would be enforceable. In addition to stockbrokers,
    financial institutions, registered investment companies and securities
    clearing agencies, large and sophisticated market participants would be
    able to close out their securities contracts, forward contracts and
    commodity contracts against Bankruptcy Code debtors. Such
    counterparties would be defined as ``financial participants'' under the
    Bankruptcy Code through certain quantitative tests modeled on the
    Federal Reserve Board's Regulation EE. Once amended, the counterparty
    limitations under the Bankruptcy Code would have a more rational scope
    than they do under current law.
                            d. cross-product netting
        Financial market participants often have a wide range of
    transactions outstanding with one another at any given time. Thus, a
    given party's exposure to the risk of default by another party may be
    understood only by considering the total value of the payments that
    party expects to receive and pay under all of the various contracts.
    The Federal Deposit Insurance Act reflects an understanding of this and
    permits the netting of obligations stemming from one type of
    ``qualified financial contract'' against obligations stemming from
    another type of ``qualified financial contract.'' This practice, known
    as ``crossproduct'' netting, permits more rational risk management
    practices and allows market participants to resolve whatever problems
    arise from the insolvency of one of their counterparties in a more
    orderly fashion. Cross-product netting also reduces the likelihood of
    systemic risk, as it allows the non-bankrupt counterparty to
    crystallize its exposure and not be treated as a secured creditor with
    an interest in cash collateral subject to the automatic stay.
        Cross-product netting is also permitted under the Bankruptcy Code,
    but to a lesser degree. Parties can net their obligations under
    securities contracts, forward contracts and commodity contracts against
    one another. It is unclear whether cross-product netting is permitted,
    however, when the contracts involved are swaps and repurchase
    agreements.
        Example. Party A, a securities dealer, and Party B, a large
    corporation, have an outstanding securities contract that upon close-
    out is profitable for Party A. The parties also have an outstanding
    forward contract that upon close-out is profitable for Party B. When
    Party B becomes the subject of a proceeding under the Bankruptcy Code,
    Party A would be able to close out each of the contracts and offset its
    obligation to pay Party B under the forward against Party B's
    obligation to Party A under the securities contract.
        Example 7. Party A and Party B have an outstanding swap that upon
    close-out is profitable for Party A. The parties also have an
    outstanding repurchase agreement under which Party A holds securities
    purchased from Party B that upon close-out is profitable to Party B
    (i.e., the value of the securities exceeds the repurchase price). If
    Party B becomes the subject of proceedings under the Bankruptcy Code,
    Party A would not clearly be able to offset the excess repo proceeds
    against Party B's outstanding obligation under the swap. At worst,
    Party A would be treated as a secured creditor with a security interest
    in the repo proceeds. Its rights could, however, be subject to the
    automatic stay, thereby impairing its liquidity and creating the
    potential for systemic risk.
        There is no plausible rationale for treating cross-product netting
    between securities, forward and commodity contracts differently from
    cross-product netting between those contracts, swap agreements and
    repurchase agreements. These anomalies emerged over time, as various
    protective provisions were added to the Bankruptcy Code to protect
    various types of markets. (Because the ``qualified financial contract''
    provisions of the Federal Deposit Insurance Act were enacted at the
    same time, no such anomalies exist in those provisions.) However, the
    capital markets have grown and matured to such an extent that various
    types of market participants now engage in many types of transactions,
    and it is time for the market safe harbors to be rationalized and made
    consistent in their application to all financial products for all
    participants. Wider and more certain cross-product netting in cases of
    bankruptcy should allow parties to enter into additional types of
    transactions with the same counterparty without necessarily increasing,
    on a net basis, their overall credit exposure or risk to the markets as
    a whole. Indeed, some cross-product transactions will serve to reduce a
    counterparty's overall risk, facilitating better risk management and
    reducing overall risk in the financial markets.
                   III. Mortgage- and Asset-backed Securities
        The process of assembling pools of financial assets and selling
    securities with payments derived from the assets' cash flows is known
    as ``securitization.'' Almost any financial asset can be securitized.
    The earliest examples were home mortgage loans, but today financial
    services firms securitize car loans and leases, credit card
    receivables, business loans and many other assets generating current or
    future cash flows. The proceeds from sales of securities supported by
    those assets make their way back into the capital markets and become
    available for new lending to homeowners, car owners, consumers,
    businesses and myriad other borrowers. A larger supply of lendable
    capital means that home buyers, car buyers, consumers and companies can
    all borrow at lower interest costs. A simple example demonstrates the
    process of financial asset securitization:
        Example 8. Party O originates mortgage loans with a total principal
    amount of $100 million and sells the whole loans to a special-purpose
    vehicle (an ``SPV ''). The SPV issues mortgage-backed securities (``MBS
    ''), the payments on which are supported by cash flows from the
    mortgage loans. As borrowers make principal and interest payments on
    their mortgage loans, these payments pass through a servicer and
    eventually are distributed to the MBS investors. The proceeds of the
    sale of the loans by Party O to the SPV are available for new loans to
    home buyers.
        Certain types of mortgage-backed and asset-backed transactions
    raise issues under the Bankruptcy Code that make them more costly or
    difficult to complete. The central issue in such situations is the risk
    that securitized assets transferred to a special-purpose vehicle, which
    then issues securities backed by such assets, will be considered part
    of the bankruptcy estate of the party selling them into the pool if
    that seller becomes insolvent. Such treatment could subject the cash
    flows from the securitized assets to the automatic stay and inhibit the
    timely distribution of principal and interest payments to investors in
    the subsequently issued asset-backed securities. It could also subject
    the pool of transferred assets to attack by a bankruptcy trustee who
    might seek to reclaim them for the bankrupt's estate for the benefit of
    general creditors, denying beneficial holders of asset-backed
    securities the primary source of repayment that was intended to be
    provided by these securitized assets. Consider the following
    transaction:
        Example 9. Party A originates mortgage loans with a total principal
    amount of $100 million and sells the loans to Party B. Party B sells
    two classes of asset-backed securities based on the pool. The Class A
    securities, totaling $90 million, have a senior claim on the cash flows
    generated by the mortgage loans and receive an investment-grade credit
    rating. The Class B securities, totaling $10 million, are subordinated
    to the Class A securities and not rated investment-grade. Assume Party
    B obtained the mortgage loans from Party A in exchange for (i) the $90
    million raised through the sale of the Class A securities and (ii) the
    Class B certificates. If Party A becomes insolvent, Party A (as debtor-
    in-possession) or its trustee could attempt to recharacterize the sale
    of the mortgage loans as a pledge to secure a financing, based on Party
    A's retention of the Class B securities. If it were successful,
    notwithstanding that it had received fair value at the outset of the
    transaction and the reasonable expectations of the investors in the
    Class A securities, distribution of the principal and interest payments
    on the loans to the investors would be subject to the automatic stay,
    jeopardizing timely payment to the Class A investors. Such a result
    would not only harm the particular investors in question, it could have
    a material, negative effect on the mortgage-backed and asset-backed
    securities markets more generally.
        In order to obtain sales treatment under the relevant accounting
    standards, participants in mortgage-backed and asset-backed
    securitization transactions must obtain assurances from counsel that
    the sale of assets will be final under applicable bankruptcy law. Such
    legal advice is referred to as a ``true sale opinion.'' Unfortunately,
    there is a lack of guiding judicial precedent regarding what
    constitutes such a true sale of assets. The considerations in the
    analysis are highly subjective and depend on a qualitative assessment
    of a wide variety of facts and circumstances. For these and other
    reasons, any true sale opinion will generally be a reasoned one, with
    various assumptions as to factual matters and conclusions that
    introduce an unnecessary degree of legal uncertainty in the asset-
    backed market. As a result, for some types of transactions, true sale
    opinions can be extremely difficult, costly, and in a few cases,
    impossible to render.
        The FDIC recently released for comment a proposed Policy Statement
    that would clarify that, with respect to certain securitizations by
    FDIC-insured institutions, the FDIC would not seek to reclaim assets
    that were the subject of the securitization. In particular, the Policy
    Statement ``provides that subject to certain conditions, the FDIC will
    not attempt to reclaim, recover, or recharacterize as property of the
    institution or the receivership estate.  .  .the financial assets
    transferred.  .  .in connection with the securitization.'' 63 Fed. Reg.
    71926 (December 30, 1998). Similar action is needed to cover transfers
    by market participants who later become debtors under the Bankruptcy
    Code. In an effort to clarify the rights of investors in asset-backed
    securities and bring the benefits of securitization to a broader
    spectrum of market activity, H.R. 333 and S. 220 include a series of
    amendments to the Bankruptcy Code that would specifically exempt
    certain transferred assets from a debtor's bankruptcy estate and
    clarify whatever ``true sale'' confusion may exist. The amendments
    would be narrowly tailored to apply only to eligible assets transferred
    as part of a bona fide securitization involving the issuance of
    securities rated investment grade by at least one nationally recognized
    rating organization. Through a series of definitions, the proposed
    amendments would exclude from a debtor's estate any asset ``to the
    extent that such eligible asset was transferred by the debtor, before
    the date of commencement of the case, to an eligible entity in
    connection with an asset-backed securitization.''
        These changes would not only reduce transaction costs for future
    mortgage- and asset backed securitizations, they would minimize the
    likelihood that an insolvent debtor could attempt to reclaim already--
    securitized assets in a proceeding under the Bankruptcy Code,
    notwithstanding the structural safeguards designed to avoid such a
    result. Even if such a debtor were not successful, the possibility of
    recharacterization could have a significant adverse impact on the
    markets in mortgage- and asset-backed securities.
                                 IV. Conclusion
        The above examples illustrate the need for Congress to enact the
    financial contract provisions of S. 220 and H.R. 333, which would make
    important, but highly technical changes to the Bankruptcy Code and the
    Federal Deposit Insurance Act. These changes are consistent with the
    existing market safe harbors in the Bankruptcy Code and the Federal
    Deposit Insurance Act and will encourage broader use of sound risk
    management techniques and help to minimize overall systemic risk. We
    urge Congress to act quickly on this important legislation.

