    [House Hearing, 108 Congress]
    [From the U.S. Government Publishing Office]

     BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2003, AND
                         THE NEED FOR BANKRUPTCY REFORM

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

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                       COMMERCIAL AND ADMINISTRATIVE LAW

                                     OF THE

                           COMMITTEE ON THE JUDICIARY
                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED EIGHTH CONGRESS

                                 FIRST SESSION

                                       ON

                                    H.R. 975

                                   __________

                                 MARCH 4, 2003

                                   __________

                                 Serial No. 24

                                   __________

             Printed for the use of the Committee on the Judiciary

        Available via the World Wide Web: http://www.house.gov/judiciary

    85-404              U.S. GOVERNMENT PRINTING OFFICE
                                WASHINGTON : 2003
    ____________________________________________________________________________
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                           COMMITTEE ON THE JUDICIARY

                F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
    HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
    HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
    LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
    ELTON GALLEGLY, California           JERROLD NADLER, New York
    BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
    STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
    WILLIAM L. JENKINS, Tennessee        ZOE LOFGREN, California
    CHRIS CANNON, Utah                   SHEILA JACKSON LEE, Texas
    SPENCER BACHUS, Alabama              MAXINE WATERS, California
    JOHN N. HOSTETTLER, Indiana          MARTIN T. MEEHAN, Massachusetts
    MARK GREEN, Wisconsin                WILLIAM D. DELAHUNT, Massachusetts
    RIC KELLER, Florida                  ROBERT WEXLER, Florida
    MELISSA A. HART, Pennsylvania        TAMMY BALDWIN, Wisconsin
    JEFF FLAKE, Arizona                  ANTHONY D. WEINER, New York
    MIKE PENCE, Indiana                  ADAM B. SCHIFF, California
    J. RANDY FORBES, Virginia            LINDA T. SANCHEZ, California
    STEVE KING, Iowa
    JOHN R. CARTER, Texas
    TOM FEENEY, Florida
    MARSHA BLACKBURN, Tennessee

                 Philip G. Kiko, Chief of Staff-General Counsel
                   Perry H. Apelbaum, Minority Chief Counsel
                                     ------

               Subcommittee on Commercial and Administrative Law

                          CHRIS CANNON, Utah, Chairman

    HOWARD COBLE, North Carolina         MELVIN L. WATT, North Carolina
    JEFF FLAKE, Arizona                  JERROLD NADLER, New York
    JOHN R. CARTER, Texas                TAMMY BALDWIN, Wisconsin
    MARSHA BLACKBURN, Tennessee          WILLIAM D. DELAHUNT, Massachusetts
    STEVE CHABOT, Ohio                   ANTHONY D. WEINER, New York
    TOM FEENEY, Florida

                      Raymond V. Smietanka, Chief Counsel

                            Susan A. Jensen, Counsel

                            Diane K. Taylor, Counsel

                      James Daley, Full Committee Counsel

                       Stephanie Moore, Minority Counsel

                                C O N T E N T S

                                  ----------

                                 MARCH 4, 2003

                               OPENING STATEMENT

                                                                       Page
    The Honorable Chris Cannon, a Representative in Congress From the
      State of Utah, and Chairman, Subcommittee on Commercial and
      Administrative Law.............................................     1
    The Honorable Melvin L. Watt, a Representative in Congress From
      the State of North Carolina, and Ranking Member, Subcommittee
      on Commercial and Administrative Law...........................     3
    The Honorable Jerrold Nadler, a Representative in Congress From
      the State of New York..........................................     5
    The Honorable Howard Coble, a Representative in Congress From the
      State of North Carolina........................................     7