                 Statement of Commercial Law League of America

    The Honorable Orrin G. Hatch
    Chairman of the Judiciary Committee
    The United States Senate
    131 Russell Senate Office Building
    Washington, DC 20510

    Dear Senator Hatch:

        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 in interest.
        The Bankruptcy Section of the League 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.
        In the Senate and the House of Representatives, S. 220 and H.R. 333
    have been respectively introduced to reform the nation's bankruptcy
    laws. Each is virtually identical to H.R. 2415, which passed the
    106th Congress, but did not become law due to a presidential
    veto. Although the League has prepared a position paper addressing its
    foremost substantive concerns with S. 220 and H.R. 333, we believe it
    is necessary to address procedural and substantive concerns that have
    arisen in that past and that, in all likelihood, will persist as S. 220
    and H.R. 333 are considered.
        Last session's H.R. 2415 reflected a compromise between H.R. 833
    and S. 625, each of which passed its respective Congressional house but
    with some significant substantive differences. Unfortunately, the
    compromise that produced H.R. 2415 was not the product of reasoned
    debate because the legislation was never considered by a conference
    committee consisting of members of the Judiciary Committee.
        The need for a full conference cannot be overemphasized. Bankruptcy
    law and legislation is highly specialized and complex, requiring
    intimate knowledge of the inner workings of the Bankruptcy Code and
    Rules, and their interrelationship among the various parties in
    interest. Further, to the League's knowledge, not a single bankruptcy
    organization, judges group or academicians has endorsed the current
    versions of the bills or their predecessors. Most disturbing is that
    the recommendations of the Bankruptcy Review Commission have been all
    but ignored in the current legislation.
        While extensive attention has been given to the consumer aspects of
    bankruptcy reform, the business bankruptcy provisions have varied from
    bill to bill and have not been afforded the same deference. With an
    economic downturn already occurring, business bankruptcies inevitably
    will rise, making it more critical that any business bankruptcy reform
    be well reasoned and fully considered.
        The business provisions of H.R. 833 and S. 625 were fundamentally
    flawed. As extensively addressed in the League's previous position
    papers, both pieces of legislation created far more problems than they
    remedied. These problems are carried forward in the recently re-
    introduced versions of H.R. 833 and S. 625.
        For example, the legislation creates an untested procedure for the
    reorganization of small businesses. The problems begin with the
    commencement of the bankruptcy case be case the definition of ``small
    business,'' tied to the amount of debt, would include an overwhelming
    majority of all business bankruptcies. Designed with a preference for
    efficiency over practicality, the small business provisions completely
    ignore the realities involved and will effectively eliminate the
    possibility of an otherwise viable reorganization in a great number of
    cases, causing creditors to go unpaid and workers to lose their jobs.
        Retail bankruptcies are doomed to failure. The proposed legislation
    grants lessors of commercial real estate virtual veto power over lease
    assumption and rejection, rather than allowing the bankruptcy courts to
    continue to exercise their discretion regarding the time necessary for
    a debtor to make decisions about whether or not to retain leased
    property. Lessors will, in all likelihood, use their extraordinary
    power to exert concessions from debtors as the quid pro quo for the
    requested extensions, to the detriment of all other parties in
    interest. This protection is, of course, in addition to the already
    preferential treatment that commercial real estate lessors currently
    enjoy under the Bankruptcy Code, which requires debtors to timely remit
    lease payments or risk eviction from the premises. Equally disturbing
    is that lessors' administrative expense claims are proposed to be
    expanded. This further enhances lessors' rights, correlatively
    compounding the harm to all other creditors. Strenuous objection has
    been raised to this provision and virtually no one, other than the
    shopping center lobby, supports it.
        Most critically, the legislation does not address the single
    largest defect in the business bankruptcy process--venue. The corporate
    chapter 11 has become an embarrassment to our system of law. Due
    process considerations have been undermined and access to the courts by
    creditors and parties in interest has effectively been eliminated,
    based on a debtor's current ability to file in its state of
    incorporation, rather than where its principal assets or principal
    place of business is located. This has resulted in over 40%of the
    business bankruptcy cases filed in 1999 having been filed in Delaware.
    Delaware courts are now determining from a remote location, issues
    which directly impact the community where the debtor is actually
    located and conducts its business. The inequitable nature of this
    process is heightened, as the largest bankruptcy cases are now being
    filed in Delaware. Whole communities, which are dependent on these
    mega-employers, are affected without having any local presence or real
    access to the process. Taxing authorities, who do not routinely utilize
    ``local counsel'' are being railroaded in the claims process, to the
    detriment of their citizens. Local community issues, such as hospital
    bed availability, nursing home care and public services such as garbage
    removal and utility service, are being determined by those who are
    least affected by the bankruptcy courts. Public confidence in the
    bankruptcy process is eroding, and justifiably so, when ``notice'' and
    ``an opportunity to be heard'' are nothing but hollow gestures.
        These and a plethora of other troublesome provisions demonstrate
    the inherent complications involved in the process of reforming the
    Bankruptcy Code on the scale contemplated by the most recent bankruptcy
    reform legislation. The please of those with an intimate understanding
    of the bankruptcy system, including judges, practitioners, trustees,
    and academics, to more carefully consider the effects of the reform
    legislation have repeatedly fallen on deaf ears. Bankruptcy reform
    generally has yet to be debated in an appropriate conference,
    independent of other legislation, where its problematic aspects can be
    considered, including proper analysis of the harmful, unintended
    consequences that surely will befall debtors, creditors and the process
    as a whole. Real bankruptcy reform need not be so disruptive and should
    never depart so far from the longstanding and bedrock principle of
    bankruptcy--fair and balanced treatment of all parties in interest.
        The League appreciates the opportunity to set forth and discuss
    these significant concerns regarding proposed bankruptcy reform and the
    process by which such reform is being considered. We welcome the
    invitation to work with you and the other members of Congress to
    achieve effective, balanced and meaningful bankruptcy reform for all
    parties in interest.
                Respectfully submitted,
                                                 Jay L. Welford
                                        Co-Chair, Legislative Committee

                                       Judith Greenstone Miller
                                        Co-Chair, Legislative Committee

                                                  Mark Shieriff
                                                              President

                        Commercial Law League of America

    Position Paper on S. 178 and H.R. 188 Permanent Reenactment of Chapter
            12 of Title 11, United States Code Submitted to the United
            States House of Representatives and the United States Senate by
            The Commercial Law League of America and Its Bankruptcy Section