                                   WITNESSES

    Mr. Lawrence A. Friedman, Director, Executive Office for United
      States Trustees, United States Department of Justice
      Oral Testimony.................................................    68
      Prepared Statement.............................................    69
    Ms. Lucile P. Beckwith, President and Chief Executive Officer,
      Palmetto Trust Federal Credit Union, Columbia, SC, on behalf of
      Credit Union National Association, Inc.
      Oral Testimony.................................................    73
      Prepared Statement.............................................    76
    Judith Greenstone Miller, Esq., Raymond & Prokop, P.C.,
      Southfield MI, on behalf of the Commercial Law League of
      America
      Oral Testimony.................................................    83
      Prepared Statement.............................................    84
    George Wallace, Esq., of Counsel, Eckert Seamans Cherin & Mellot,
      LLC, Washington, DC, on behalf of the Coalition for Responsible
      Bankruptcy Laws
      Oral Testimony.................................................   116
      Prepared Statement.............................................   118

              LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

    Prepared Statement of the Honorable Chris Cannon, a
      Representative in Congress From the State of Utah, and
      Chairman, Subcommittee on Commercial and Administrative Law....     2
    Prepared Statement of the Honorable Jerrold Nadler, a
      Representative in Congress From the State of New York..........     6
    Letter from organizations opposed to H.R. 975....................     9
    Prepared Statement of Joseph Patchan, Bankruptcy Trustee.........    12
    Article from the Credit Union Journal............................    16
    Bankruptcy Article from the Lexington Herald-Leader..............    21
    Letter from Robert D. Evans, Governmental Affairs, American Bar
      Association (ABA)..............................................    25
    Prepared Statement of The Bond Market Association................    33
    Prepared Statement of the International Council of Shopping
      Centers........................................................    41
    Prepared Statement of Robin Schauseil, President, National
      Association of Credit Management...............................    45
    Letter from Fred R. Becker, Jr., President/CEO, National
      Association of Federal Credit Unions (NAFCU)...................    49
    Prepared Statement of the National Multi Housing Council/National
      Apartment Association Joint Legislative Program, National
      Leased Housing Association, Manufactured Housing Institute and
      the Institute of Real Estate Management........................    51
    Prepared Statement of Dean Sheaffer, Senior Vice President of
      Credit and CRM, Boscov's Department Stores, Inc., on behalf of
      the National Retail Federation.................................    53
    Legislative History of the Bankruptcy Reform Act of 2002.........    56
    Letter from Lucile P. Beckwith, President/CEO, Palmetto Trust
      Federal Credit Union, CUNA & Affiliates........................   137
    Memo from Robert Green, Penn, Schoen & Berland Associates, Inc...   139
    Memo from Jan van Lohuizen and Katie Reade, Voter/Consumer
      Research.......................................................   141
    Article from the Credit Union Journal............................   142
    Letter from Fred R. Becker, Jr., President/CEO, National
      Association of Federal Credit Unions (NAFCU)...................   144

                                    APPENDIX
                   Material Submitted for the Hearing Record

    Questions posed to witnesses after the hearing and their
      responses
      Lawrence A. Friedman...........................................   153
      Lucile P. Beckwith.............................................   173
      Judith Greenstone Miller.......................................   182
      George Wallace.................................................   207

     BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2003, AND
                         THE NEED FOR BANKRUPTCY REFORM