        The Commercial Law League of America (``League ''), founded in
    1895, is the nation's oldest organization of attorneys and other
    experts in credit and finance actively engaged in the field 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 in interest.
        The Bankruptcy Section of the League 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 strongly supports H.R. 188 and S. 178, which would make
    permanent Chapter 12 of the Bankruptcy Code (the ``Code ''), the
    provisions authorizing family farmer reorganization. The League urges
    prompt enactment of this legislation.
        Since the 105th Congress, the existence of the family
    farmer reorganization provisions have been tenuous, subject to a series
    of sunset dates imposed by temporary extensions. During this time, the
    intent of Congress to make Chapter 12 permanent has been clear.
    Fulfilling this intent has been repeatedly stalled, however, because
    the necessary provisions to make Chapter 12 permanent have been
    included in controversial bills that sought extensive reform of the
    Code generally.
        By all accounts, Chapter 12 has proven successful, enabling family
    farmers to reorganize within a specifically tailored bankruptcy
    structure. Prior to the enactment of Chapter 12, many family farmer
    bankruptcies failed simply because the existing Code provisions were
    unworkable in the unique circumstances involved in farming operations.
        No evidence has been presented that Chapter 12 is not accomplishing
    the purpose for which it was designed. It appears to be a victim of the
    ongoing discussions relative to much more comprehensive and more
    controversial bankruptcy legislation.
        Enacting the permanent extension of Chapter 12, as proposed in H.R.
    188 and S. 178, will ensure that family farmers in need of
    reorganization are not denied meaningful bankruptcy relief. Too much
    uncertainty arises for existing Chapter 12 debtors from temporary
    extensions when, as in the past, gap periods occur during which there
    is no authority to utilize the chapter's provisions. A permanent
    extension of Chapter 12 independent of any other reform of the Code is
    the only means of protecting all parties involved, including current
    and potential family farmer debtors, as well as their creditors.
        The League appreciates the opportunity to comment on H.R. 188 and
    S. 178. We would be happy to address the position taken by the League
    and its Bankruptcy Section in this Position Paper or to respond to
    questions or concerns raised by this analysis.