                                  ----------

                             TUESDAY, MARCH 4, 2003

                      House of Representatives,
                             Subcommittee on Commercial
                                and Administrative Law,
                                    Committee on the Judiciary,
                                                        Washington, DC.
        The Subcommittee met, pursuant to call, at 2 p.m., in Room
    2141, Rayburn House Office Building, Hon. Chris Cannon
    [Chairman of the Subcommittee] presiding.
        Mr. Cannon. I want to thank you all for coming out today. I
    want to begin today's legislative hearing before the
    Subcommittee on Commercial and Administrative Law by extending
    a warm welcome to my colleague from North Carolina and my
    friend Mr. Watt, the Subcommittee's distinguished Ranking
    Member, as well as the other Subcommittee Members who we expect
    to join us over time, and also our witnesses today. It is my
    sincere hope that the inaugural hearing of the Subcommittee in
    the 108th Congress commences what will be a productive
    legislative agenda and a cooperative working relationship.
        In that regard, it is particularly appropriate and timely
    that H.R. 975, the ``Bankruptcy Abuse Prevention and Consumer
    Protection Act of 2003,'' is the focus of our first legislative
    hearing.
        Today's hearing is especially timely, because just last
    month the Administrative Office of the United States Courts
    reported the number of bankruptcy filings filed during a 1-year
    period once again has broken all previous records. During
    calendar year 2002, nearly 1.6 million bankruptcy cases were
    filed, reflecting an increase of approximately 6 percent over
    the prior year. This has been growing faster than our economy
    and our population combined.
        I guess as a backdrop, the Chairman of the Judiciary
    Committee Mr. Sensenbrenner introduced H.R. 975 with 50
    original cosponsors last week. Representing the most
    comprehensive set of reforms to the bankruptcy system in nearly
    25 years, H.R. 975 seeks to improve bankruptcy law and practice
    by restoring personal responsibility and integrity in the
    bankruptcy system and by ensuring that the system is fair for
    both debtors and creditors.
        Besides consumer and business bankruptcy law reforms, H.R.
    975 includes an extensive array of provisions ranging from
    implementing an entirely new form of bankruptcy relief to deal
    with the complexities of transnational insolvencies to
    extending special protections to family farmers and fishermen.
    H.R. 975 is yet a further perfection of legislation that has
    been the subject of intense congressional consideration and
    debate for nearly 6 years. It is essentially identical to the
    bankruptcy reform legislation that the House considered and
    passed less than 4 months ago on the last day of the 107th
    Congress by a vote of 244 to 116. Indeed, the House on not one,
    but on six separate occasions has registered its unqualified
    bipartisan support for this legislation's predecessors in the
    last three Congresses.
        Arguably some may wonder why it is even necessary to hold a
    hearing on this legislation given this fact and especially in
    light of the fact that over the course of the last 3
    Congresses, there have been at least 17 prior hearings on the
    subject of bankruptcy reform before this Subcommittee and the
    full Committee at which nearly 130 witnesses testified.
    Nevertheless, we are here today to embellish further the
    legislative record in support of bankruptcy reform. Today's
    hearing will also provide a valuable opportunity for those of
    us, like myself, who are new to this Subcommittee or who are
    new to the Congress, like my colleagues from the States of
    Tennessee, Texas and Florida, to acquaint ourselves with H.R.
    975's proposed reforms, with the assistance of our excellent
    panel of witnesses.
        It is my hope that today's hearing will serve as a forum
    for the expression of all views on all issues presented by H.R.
    975. From my perspective it would be particularly useful for
    the witnesses to discuss whether the current bankruptcy law
    adequately deals with fraud and abuse, and whether the proposed
    reforms would assist those who are defrauded, as well as in the
    court system and law enforcement who are charged with ferreting
    out fraud and abuse in the bankruptcy system. It would also be
    useful to hear from our witnesses with respect to how abuse and
    fraud in the current bankruptcy system affects American
    businesses and our Nation's citizens generally, and why, given
    the current economic circumstances, the need for comprehensive
    bankruptcy reform is even greater.
        [The prepared statement of Mr. Cannon follows:]

     Prepared Statement of the Honorable Chris Cannon, a Representative in
                        Congress From the State of Utah

        I want to begin today's legislative hearing before the Subcommittee
    on Commercial and Administrative Law by extending a warm welcome to my
    colleague from North Carolina, Mr. Watt, the Subcommittee's
    distinguished Ranking Member, as well as to the other Subcommittee
    Members and our witnesses. It is my sincere hope that this inaugural
    hearing of the Subcommittee in the 108th Congress commences what will
    be a productive legislative agenda and cooperative working
    relationship.
        In that regard, it is particularly appropriate and timely that H.R.
    975, the ``Bankruptcy Abuse Prevention and Consumer Protection Act of
    2003,'' is the focus of our first legislative hearing. Today's hearing
    is especially timely because just last month, the Administrative Office
    of the United States Courts reported that the number of bankruptcy
    filings filed during a one-year period--once again--has broken all
    previous records. During calendar year 2002, nearly 1.6 million
    bankruptcy cases were filed, reflecting an increase of approximately 6
    percent over the prior year.
        Against this backdrop, the Chairman of the Judiciary Committee, Mr.
    Sensenbrenner, introduced H.R. 975 with 50 original cosponsors last
    week. Representing the most comprehensive set of reforms to the
    bankruptcy system in nearly 25 years, H.R. 975 seeks to improve
    bankruptcy law and practice by restoring personal responsibility and
    integrity in the bankruptcy system and by ensuring that the system is
    fair for both debtors and creditors. Besides consumer and business
    bankruptcy law reforms, H.R. 975 includes an extensive array of
    provisions ranging from implementing an entirely new form of bankruptcy
    relief to deal with the complexities of transnational insolvencies to
    extending special protections to family farmers and fishermen.
        H.R. 975 is yet a further perfection of legislation that has been
    the subject of intense Congressional consideration and debate for
    nearly six years. It is essentially identical to bankruptcy reform
    legislation that the House considered and passed less then four months
    ago on the last day of the 107th Congress by a vote of 244 to 116.
    Indeed, the House on not one, but on six separate occasions has
    registered its unqualified bipartisan support for this legislation's
    predecessors in the last three Congresses.
        Arguably, some may wonder why it is even necessary to hold a
    hearing on this legislation given this fact and especially in light of
    the fact that over the course of the last three Congresses there have
    been at least 17 prior hearings on the subject of bankruptcy reform
    before this Subcommittee and the full Committee at which nearly 130
    witnesses testified.
        Nevertheless, we are here today to embellish further the
    legislative record in support of bankruptcy reform. Today's hearing
    will also provide a valuable opportunity for those of us, like myself--
    who are new to this Subcommittee or new to the Congress, like my
    colleagues from the states of Tennessee, Texas and Florida--to acquaint
    ourselves with H.R. 975's proposed reforms with the assistance of our
    excellent panel of witnesses.
        It is my hope that today's hearing will serve as a forum for the
    expression of all views on all issues presented by H.R. 975. From my
    perspective, it would be particularly useful for the witnesses to
    discuss whether the current bankruptcy law adequately deals with fraud
    and abuse and whether the proposed legislative reforms would assist
    those who are defrauded as well as those in the court system and in law
    enforcement who are charged with ferreting out fraud and abuse in the
    bankruptcy system. It would also be useful to hear from our witnesses
    with respect to how abuse and fraud in the current bankruptcy system
    impacts on American businesses and our nation's citizens generally; and
    why, given the current economic circumstances, the need for
    comprehensive bankruptcy reform is even greater.