                    Statement of Consumer Mortgage Coalition

        Mr. Chairman, the Consumer Mortgage Coalition (``CMC''), a trade
    association of national mortgage lenders and servicers, appreciates the
    opportunity to submit testimony to the Committee on S. 220, the
    ``Bankruptcy Reform Act of 2001.''
            Impact of Bankruptcy In the Residential Mortgage Market
        CMC acknowledges the potential societal benefit in providing relief
    for borrowers who are unable to pay their debts because of legitimate,
    unforeseen circumstances. At the same time, it must be recognized that
    the effect of bankruptcy on home mortgage lenders (``bankruptcy
    severity'') ultimately affects the cost of residential mortgage loans
    or credit availability, or both. In making pricing and underwriting
    decisions, mortgage lenders consider the frequency of bankruptcy
    filings, the delays caused by such filings, the amount of debt
    recovered in bankruptcy, and the legal fees and other transaction costs
    involved. Delays are of particular concern to mortgage lenders because
    they lead to deterioration of the secured residence, which is being
    maintained by a debtor with little or no stake in the property. Too
    often, by the time the automatic stay is lifted by the bankruptcy court
    and the lender is permitted to foreclose upon and sell the residence,
    the proceeds of the sale are insufficient to pay the mortgage loan in
    full. Lenders who want to remain in business spread their mortgage loan
    losses to other borrowers in the form of higher interest rates. Any
    changes in the bankruptcy system that decrease bankruptcy severity will
    ultimately reduce the cost of home mortgages to the general public and
    will benefit creditworthy consumers who are seeking home mortgage
    financing.
                                Abusive Filings
        There are a number of abuses of the bankruptcy process that prevent
    lenders from foreclosing, even when the debtor is clearly unable to pay
    the mortgage debt. Attached to this testimony is a case history
    (Appendix A) which illustrates the reason mortgage lenders are
    concerned with abusive filings. In this case, the debtor was able to
    delay foreclosure for more than a year through the simple technique of
    repeatedly conveying a partial interest in the mortgaged property to a
    third party, who then filed for bankruptcy relief under Chapter 7. The
    filing by the third party triggered the automatic stay, delaying
    foreclosure on the property by two to three months. When the judge
    dismissed the Chapter 7 filed by the third party, the debtor simply
    found another transferee to whom a partial interest was conveyed and
    who filed under Chapter 7 following the conveyance again triggering the
    application of the automatic stay to the mortgaged property.
        In this case example, the debtor was able to obtain nine separate
    delays of the foreclosure sale, using five different transferees. The
    lender was finally able to obtain relief from the automatic stay by
    presenting evidence demonstrating to the court that the addresses--and
    even the existence--of the transferees could not be verified. Even
    after the court granted the motion for relief, the debtor again
    attempted the same technique, transferring a partial interest in the
    mortgaged property to yet another third party who immediately filed
    under Chapter 7. Unfortunately, the practice of transferring partial
    interests in mortgaged property to third parties who in turn file a
    bankruptcy petition to delay foreclosure has become more prevalent over
    the last few years. CMC would be pleased to present additional case
    histories to the Committee or its staff upon request.
        In addition to the third party transferee abuse, a debtor may file
    a Chapter 13 petition, never make a single mortgage payment under the
    plan, voluntarily dismiss the case just before the hearing on the
    lender's motion to lift the automatic stay--and then file another
    petition just before the next foreclosure sale. Although these
    practices should subject the debtor to sanctions, the penalties in the
    current Bankruptcy Code are difficult to enforce.
        S. 220, Mr. Chairman, addresses the above-described filing abuses.
    Section 302 amends Section 362 of the Bankruptcy Code to provide that
    if a case filed by a debtor under Chapters 7, 11 or 13 was dismissed
    and if the same debtor files a second case within a year of the
    dismissal, the automatic stay will terminate within 30 days of the
    filing of the second case unless the court extends the stay upon a
    finding that the second case was filed in good faith.
        In addition, Section 303 of S. 220 addresses the situation in which
    a debtor transfers undivided interest in secured property to third
    party transferees by permitting the bankruptcy judge to grant in rem
    relief from the automatic stay. Properly applied, the in rem relief
    would prevent third party transferees who file a petition in bankruptcy
    from delaying foreclosure on property covered by in rem relief because
    the automatic stay would not apply to the covered property.
                                   Cramdowns
        Several recent decisions have held that a lien on a residence
    securing a mortgage loan is subject to- cramdown in certain
    circumstances. A cramdown can negatively impact the lender's secured
    claim. In a cramdown, the secured claim--the amount due on the mortgage
    loan--is reduced to the amount of the lien that does not exceed the
    market value of the property. The remainder of the claim is considered
    unsecured, which reduces or eliminates its value.
        In addition, the lender's remaining lien under a cramdown is
    subject to restructuring as a secured claim in the Chapter 13 plan,
    which can dramatically reduce its value. There have been cases, for
    example, in which a conventional mortgage loan with equal monthly
    payments to maturity was converted into one with small monthly payments
    and large balloon payment at maturity--which the borrower could not
    realistically be expected to be able to pay.
        The United States Supreme Court in Nobelman v. American Savings
    Bank, 508 U.S. 324 (1993), disallowed cramdowns under a Chapter 13 on
    residential mortgage loans that constituted the debtor's principal
    residence. However, courts, such as the Third Circuit Court of Appeals
    in Hammond v. Commonwealth Mortgage Corporation of America, 27 F.3d 52
    (3d Cir. 1994), have subsequently narrowed the reach of the Nobelman
    decision. Section 1322(b)(2) of the Bankruptcy Code provides that a
    Chapter 13 plan may not cramdown a ``claim secured only by a security
    interest in real property that is the debtor's principal residence.''
    (Emphasis added). The Third Circuit in Hammond narrowly read the term
    ``only'' and held because the mortgage lien on the principal residence
    contained language creating a security interest in fixtures, rents,
    escrow balance and the like--in addition to the lien on the real
    property--the mortgage lien was no longer entitled to protection from
    cramdowns under Section 1322(b)(2) of the Bankruptcy Code. Almost all
    residential real estate mortgages--including the standard Federal
    National Mortgage Association (Fannie Mae) and the Federal Home Loan
    Mortgage Corporation (Freddie Mac) mortgage forms--contain language
    creating a security interest in fixtures, escrow balances, etc. The
    practical effect of decisions, such as Hammond, is to nullify the
    cramdown protections in the Bankruptcy Code as enacted by Congress and
    interpreted by the U.S. Supreme Court in Nobelman for the overwhelming
    majority of residential mortgages.
        There are a number of reasons for according residential mortgage
    loans protection from the cramdown provisions of Chapter 13.
     Protecting residential mortgage loans against cramdown
            encourages lenders to make higher loan-to-value loans and to
            lend to borrowers to whom they might otherwise not lend at all.
            This in turn makes possible wider home ownership consistent
            with the national policy evidenced by tax benefits favoring
            home ownership and government-sponsored mortgage insurance
            programs.
     Prohibiting cramdowns on residential mortgage loans protects
            and supports the secondary market for home mortgages. A sizable
            portion of Fannie Mae and Freddie Mac mortgage loans, together
            with other residential mortgage loans, are sold into the
            secondary market. The existence of the secondary market
            encourages mortgage origination by providing greater access to
            capital with which to fund residential mortgage loans.
     If a debtor is permitted to cramdown a mortgage loan to the
            current market value of the residence securing the mortgage
            loan, he will be able to take advantage of a temporary decline
            in the value of his home to reduce the mortgage lender's
            secured claim. If the residence later increases in value
            following a cramdown, the debtor rather than the lender will
            obtain the benefit of the appreciation. This problem is not
            particularly serious in the case of other consumer collateral
            (such as automobiles or appliances) since those types of
            collateral depreciate in value over time. It is a serious
            problem (and a temptation to the debtor) in the case of a home
            mortgage, since a residence often fluctuates in value over the
            life of a mortgage loan.
     Since the procedures provided by real estate law for
            foreclosing on a residential mortgage loan are typically more
            formal, more cumbersome and provide greater protection to
            borrowers (e.g., through rights of redemption) than is the case
            with other types of consumer collateral, the borrower's need
            for the ability to cramdown a mortgage loan is less and the
            prejudice to the mortgage lender of taking away the protection
            from cramdown, when combined with the stricter limitations on
            the lender's ability to foreclose is greater.
        Perhaps the best argument for protecting residential mortgage loans
    from cramdown was advanced by the Fourth Circuit Court of Appeals in
    its recent decision, Witt v. United Companies Lending Corp. 113 F.3d
    508, (4th Cir. 1997) in which it noted that:
     We recognize that the effect of our decision will require the
            Witts to pay back the full amount of their home mortgage loan,
            making it harder for them to get `a fresh start in life, after
            they have made a good-faith attempt to pay what they can.'
            Report at 32. As Justice Stevens recognized in Nobelman, `[a]t
            first blush it seems somewhat strange that the Bankruptcy Code
            should provide less protection to an individual's interest in
            retaining possession of his or her home than of other assets.'
            Nobelman, 508 U.S. at 332 (Stevens, J., concurring). Permitting
            the bifurcation of home mortgage loans, however, could make
            lenders more hesitant to make such loans in the first place.
            Although a broader reading of [section] 1322(c)(2) might help
            the Witts today, it could make it more difficult in the future
            for those similarly situated to the Witts to obtain any
            financing at all. Congress appears to have designed another
            important section, [section] 1322(b)(2), with this result in
            mind. See id. (stating that [section] 1322(b)(2)'s `legislative
            history indicat[es] that favorable treatment of residential
            mortgagees was intended to encourage the flow of capital into
            the home lending market)'; Perry, 945 F2d at 64 (finding that
            [section] 1322(b)(2) `was intended to make home mortgage money
            on affordable terms more accessible to homeowners by assuring
            lenders that their expectations would not be frustrated');
            Grubbs v. Houston Am. Sav. Ass'n, 730 Fd 236 (5th Cir. 1984)
            (noting that the exception for home mortgages in [section]
            1322(b)(2) `was apparently in response to perceptions, or to
            suggestions advanced in the legislative hearings.  .  .that
            home mortgage lenders, performing a valuable social service
            through their loans, needed special protections against
            modification thereof (i.e., reducing installment payments,
            secured valuations, etc.)'). Witt at page 514.
        Recognizing the importance of protecting residential mortgage loans
    from cramdown under a Chapter 13, Section 306(c) of S. 220 includes
    definitions of ``debtor's principal residence'' and ``incidental
    property'' clarifying that a lender's security interest in incidental
    property that is commonly conveyed with a principal residence to secure
    a mortgage loan will not remove the loan from the cramdown protections
    afforded under Section 1322(b)(2).
        One additional cramdown issue merits consideration of the
    Committee. It relates to confusion that has arisen among various courts
    in differing jurisdictions as to whether mortgage loans secured by
    duplexes, triplexes and four-unit residences are entitled to protection
    from cramdown under Section 1322(b)(2).
        The definition of ``debtor's principal residence'' in Section
    306(c)(1) of S. 220 reads as follows:
    (13A) `debtor's principal residence'--
     (A) means a residential structure, including incidental property,
            without regard to whether that structure is attached to real
            property; and
     (B) includes an individual condominium or cooperative unit, a mobile
            or manufactured home, or trailer;
        Language should be added to subsection (A) of the definition of
    ``debtor's principal residence'' to make it clear that the definition
    includes duplexes, triplexes and four-unit residences. The revised
    subsection (A) would read as follows:
    (A) means a residential structure containing 1 to 4 units, including
            incidental property, without regard to whether that structure
            is attached to real property; and
        The ``1 to 4 units'' language would resolve a conflict in
    jurisdictions. Courts have differed as to whether a duplex, triplex or
    four-unit residence in which the debtor/owner lives in one of the units
    and rents out the remaining units qualifies as a ``debtor's principal
    residence'' protected from cramdown under Section 1322(b)(2). See Lomas
    Mortgage, Inc. v. Louis, 82 F.3d 1 (1st Cir, 1996) in which the First
    Circuit found that a triplex did not qualify as ``debtor's principal
    residence'' under Section 1322(b)(2) and Brunson v. Wendover Funding
    Inc., 201 B.R. 351 (Bankr. W.D.N.Y. 1996) in which the Bankruptcy Court
    for the Western District of New York found that a duplex did qualify as
    ``debtor's principal residence''.
        The First Circuit in Lomas noted that the Supreme Court in Nobelman
    had determined that Congress enacted carmdown protection under Section
    1322(b)(2) to encourage the flow of capital into the home lending
    market and went on to state that:
    If the antimodification provision [Section 1322(b)(2)] is meant to
            encourage home lending, then excluding multifamily houses would
            tend to harm (in revenue terms) those purchasing property in
            urban neighborhoods, where owner-occupied multi-unit housing
            would tend to be more common, and to favor those purchasing
            single-family homes, more common in suburbia. The theory is
            that lenders would face relatively more risk of modification
            [cramdown] in the case of default in urban areas, and interest
            rates on loans in those areas would rise accordingly. Lomas, 82
            F.3d at 6.
        The First Circuit noted that ``extending the antimodification
    provision to multi-family houses would create a difficult line-drawing
    problem. It is unlikely Congress intended the antimodification
    provision to reach a 100-unit apartment complex simply because the
    debtor lives in one of the units.'' Lomas, 82 F.3d at 6.
        The First Circuit ended its decision by noting that ``If we are
    wrong as to what Congress intended [in concluding that the
    antimodification provisions of Section 1322(b)(2) did not protect a
    triplex from cramdown], legislation can provide a correction.'' The
    Burnson court shared the concern of the First Circuit in Lomas, noting
    that the Lomas:
    Court bemoaned a lack of `clear guidance' on the question [of whether a
            multi-family residential property was subject to cramdown] from
            either the language or contemporaneous legislative history of
            Section 1322(b)(2).  .  .This Court shares the frustration of
            numerous other courts in attempting to interpret this statute
            which is impenetrable when sought to be applied to a single
            parcel of land upon which the Debtor resides but which contains
            two or more dwelling units. Brunson, 201 B.R. at 351.
        As the First Circuit noted in Lomas, a number of residential
    properties, particularly in the Northeast, are comprised of duplexes,
    triplexes and four-unit residences. Clarifying that such properties
    would qualify as ``debtor's principal residence'' for purposes of
    Section 1322(b)(2) with the result that mortgage loans secured by
    duplexes, triplexes and four-unit residences would not be subject to
    cramdown--would provide certainty to residential mortgage lenders. Such
    certainty would encourage the continued flow of capital into the 2 to 4
    unit residential market.
        The definition of ``debtor's principal residence'' at Section
    306(c)(1) of S. 220 should be modified to include language making it
    clear that that a ``debtor's principal residence'' for purposes of
    Section 1322(b)(2) of the Bankruptcy Code includes a residential
    ``structure containing 1 to 4 units.''
                                   Conclusion
        Mr. Chairman, CMC is very appreciative of the opportunity to
    present its views on issues of critical importance to the residential
    mortgage industry and to all American homeowners. We look forward to
    working with you and the other Members of the Committee and the staff
    in finalizing legislation to implement necessary and long overdue
    reforms to the Bankruptcy Code.