        Mr. Cannon. I now turn to my colleague Mr. Watt, the
    distinguished Ranking Member of the Subcommittee, and ask him
    if he has any opening remarks.
        Mr. Watt. Thank you, Mr. Chairman. I want to, first of all,
    return the compliment and tell you how much I am looking
    forward to serving with you as the Chair of this Committee and
    serving in my capacity as the Ranking Member of the
    Subcommittee since this is our first official business of this
    term of Congress, and I think it is actually quite a tribute to
    you, Mr. Chairman, that there is a hearing taking place on the
    bankruptcy bill, because as I recall, 2 years ago one of the
    major complaints that we had was that the bill itself, without
    the benefit of a hearing for the new Members of the Committee
    or Subcommittee, went directly to the full Committee; no
    hearing at the Subcommittee level, no hearing at the full
    Committee level, and directly to markup. And some of us
    attributed that to the fact that the full Committee may have
    been trying to snub the Subcommittee Chairman.
        So it looks like you have got enough power to get a hearing
    at this level, and I doubt that we will get to mark the bill up
    at this level, but at least we ought to be having some
    hearings, even though this bill appears to be pretty much the
    same bill that we dealt with last time.
        I wish some of the new Members were here so that it would
    add power to my argument that a hearing such as this helps to
    inform the new Members of the Judiciary Committee, but maybe
    they have already made up their minds about it.
        At a minimum this hearing allows me to put on the record a
    couple of things that I have put on the record before, and let
    me just put a couple of things on the record. Number one, I,
    like most everybody in America, thinks that there is abuse of
    the existing bankruptcy system, and that some reform is needed
    to try to rein in the abuse of the bankruptcy system.
        Unlike many of my colleagues and the majority of the House,
    in fact, I do not believe this bill does a good job of doing
    that, and I want to restate again, much to the ire of my
    consumer friends and my creditor and debtor friends, my belief
    that a deal was made that minimizes the impact of this bill on
    fraud and abuse, and that deal basically allowed poor people
    to--whether they abuse the system or not, to go into one form
    of bankruptcy and not-so-poor people to go into another form of
    bankruptcy.
        I think the means test is a terrible idea if the objective
    is to get to people who are abusing the system, because I think
    people are abusing the system whether they fall above the means
    test, whether they fall below the means test, and some people
    are not abusing the system whether they fall above the means
    test or below the means test level.
        So if your purpose in doing bankruptcy reform was to do a
    reform bill that gets at fraud and abuse of the system, to go
    and set up a means test that automatically exempts some people
    from having to be responsible runs contrary, in my opinion, to
    that, and I have said it over and over again. But I won't
    belabor that. I don't have enough time to belabor it. I have
    said it over and over again. I continue to believe it. I think
    it is a terrible public policy decision to create a pauper's
    bankruptcy court and a higher-income bankruptcy court, and it
    is just bad public policy, and I will continue to say that
    throughout this process, even though virtually everybody is
    brought into this means test as a way of getting the bill
    passed.
        So if we could go back and roll up our sleeves and really
    get at the problems that are besetting the bankruptcy system
    and do the hard work that would be necessary to come up with a
    system that would get at the abuse that is going on, and not
    just kind of pass for some people, I would be the first to roll
    up my sleeves, but I don't think that is going to happen this
    term. It didn't happen last term. It didn't happen the term
    before that, and so I think we are about to engage in a
    travesty on the public.
        So with that, I will yield back whatever--I probably don't
    have any time--back, but I will yield it back anyway.
        Mr. Cannon. Given your eloquence and our relationship, we
    didn't run the clock, although we will in the future.
        Did you have a written statement you wanted to submit?
        Mr. Watt. No, Mr. Chairman.
        Mr. Cannon. Thank you.
        Without objection, all Members may place their statements
    in the record at this point. Is there any objection?
        Mr. Nadler. Is there any right to object that I can make a
    statement now?
        Mr. Cannon. Certainly. Would you like to make an opening
    statement?
        Mr. Nadler. Yes.
        Mr. Cannon. May I just ask, who would like to make an
    opening statement?
        Okay. Why don't you go ahead for 5 minutes, Mr. Nadler, and
    I shall--may--if I might just interject here. I shall tap when
    the light goes red, and if you could finish up, and also to our
    panel members who may not have done that before so that we can
    move the hearing expeditiously.
        Thank you, and the gentleman is recognized for 5 minutes.
        Mr. Nadler. Thank you, Mr. Chairman, and I am pleased to
    welcome you as our new Subcommittee Chair on the occasion of
    your first hearing at the helm of the Subcommittee. I would
    also like to thank you and Chairman Sensenbrenner for following
    regular order on this bill despite the great pressure that has
    been exerted in some corners to circumvent the normal process.
        Although we have been considering bankruptcy legislation
    since the end of 1997, this bill has gone through many
    incarnations. Indeed, this is the first hearing that we have
    held since the beginning of the last Congress. During that time
    many things have happened. The economy has worsened. Whatever
    the reasons, that is a fact. People are hurting, and more than
    that, businesses are hurting. This bill will make it much
    harder to rescue a business as a going concern and to keep it
    from liquidation, and thus it will hurt many employees,
    communities, trade creditors and other businesses
    unnecessarily.
        Making a discharge in bankruptcy more elusive will make it
    harder for consumers to get a fresh start and to continue to
    buy products. Household debt in this country has reached a
    record level. With that come more bankruptcies, but no serious
    economists would argue that a precipitous drop in consumer
    spending would help our economy.
        Bankruptcy is a trade-off. Encouraged risk-taking in
    business allows distressed families to remain in the economy,
    creating demand for products businesses must sell to remain
    alive. Bankruptcy doesn't cause default any more than a
    hospital causes people to be sick.
        Today's witnesses will stress the importance of making sure
    individuals understand the facts on bankruptcy before filing.
    The facts are--is that it is not a walk in the park. A debtor
    in Chapter 7 must give up all nonexempt assets in order to
    obtain a discharge. Secured debts must be paid, or the property
    is subject to foreclosure. The bankruptcy remains on the
    debtor's record for 10 years, and the debtor may not refile for
    6 years under current law and 8 under the bill, which is 1 more
    year than is found in Deuteronomy. Apparently the banks who
    wrote this bill believe they know better than God on this one.
        It can be hard to get a job, an apartment or a loan. As a
    Majority witness who had been a debtor told this Committee a
    few years ago, had she known the consequences of filing, she
    might not have done so.
        No one on this Committee seriously believes that people
    should avoid debts that they can repay. The question, rather,
    is does this bill make sense. Members should ask themselves why
    the overwhelming majority of bankruptcy professionals,
    scholars, trustees, creditor lawyers, corporation lawyers and
    judges are appalled that Congress is even contemplating this
    bill. There is a terrible disconnect between people who
    actually have to make the system function, regardless of their
    role or interest, who genuinely oppose this bill, and many
    people here in Congress and those who follow the demands of
    special interests who have a stake in some provision of this
    bill who generally think this is a great idea that requires no
    further investigation.
        Over the years this Committee has heard from, among other
    people, Ken Klee, one of the leading bankruptcy scholars and
    business bankruptcy lawyers in the country, and former
    Republican bankruptcy counsel to this Committee. He has drafted
    Supreme Court briefs signed by Members of this Committee. Ralph
    Mabey, one of the most respected business bankruptcy lawyers in
    the country, has also testified against this bill. The late
    Lawrence King of NYU, an editor in chief of the authoritative
    Collier on Bankruptcy, has testified against this bill. Bob
    Waldschmidt on behalf of The National Association of Bankruptcy
    Trustees and Hank Hildebrand on behalf of the National
    Association of Chapter 13 Trustees have strongly criticized
    this bill in testimony, notwithstanding the fact that their
    organizations do not take formal positions on the bill.
        We have heard from consumer rights organizations, women
    groups, child advocacy groups, unions, civil rights groups and
    every national bankruptcy organization in the country, who have
    testified that this bill will hurt consumers, will hurt
    families, will hurt children, yes, children, will hurt
    employees, minorities and the economy as a whole. It will raise
    costs to the system and will disrupt the efficient management
    of bankruptcy proceedings.
        Mr. Chairman, despite the votes in this House, opposition
    to this bill is hardly marginal. In fact, outside the Beltway
    it is mainstream among the Nation's experts in bankruptcy. We
    have had many hearings over the years, but the considered
    opinion of people in the position to understand this technical
    subject matter has been systematically ignored.
        Mr. Chairman, I know the leadership of this House is intent
    on moving the bill. I know it has been bought and paid for many
    times over by lobbying and campaign contributions. I know it is
    a priority of the President's, but we have a responsibility to
    the country to be deliberative, to take a careful look and to
    get it right despite the politics. Today we are having a
    hearing. I ask my colleagues to please listen and consider.
        Thank you, Mr. Chairman. I yield back the balance of my
    time.
        Mr. Cannon. I thank the gentleman from New York, Mr.
    Nadler.
        [The prepared statement of Mr. Nadler follows:]