           Statement of the International Council of Shopping Centers

                                  Introduction
        The International Council of Shopping Centers (ICSC) is pleased to
    present this written statement for the record to the Senate Judiciary
    Committee in conjunction with its February 8, 2001 hearing on the
    Bankruptcy Reform Act of 2001 (S. 220).
        ICSC is the global trade association of the shopping center
    industry. Its 40,000 members in the United States, Canada and more than
    70 other countries around the world include shopping center owners,
    developers, managers, investors, lenders, retailers and other
    professionals. The shopping center industry contributes significantly
    to the U.S. economy. In 1999, shopping centers in the U.S. generated
    over $1.2 trillion in retail sales and over $47 billion in state sales
    tax revenue, and employed over 11 million people.
        First and foremost, ICSC would like to commend Congress, and this
    Committee in particular, for its efforts over the past few years to
    enact meaningful bankruptcy reform legislation. We are hopeful that S.
    220, introduced by Senator Charles Grassley (R-IA), will be swiftly
    enacted so it can end existing abuses of the bankruptcy system.
    Although all of ICSC's concerns are not addressed in S. 220, we believe
    it is a well-balanced piece of legislation and should be approved and
    signed into law as soon as possible.
                Business Bankruptcy Abuses are a Growing Problem
        As we all know, an increasing number of retailers and entertainment
    establishments have been filing for bankruptcy protection over the last
    several years, including Bradlees, Crown Books, Discovery Zone, Edison
    Brothers, Garden Botanika, General Cinema, Montgomery Ward, Paul Harris
    Stores, Planet Hollywood, Service Merchandise, and United Artists, just
    to name a few. According to industry sources, included in the total
    number of businesses filing Chapter 11 bankruptcies in 2000 are 176
    companies with assets totaling $95 billion. It seems as if every week
    another longstanding business is declaring bankruptcy. Furthermore, as
    our nation's economy continues to soften, it is very likely that
    additional businesses--both large and small alike--will be forced to
    seek the protections of Chapter 7 and 11 of the Bankruptcy Code.
        ICSC supports and respects an underlying goal of the bankruptcy
    system that companies facing financial catastrophe should be able to
    reorganize their businesses under Chapter 11. Unfortunately, more and
    more solvent businesses are taking advantage of the system and filing
    for bankruptcy protection in order to accomplish goals that would
    otherwise not be permissible, such as shedding undesirable leases.
        In addition, many U.S. bankruptcy judges and trustees are not
    abiding by existing rules that were enacted by Congress to protect
    shopping center owners. As a result, many shopping center owners are
    losing control over their own properties, neighboring tenants are
    losing business, retail employees are losing jobs or suffering reduced
    working hours, and local economies are being threatened.
       Shopping Centers Need Special Protection Under the Bankruptcy Code
        Bankruptcies pose unique risks and hardships to shopping center
    owners that are not faced by other creditors because such owners are
    compelled creditors to their retail tenants. As a compelled creditor, a
    shopping center owner must, under the Bankruptcy Code, continue to
    provide leased space and services to its debtor tenants without any
    real assurance of payment or knowledge as to whether or when its leases
    will be assumed or rejected or whether its stores will be vacated.
        On the other hand, trade creditors can decide for themselves
    whether or not they want to continue providing credit to its bankrupt
    customers for goods or services. Banks and other lenders are not
    obliged to continue making loans to their clients once they file for
    bankruptcy. Utility companies can demand security deposits before they
    provide additional services to their customers. In fact, some judges
    are granting ``critical vendor motions'' made by certain creditors that
    allow them to receive their pre-petition claims (before all other
    creditors) in exchange for agreeing to provide their goods or services
    to the debtor during bankruptcy.
        Another element unique to shopping center owners is the
    interdependence and synergy that exists between a shopping center and
    its tenants. Owners carefully design a ``tenant mix'' for each of its
    shopping centers in order to maximize customer traffic from its market
    area. The tenant mix includes tenants based on their nature or ``use'',
    their quality, and their contribution to the overall shopping center,
    and is enforced by lease clauses that describe the required uses,
    conditions and terms of operation. Such clauses are designed to prevent
    an owner from losing control over its own property and to maintain a
    well-balanced shopping atmosphere for the local community.
        For example, an owner and a retailer of upscale ladies' shoes may
    enter into an agreement that restricts the tenant, or an assignee, from
    selling low quality, discounted footwear or changing its line of
    business to one that competes with another store in the same shopping
    center. When a use clause is ignored during bankruptcy proceedings, the
    delicate retail balance and synergy that has been painstakingly
    achieved by an owner with its tenants is disturbed and can deal a
    devastating blow to the entire shopping center, and to the community at
    large.
        Acknowledging that shopping center owners are in a truly unique
    position once one of its tenants files for bankruptcy, Congress enacted
    special protections in Section 365 of the Code in 1978 and 1984.
    Unfortunately, many of these laws either have not been enforced or have
    been liberally construed against shopping center owners beyond
    Congress' original intent.
     Leases Need to be Assumed or Rejected within a Reasonable, Fixed Time
                                     Period
        Under Section 365(d)(4), tenants have 60 days after filing for
    bankruptcy to
        assume or reject their leases. If additional time is needed, the
    court may extend the time period ``for cause''. Unfortunately, in most
    cases, the ``for cause'' exception has become the rule. As a matter of
    practice, bankruptcy judges routinely extend the 60-day period for
    several months or years. In many instances, debtors do not have to
    decide what they plan on doing with their leases until their plans of
    reorganization are confirmed. Some debtors are even permitted to make
    such decisions after the date of confirmation.
        As a result, the stores of these bankrupt retailers often remain
    closed for long periods of time, casting a dark shadow on the entire
    shopping center. Even if a shopping center owner receives rent from the
    bankrupt tenant during this period, a vacant store usually creates a
    negative impact on the other stores in the shopping center. Not only do
    the neighboring stores suffer reduced traffic and sales, but the owner,
    by virtue of percentage rent clauses that have been written into their
    leases, suffers reduced percentage rent income from its other tenants.
        To make matters worse, the owner is unable to make arrangements to
    lease out the vacant space to another potential tenant since the
    bankrupt retailer is not required to inform the owner whether it plans
    to assume or reject the lease. It is this uncertainty that is most
    frustrating to shopping center owners. They, and the rest of the
    shopping center, are essentially kept in limbo until the debtor, or the
    debtor's trustee, makes a decision to assume or reject its lease.
    Owners are not attempting to pressure debtors to reject their leases.
    Instead, they simply want a determinable period of time for their
    bankrupt tenants to assume or reject their leases.
        The current situation is clearly unfair to shopping center owners
    and has to be remedied. While we realize that 60 days in most cases is
    not enough time for a bankrupt retailer to decide which of its leases
    it wants to assume or reject, we strongly believe that a reasonable,
    fixed time period must be created so an owner, and the rest of the
    tenants in the shopping center, have certainty as to when a lease of a
    vacant store will be either assumed or rejected.
        One must remember that, in most cases, a debtor can decide when it
    files for bankruptcy protection. Retail chains do not suddenly decide
    they will file for bankruptcy. They typically review their economic
    situation well in advance of filing a bankruptcy petition. Retailers
    and their advisors have a pretty good indication even before they file
    for bankruptcy which leases they want to assume and which they want to
    reject since it is often the very reason they are filing for
    bankruptcy.
        Section 404(a) of S. 220 would require a debtor tenant to assume or
    reject its leases within 120 days after filing for bankruptcy. Prior to
    the expiration of the 120 days, a judge could extend this time period
    for an additional 90 days upon the motion of the trustee or owner ``for
    cause''. Additional extensions could be granted only upon the prior
    written consent of the owner.