    Prepared Statement of the Honorable Jerrold Nadler, a Representative in
                      Congress From the State of New York

        Thank you, Mr. Chairman. I am pleased to welcome you as our new
    Subcommittee Chair on the occasion of your first hearing at the helm of
    this Subcommittee. I would also like to thank you and Chairman
    Sensenbrenner for following regular order on this bill despite the
    great pressure that has been exerted in some quarters to circumvent the
    normal process.
        Although we have been considering bankruptcy legislation since the
    end of 1997, this bill has gone through many incarnations. Indeed, this
    is the first hearing that we have held since the beginning of the last
    Congress.
        During that time, many things have happened. The economy has
    worsened. Whatever the reasons, that is a fact. People are hurting, and
    more than that, businesses are hurting. This bill will make it much
    harder to rescue a going concern and thus hurt communities employees,
    trade creditors, and other businesses unnecessarily.
        Making a discharge in bankruptcy more elusive will make it harder
    for consumers to get a fresh start and continue to buy. Household debt
    has reached record levels. With that come more bankruptcies, but no
    serious economist would argue that a precipitous drop in consumer
    spending would help our economy.
        Bankruptcy is a trade-off. Encourage risk-taking in business, allow
    distressed families to remain in the economy creating demand for
    products businesses must sell to remain alive.
        Bankruptcy doesn't cause default any more than a hospital causes
    people to be sick. Today's witnesses will stress the importance of
    making sure individuals understand the facts on bankruptcy before
    filing. The facts are that it is not walk in the park. A debtor in ch.
    7 must give up all non-exempt assets in order to obtain a discharge.
    Secured debts must be paid or the property is subject to foreclosure.
    The bankruptcy remains on the debtor's record for ten years and the
    debtor may not refile for six years under current law and eight under
    the bill, which is one more year than is found in Deuteronomy.
    Apparently the banks believe they know better than G-d on this one. It
    can be harder to get a job, an apartment, or a loan. As a majority
    witness who had been a debtor told this committee a few years, had she
    known the consequences of filing, she may not have done so.
        No one on this Committee seriously believes that people should
    avoid debts they can repay. The question is rather, does this bill make
    sense. Members should ask themselves why the overwhelming majority of
    bankruptcy professionals, scholars, trustees, creditor lawyers,
    corporation lawyers, and judges are appalled that Congress is even
    contemplating this bill. There is a terrible disconnect between people
    who actually have to make the system function--regardless of their role
    or interests--oppose this bill, and here in Congress, the demands of
    special interests who have a stake in some provision in this bill
    generally think this is a great idea that requires no further
    investigation.
        Over the years, this committee has heard from, among other people,
    Ken Klee, one of the leading bankruptcy scholars and business
    bankruptcy lawyers in the country, and former Republican bankruptcy
    counsel to this Committee. He has drafted Supreme Court briefs signed
    by members of this Committee. Ralph Maybe, one of the most respected
    business bankruptcy lawyers in the country, has also testified against
    this bill. The late Lawrence King of New York University, and Editor in
    Chief of the authoritative Colliers on Bankruptcy, has testified
    against this bill. Bob Walschmitt on behalf of the National Association
    of Bankruptcy Trustees and Hank Hildebrandt, on behalf of the National
    Association of Chapter 13 Trustees, have strongly criticized this bill
    in testimony notwithstanding the fact that their organizations do not
    take formal positions on this bill.
        We have heard from consumer rights organizations, women's groups,
    child advocacy groups, unions, civil rights groups, and every national
    bankruptcy organization in the country that this bill will hurt
    consumers, families, children--yes, children--employees, minorities,
    and the economy. It will raise costs to the system, and disrupt the
    efficient management of bankruptcy proceedings.
        Mr. Chairman, despite the votes in this House, opposition to this
    bill is hardly marginal. In fact, outside the beltway, it is mainstream
    among the nation's experts. We have had many hearings over the years,
    but the considered opinion of people in a position to understand this
    technical subject matter has been ignored.
        Mr. Chairman, I know that the Leadership is intent on moving this
    bill. I know that it is a priority of the President's, but we have a
    responsibility to the country to be deliberative, to take a careful
    look, and to get it right no matter what the politics.
        Today, we are having a hearing. Please, I ask my colleagues, please
    listen.