        By requiring an owner's consent for additional extensions after the
    initial 120-day and court-extended 90-day periods, shopping center
    owners would retain a certain degree of control of their property if a
    tenant has not decided to assume or reject its leases within 210 days.
    Owners would often be amenable to extending the time period for
    assumption or rejection for a certain length of time if it appears to
    be in the best interest of both parties.
        While ICSC believes that a total of 120 days (including a court
    extension ``for cause '') is ample time for retailers in bankruptcy to
    make informed decisions as to which leases should be assumed and which
    should be rejected, to the extent the other shopping center provisions
    listed below are included in the final package, we would support this
    provision of S. 220.
       ``Use'' Clauses Need to be Adhered to by Trustees Upon Assignment
        As mentioned above, a well balanced ``tenant mix'' helps create the
    character and synergy among the various tenants of a shopping center. A
    lease's ``use'' clause is specifically designed to maintain this tenant
    mix, and is supposed to be adhered to upon assumption or assignment.
    Unfortunately, a growing number of judges are allowing trustees to
    assign shopping center leases to outside retailers in clear violation
    of existing use clauses and Code Sections 365(f)(2)(B) and 365(b)(3).
        A recent notable case involves a children's educational retailer in
    the Boston-area in which a judge allowed the trustee to assign two of
    its unexpired leases to a jeweler and a candle shop, even though
    another children's educational retailer offered bids, albeit lower
    ones, on those leases.
        Use clauses are mutually agreed-upon provisions that are intended
    to direct the use of a particular property to a particular use. They do
    not prevent the assignment of a property to another retailer; however,
    the new tenant is supposed to adhere to the lease's use clause.
        Congress has already recognized in the Bankruptcy Code that a
    shopping center does not merely consist of land and buildings. It is
    also a particular mix of retail uses which the owner has the right to
    determine. Thus, Section 365(f)(2)(B) already requires that a trustee
    has to obtain adequate assurance that a lease's use clause will be
    respected before he or she can assign the lease to a third party.
    Section 365(b)(3)(C), defining ``adequate assurance'', states that ``.
    .  .adequate assurance of future performance of a lease of real
    property in a shopping center includes adequate assurance .  .  . that
    assumption or assignment of such lease is subject to all the provisions
    thereof, including (but not limited to) provisions such as radius,
    location, use, or exclusivity provision .  .  .  .''
        Yet, a number of bankruptcy judges have ignored this requirement.
    This abuse of the Bankruptcy Code must end. Section 404(b) of S. 220
    would amend Section 365(f)(1) to make it crystal clear to all trustees
    that the shopping center provisions contained in Section 365(b),
    including that relating to adequate assurance that use clauses will be
    respected, must be adhered to before they can assign leases to other
    retailers.
      Shopping Center Owners Need Greater Access to Creditors' Committees
        Another growing concern of the shopping center industry is the lack
    of appointments by many U.S. trustees of shopping center owners to
    creditors' committees during bankruptcy proceedings. A creditors'
    committee is the key decision-making body in a bankruptcy case as it
    helps formulates how and when a debtor is going to reorganize its
    business. In addition to having a vested interest in the outcome of a
    bankruptcy case, a shopping center owner can provide valuable
    knowledge, insight and perspective to a creditors' committee in order
    to assist in the creation of a successful reorganization plan.
        Under current law, U.S. trustees are authorized under Section
    1102(a)(1) to appoint a committee of creditors holding unsecured
    claims. Unfortunately, many trustees have excluded shopping center
    owners from these committees, even if they qualify to serve under
    Section 1102(b)(1). This section states that a creditors' committee ``.
    .  . shall ordinarily consist of the persons, willing to serve, that
    hold the seven largest claims against the debtor of the kinds
    represented on such committee .  .  .''.
        Even in cases where an owner is not one of the seven largest pre-
    petition creditors, it usually is one of the seven largest post-
    petition creditors due to damage claims from rejected leases. A
    retailer may have been making timely lease payments up to the time it
    filed for bankruptcy; however, if it later defaults on payments (which
    it is obligated to make) or decides to reject some or all of its
    leases, the shopping center owner usually has very large potential
    rejection claim damages. Certainly, such an owner should be entitled to
    participate on these creditors' committees.
        Although bankruptcy judges currently may order the appointment of
    additional committees to assure adequate representation of creditors,
    only the trustees are actually authorized to appoint such committees.
    Therefore, the discretion to add shopping center owners to creditors'
    committees is solely vested with the U.S. trustees. Section 405 of S.
    220 would also give this discretion to bankruptcy judges as it would
    permit them, after receiving a request from an interested party, to
    order a change in the membership of a creditors' committee to ensure
    the adequate representation of creditors.
      Non-Monetary Defaults Need to be Cured before a Lease can be Assumed
        Under Section 365(b)(1)(A) of the Bankruptcy Code, a trustee may
    not assume an unexpired lease unless he or she cures, or provides
    adequate assurance that he or she will promptly cure, all existing
    monetary and non-monetary defaults. This provision was enacted by
    Congress to ensure that existing leases are adhered to before they may
    be assumed and later assigned to another tenant. Unfortunately, some
    judges are allowing leases to be assumed and assigned despite the fact
    that such leases remain in default.
        Section 328 of S. 220 would amend existing law by providing that
    non-monetary defaults of unexpired leases of real property that are
    ``impossible'' to cure would not prevent a trustee from assuming a
    lease. Unlike monetary defaults, certain non-monetary defaults are
    impossible to cure. For example, a vacant store can later be reopened;
    however, the default (the vacating of the store) can never be fully
    cured since it is impossible to reopen the store during the time it was
    vacant.
        However, Section 328 also provides that ``.  .  . if such default
    arises from a failure to operate in accordance with a nonresidential
    real property lease, then such default shall be cured by performance at
    and after the time of assumption in accordance with such lease, and
    pecuniary losses resulting from such default shall be compensated .  .
    .''. Therefore, a trustee would be able to assume the lease of a vacant
    store so long as its nonmonetary defaults are cured (e.g., the store is
    reopened) at and after the time of assumption. ICSC supports this
    provision since it would require trustees to abide by the terms of a
    commercial lease agreement upon its assumption.
        A Reasonable Administrative Priority for Rents Should be Enacted
        Under current law, post-petition rents are treated as an
    administrative priority until a lease is assumed or rejected under
    Section 365(d)(3). If a lease is rejected, postrejection rents are
    treated as an unsecured claim under Section 502(b)(6), which usually
    limits the claim to one year's rent. The Bankruptcy Code, however, does
    not specifically address claims resulting from nonresidential real
    property leases that are assumed and subsequently rejected.
        However, in a 1996 U.S. Court of Appeals case, Klein Sleep
    Products, the court held that all future rents due under an assumed
    lease, regardless of whether it is subsequently rejected, should be
    treated as an administrative priority and not limited by Section
    502(b)(6). As a practical matter, shopping center owners prefer to
    lease their property to operating retailers as soon as possible to
    maintain a vibrant center and collect rent, rather than maintain a
    vacant store whose unpaid rents are treated as an administrative
    priority.
        Section 445 of S. 220 would treat rents due under an assumed and
    subsequently rejected lease as an administrative priority for two years
    after the date of rejection or turnover of the premises, whichever is
    later, ``without reduction or set off for any reason except for sums
    actually received or to be received from a nondebtor''. Any remaining
    rents due for the balance of the lease term would be treated as an
    unsecured claim limited under Section 502(b)(6).
        While ICSC prefers that rents due under an assumed and subsequently
    rejected lease are treated as an administrative priority for three
    years, and that any remaining rents due under the lease are treated as
    an unsecured claim not limited under Section 502(b)(6), we accept this
    provision as a reasonable compromise so long as the other shopping
    center provisions listed above are included in the final package.

                                 United States Court of Appeals
                                                  Fifth Circuit
                                              Houston, Texas 77002-2655

    Chairman Orrin Hatch
    Senate Judiciary Committee
    Washington, DC 20510

        Re: Section 1235, Bankruptcy Reform Act of 2000, Expedited Appeals
    of Bankruptcy Cases to Courts of Appeals

        Dear Chairman Hatch:

        Streamlining the bankruptcy appellate process is one of the most
    important bankruptcy reform goals that Congress can achieve. As an
    appellate court judge, a member of the National Bankruptcy Review
    Commission, and a former bankruptcy lawyer, I write to issue my support
    for expediting some bankruptcy appeals to the courts of appeals. By
    keeping this type of provision in the Bankruptcy Reform bill, Congress
    will: (1) eliminate excessive costs and delay; (2) promote efficiency,
    fairness and stability; and (3) bring much needed uniformity to
    bankruptcy and the American commercial law system. Contrary to the
    position taken by some appellate judges, authorizing direct appeals
    will not cause an undue burden on the federal courts of appeals.\1\
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        \1\ I do not write in support of any particular form of direct
    appeals, because there are a number of possibilities in addition to
    Sec. 1235 as now structured that would accomplish the same basic
    objective.
    ---------------------------------------------------------------------------
        Enthusiasm for expedited appeals exists throughout the bankruptcy
    community. Its supporters include bankruptcy judges, lawyers,
    academics, and debtor and creditor representatives. Indeed, in a rare
    expression of unity, the National Bankruptcy Review Commission voted
    unanimously to recommend direct appeals.\2\
    ---------------------------------------------------------------------------
        \2\ See 1 National Bankruptcy Review Commission, Final Report of
    the National Bankruptcy Review Commission (Bankruptcy: The Next Twenty
    Years) 752-67 (1997). Then-Chief Judge Richard Arnold of the Eighth
    Circuit, who was at that time a member of the Executive Committee of
    the Judicial Conference of the United States, endorsed the direct
    appeal proposal when he attended the meeting where the Commission voted
    to support it.
    ---------------------------------------------------------------------------
        The present two-tier appellate system directs bankruptcy appeals
    first to the district courts and then to the courts of appeals. The
    policy reasons supporting the elimination, as far as practical, of
    federal district courts from the bankruptcy appellate process are
    overwhelming. Bankruptcy cases, recently rising to over one million a
    year, have immediate and far-reaching consequences for borrowers and
    lenders nationwide. These cases are a significant federal court
    responsibility. Not only do bankruptcy courts interpret the federal
    Bankruptcy Code, but their decisions form the core body of cases in
    American commercial law today. Despite the potential social
    significance of the decisions, and despite the Constitution's provision
    for uniform bankruptcy law, there is precious little uniformity in
    bankruptcy.
        The present system discourages final rulings and uniformity in
    several ways. First, most participants in bankruptcy lack the resources
    to finance legal fees through two full stages of appeal. Since most
    bankruptcy claims are already heavily discounted, there is rarely
    enough money at stake to justify undertaking duplicative appeals in
    order to obtain binding precedent. Second, delay imposes high costs.
    Adding to the inherent delay from duplication is the fact that some
    federal district courts do not handle bankruptcy appeals expeditiously.
    Neglect by these courts creates incentives to file appeals for the
    purposes of delay, even as it discourages the pursuit of meritorious
    appeals.
        The excessive costs and delays mean that courts of appeals are
    rarely called upon to issue bankruptcy precedents binding throughout
    their circuit. Unfortunately, district court opinions rendered at the
    first level of review are not considered binding on the bankruptcy
    courts. Consequently, bankruptcy law is variable, non-uniform, and
    lacking in stare decisis within individual judicial districts as well
    as nationwide. Many issues that could have been settled by circuit
    courts are subject to interminable and costly relitigation in case
    after case, because the current appellate process stymies the
    definitive resolution of issues by courts of appeals.
        The current two-tier system is thus both legally inefficient and
    unfair to the hapless participants in bankruptcy.
        Against the manifest deficiencies of this system, and the national
    impact of bankruptcy court and Bankruptcy Code decisions, some
    appellate judges fear that eliminating the district court appellate
    function will unbearably increase our workload. With due respect, I
    believe this fear is exaggerated.
        The courts of appeals, while busy, are currently not overburdened.
    In fact, appellate filings for fiscal year 1999 fell 3%, after
    excluding some newly-counted original proceedings.\3\
    ---------------------------------------------------------------------------
        \3\ See Administrative Office of the U.S. Courts, Judicial Business
    of the United States Courts: 1999 Annual Report of the Director 15.
    ---------------------------------------------------------------------------
        The short-term impact of expediting bankruptcy appeals to the
    courts of appeals is unknowable, but there are several reasons to
    predict it will not be severe.\4\ First, many appeals now filed for
    purposes of delay in the district courts would not be pursued to the
    courts of appeals. Second, the Bankruptcy Appellate Panels (BAP's) will
    remain available for bankruptcy appeals in several circuits or could be
    created in other circuits where they become necessary. BAP's will be
    selected by many litigants for strategic reasons that we cannot presume
    to assess.\5\ Finally, devices such as appeals without oral argument
    and the growing use of appellate conference attorneys could screen and
    resolve many less consequential bankruptcy appeals.
    ---------------------------------------------------------------------------
        \4\ Even if each appeal filed in the district courts in fiscal year
    1999 went to the courts of appeals, that would amount to about 3,000,
    or at most, a 6t increase in the court of appeals docket. For the
    reasons stated, I question whether anything close to one-to-one
    equivalency would occur.
        \5\ In addition, to some litigants, the relative unfamiliarity of
    federal appellate court procedure might be a deterrent (albeit an
    irrational one) to appeal.
    ---------------------------------------------------------------------------
        The long-term forecast for direct bankruptcy appeals is more
    optimistic. As unclear issues are resolved at the circuit level, there
    will be more stability in the initial bankruptcy process and less need
    for appeals.
        As is the case with any changes in legal process, the courts of
    appeals can expect a period of somewhat increased bankruptcy appeals,
    followed by a leveling-off due to the growing effect of stare decisis.
    To measure the desirability of the change, one must consider the impact
    not only on the appellate courts but also on the bankruptcy system and
    the American commercial system it serves. In view of the very large
    benefits that will accrue from eliminating a wasteful and inefficient
    extra layer of bankruptcy appeals and from instilling more appellate
    certainty in bankruptcy, I think the complaints about an increased
    appellate caseload are misplaced.
        Thank you for allowing me to comment on this vital element of
    bankruptcy reform.

                Very truly yours,

                                            Hon. Edith H. Jones

                                     U.S. Department of Justice
                                  Office of Legislative Affairs
                                                   Washington, DC 20530

    Hon. Charles E. Schumer
    United States Senate
    Washington, DC 20510

        Dear Senator Schumer:

        The Administration is deeply concerned by the incidents of
    violence, vandalism, and harassment committed against family planning
    clinics: Some of these acts have resulted in the deaths and maiming of
    innocent people. The Administration believes that these unlawful
    activities must not be tolerated, and that when they are committed,
    those found liable should be held accountable under the law.
        The Administration has a strong record of supporting efforts to end
    clinic violence. The Freedom of Access to Clinic Entrances (FACE) Act
    of which you were the principal House sponsor, and which the President
    signed into law, provides federal protection against unlawful and
    violent actions while it protects the right to engage in peaceful
    picketing and protest unaccompanied by force or physical obstruction.
    Violators of FACE are subject to criminal penalties of imprisonment, a
    fine or both. In addition, the court may also assess civil penalties
    for a particularly egregious offense or against a repeat offender.
    State clinic access laws and state and federal anti-racketeering laws
    are additional tools used to prosecute clinic violence. Yet, if
    offenders are able to escape the damages assessed under these laws,
    then they will gradually lose their effectiveness.
        Unfortunately, some defendants found liable for clinic violence are
    abusing the bankruptcy system in an effort to shield themselves from
    civil monetary penalties assessed under these laws. More specifically,
    these defendants are filing for Chapter 7 to discharge their
    obligations to the victims of their clinic violence and to escape
    responsibility for their actions. In order to stem the tide of clinic-
    related violence by ensuring that penalties for these acts are strictly
    enforced, we support your amendment that would make court-ordered fines
    and debts resulting from clinic violence nondischargeable.
        The Administration's general position has been to oppose the
    expansion of nondischargeable debt unless there is an overriding public
    policy objective to be protected and no other way to achieve that
    objective. Consistent with this position, we view your amendment as a
    necessary tool in our current efforts to end illegal clinic violence
    and intimidation.
        Certainly, one could argue that damages awarded- for all
    intentional torts should be nondischargeable. Indeed, this is largely
    the case under the ``willful and malicious injury'' exception contained
    in Section 536(x)(6) of the Bankruptcy Code. Some damages resulting
    from clinic-related violence, however, are not protected under this
    exception. This was made clear in the Supreme Court's recent decision
    in Geiger v. Kawaauhau, 523 U.S. 57 (1998). In Geiger the Court held
    that the word ``willful'' ``modifies the word `injuy' indicating that
    nondischargeability takes a deliberate or intentional injury, not
    merely a deliberate or intentional act that leads to injury.  .  .''
    Although some clinic=related violence is not committed with the direct
    intention to inflict injury, some such violence indirectly may result
    in injury. Take for example a family planning clinic that is blockaded,
    preventing all ingress and egress. Women who need essential medical
    services--some unrelated to abortion--may be denied those services;
    resulting in serious physical harm. Should damages awarded to victims
    such as these be any less protected simply because the blockader did
    not intentionally intend to injure these victims?
        In addition, there is another compelling reason to create a
    specific nondischargeability carve-out for clinic-related violence
    damages. There are reports of-those who have been found liable for such
    acts blatantly--even enthusiastically--announcing how they are going to
    escape responsibility for their actions by filing for Chapter 7.
    Indeed, such abuse of the bankruptcy system appears to be part of a
    concerted plan on the pant of these individuals to perpetuate their
    acts of violence and intimidation.
        Parties on both sides of the issue of abortion agree that violence
    against clinics should not be tolerated. This is why we have laws in
    place designed to deter such activity. We must not permit those who
    have committed odious acts of violence to escape responsibility for
    their actions. Your amendment furthers our efforts toward achieving
    this goal.
                Sincerely,
                                                Jon P. Jennings
                                      Acting Assistant Attorney General

     Statement of George J. Wallace, Eckert Seamans Cherin & Mellott LLC,
                                 Washington, DC

        Chairman Hatch, Senator Leahy and Members of the Committee, thank
    you for this opportunity to express my views on consumer bankruptcy and
    H.R. 333, The Bankruptcy Reform of 2001, and particularly the impact of
    the bill upon low income women.
        My name is George Wallace. I am a member of the law firm of Eckert
    Seamans Cherin & Mellott LLC and am resident in the Washington, D.C.
    office.
        I represent the The Coalition for Responsible Bankruptcy Laws, a
    broad coalition of consumer creditors, including banks, credit unions,
    savings institutions, retailers, mortgage companies, sales finance
    companies and diversified financial services providers.
        The Coalition strongly supports S. 220 because it will take
    significant steps toward reforming today's consumer bankruptcy laws
    while at the same time preserving the basic bankruptcy discharge and
    repayment plan remedies for debtors who use bankruptcy responsibly.
        Despite being well-intentioned, it is increasingly clear that our
    bankruptcy laws are susceptible of misuse. Everyone is by now familiar
    with the ``means test'' and how it would require approximately 10% of
    those who file chapter 7 who have the ability to repay a significant
    part of what they owe to do so. But an equally important flaw in the
    present bankruptcy system is that it can be used to significantly delay
    or defeat the payment of child support and marital obligations. S. 220
    stops that misuse of the bankruptcy system. It assures that those who
    file for bankruptcy will continue to pay their child support
    obligations throughout the bankruptcy. If S. 220 is enacted, filing
    bankruptcy will no longer halt the payment of crucial child support
    payments to low income single parent families.
        The most important change the bill makes to child support
    collection is to except child support collection orders from the
    automatic stay, require a chapter 13 debtor to be current in post-
    filing child support payments to confirm a plan, and stay current as
    well as pay all arrears in order to get a discharge. With these
    changes, the ability to use chapter 13 to delay payment of child
    support for up to 5 years is stopped. The bill also changes current law
    to place child support arrears in first priority (versus seventh under
    present law) in a chapter 7, extremely important if there are assets to
    be distributed. Other marital dissolution obligations, including
    indemnification obligations, are made clearly nondischargeable (unlike
    under present law which permits discharge under certain circumstances).
    Post- filing support arrears owed to the single parent must be paid in
    order to receive a discharge, unless waived by the custodial parent.
        Some, however, have asserted that S. 220 would harm single-parent
    families, and especially those headed by women. One claim is that
    single parents trying to collect child support will lose out to credit
    card companies collecting nondischargeable debt. This claim is
    completely without foundation. In fact, the quite reforms in S. 220
    extending in minor ways the provisions of present law on
    nondischargeable debts are unlikely to have a significant impact on
    collection of credit card debt. Moreover, the child support collection
    system Congress has mandated outside bankruptcy already gives the child
    support creditor extraordinary power to collect child support, both
    current and in arrears, except when the debtor goes into bankruptcy.\1\
    That is why it is recognized by child support collection professionals
    that child support always wins over competing creditors like credit
    card companies. Philip L. Strauss, Assistant District Attorney, City
    and County of San Francisco. Testified in 1999 before the House
    Committee on the Judiciary directly to this point:
    ---------------------------------------------------------------------------
        \1\ Child support obligations take precedence over all other debts,
    and Congress has given extraordinary powers to assist in its collection
    Today, a custodial parent owed child support can obtain free or at a
    minimal cost (the maximum charge for collection is a one time fee of
    $25, waived by many states) a child support collection lawyer employed
    by the state or municipality whose only job is to collect child
    support. That lawyer has the power to withhold child support from the
    non-custodial parent's income of payment to the mother and children.
    The child support creditor also has a blanket, automatic lien arising
    upon nonpayment on all of the debtor's personal property. In addition,
    failure to make child support payments will result in the loss of a
    motor vehicle operators license, professional license (such as a
    physician's license, law license, etc.), or even jail. Faced with loss
    of the driver's license if he doesn't pay child support, the debtor
    will always pay that first, if he can pay anything at all.

    ``Some criticism has been raised that the 1999 Bankruptcy Reform Act
            would be detrimental to women and children because it would pit
            them against banks and credit cared companies for collection of
            nondischarged credit card debt. Although this argument has some
            surface logic, no support collection professional that I know
            deems this concern to be serious.  .  .  .[N] onbankruptcy law
            has so tilted the field in favor of support creditors that
            competition with financial institutions for the collection of
            postdischarge debts presents no problems for support
    ---------------------------------------------------------------------------
            creditors.''

        Other have claimed that the means test will be excessively harsh on
    poor, single parent families, and particularly those headed by women,
    when they seek bankruptcy protection. Nothing could be further from the
    truth. To be impacted by the ability to pay provisions in this
    legislation as a practical matter, families would have to earn more
    than the State median income adjusted for family size. To put this
    inperspective, a family of four living in Alabama would have to earn
    over $46,000 annually before the ``ability to pay'' test would even be
    applied. In Connecticut, they would have to earn over $72,000. As you
    know, the vast number of single parent families with children survive
    on an income well below that amount.
        Moreover, even when the ability to pay test comes into play, it
    will only require dismissal from chapter 7 if the debtor's net income
    shows that the debtor could pay more than $100 a month if the debtor
    has debts over $24,000, or a minimum of $10,000 is his debts are
    smaller. Poor families would not have such net income, and could remain
    in chapter 7. Thus, no matter how you look at it, S. 200's ability to
    pay test will have no impact on poor families. They will continue to
    have, as they have under present law, the choice to either file in
    chapter 7 or chapter 13.
        Finally, vague claims have been made that in some fashion, other
    provisions of the bill will somehow make bankruptcy less available or
    less beneficial for low income families. When examined, these claims
    always evaporate. For example, some have urged that the requirement of
    pre-filing credit counseling burdens low income debtors who have a
    great deal of difficulty paying for their bankruptcy attorney. Yet the
    requirement is minor. You just have to go to a short (1 hour) training
    session approved by the United States Trustee, which can be over the
    phone or by internet. If there is an emergency, the debtor can file for
    bankruptcy and obtain the counseling within the next 30 days.
    Furthermore, obtaining credit counseling before filing bankruptcy
    generally benefits debtors. First, they obtain more information about
    their alternatives from a neutral source, not a bankruptcy professional
    trying to earn money from their filing. Second, some of them may be
    able to save themselves from bankruptcy through a credit repayment
    plan. They will save their credit rating and be rehabilitated more
    quickly. Finally, credit counseling teaches budgeting skills, crucial
    for the very poor struggling to make ends meet. On examination, there
    appears to be absolutely no basis to argue that these benefits somehow
    will hurt low income families, whether they are headed by women or men.
        In summary, S. 220 is legislation which benefits low income
    families, particularly those headed by women. To the extent those
    families are dependent on child support, it makes major changes to
    bankruptcy law so that it can no longer be misused to delay or defeat
    the collection of child support. Moreover, its provisions aimed at
    those who would abuse the bankruptcy system in other ways will not
    affect the honest, poor debtor needing relief from debts he has no hope
    of repaying. Finally, the bill contains provisions such as the credit
    counseling provisions, which will improve the assistance that the
    bankruptcy system provides debtors who need debt relief and help in
    reorganizing their finances.
        Thank you for the opportunity to address the Committee, and I urge
    your strong support for S. 220.