        Mr. Cannon. The record should also reflect the presence of
    Mr. Delahunt from Massachusetts and Mr. Coble, from North
    Carolina. And my understanding is that Mr. Coble would like to
    be recognized for 5 minutes.
        Mr. Coble. Sixty seconds, Mr. Chairman.
        Mr. Chairman, thank you for having the hearing, A. B, abuse
    of the system is a problem that needs to be addressed. This
    bill may or may not be the appropriate vehicle. I don't think
    this bill--this bill may not be as good as its proponents
    contend, probably not as bad as its critics claim; probably
    subtle shades of gray. I appreciate you having the hearing, Mr.
    Chairman. I have another hearing going on now that I am going
    to probably have to probably go back and forth, but in any
    event, thank you for recognizing me.
        Mr. Cannon. I thank the gentleman, and we will be happy to
    try and accommodate your schedule for questioning if you would
    like to ask questions here.
        Mr. Delahunt.
        Mr. Delahunt. Just an inquiry, Mr. Chairman. Has there been
    a decision made as to when there would be a markup on this
    proposal?
        Mr. Cannon. Let me answer the gentleman by first responding
    to what the gentleman from New York suggested. I can assure you
    that I am here to listen to the panel, and we are studying this
    issue. And I don't believe we have set a date for a markup,
    although I can assure the gentleman that Mr. Sensenbrenner and
    others would like to move it quickly. But we will be thoughtful
    in the process, I can assure you.
        Mr. Delahunt. By quickly, I mean if I could just indulge my
    friend from Utah, are we talking a matter of weeks, or are we
    talking maybe after St. Patrick's Day?
        Mr. Cannon. I don't know.
        Mr. Delahunt. Don't know.
        Mr. Cannon. Quickly means as soon as this body with regular
    order can move it. So we will have to wait and let you know as
    soon as something is decided.
        I thank the gentleman.
        Mr. Nadler. Mr. Chairman.
        Mr. Cannon. Yes.
        Mr. Nadler. Before we start the witnesses, may I be
    recognized for a unanimous consent request?
        Mr. Cannon. Certainly.
        Mr. Nadler. Thank you, Mr. Chairman. I ask unanimous
    consent at this time to place into the record the letter
    supported by 225 diverse organizations opposing the bill. I
    would also ask that the written testimony of former bankruptcy
    judge and former head of the U.S. Trustee Program, Jerry
    Patchan, explaining his views on the problems of the bill be
    entered into the record. And additionally, I would ask
    unanimous consent that two articles, one an op-ed by the Public
    Employees Credit Union in North Carolina disputing the CUNA
    position on this bill, and the second an article quoting former
    ABI president and creditor attorney Ricardo Kilpatrick stating
    the bill is a terrible mistake be placed in the record. As we
    say in Brooklyn, Mr. Chairman, these people aren't chopped
    liver. I urge all the Members of the Committee take their
    concerns very seriously.
        Mr. Cannon. Without objection, so ordered.
        Mr. Nadler. Thank you, Mr. Chairman.
        [The material referred to follows:]

        Mr. Watt. I ask unanimous consent that a letter dated March
    4, 2003 from the American Bar Association be made a part of the
    record. It is addressed to you as Chairman of the Subcommittee.
        Mr. Cannon. Without objection, so ordered.
        [The material referred to follows:]

        Mr. Cannon. And I ask unanimous consent that we submit for
    the record, in addition to the testimony that we will receive
    today from the witnesses, written statements from the following
    organizations: The Bond Market Association, the International
    Council of Shopping Centers, National Association of Credit
    Management, National Association of Federal Credit Unions,
    National Multi-Housing Council and National Retail Foundation.
    In addition, I would like to submit for the record a statement
    by Philip Strauss of the San Francisco Department of Child
    Support Services. Without objection, so ordered.
        [The material referred to follows:]

      Prepared 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 House Judiciary
    Committee's Subcommittee on Commercial and Administrative Law in
    conjunction with its March 4, 2003 hearing on the Bankruptcy Abuse
    Prevention and Consumer Protection Act of 2003 (H.R. 975).
        ICSC is the global trade association of the shopping center
    industry. Its 41,000 members in the United States, Canada and more than
    77 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 2002, shopping centers in the U.S. generated
    over $1.2 trillion in retail sales and over $53 billion in state sales
    tax revenue, and employed almost 11 million people.
        First and foremost, ICSC would like to commend the House Judiciary
    Committee and this Subcommittee for its efforts over the past few years
    to enact meaningful bankruptcy reform legislation. We are hopeful that
    H.R. 975, recently introduced by Committee Chairman James Sensenbrenner
    (R-WI), will be enacted promptly so it can end existing abuses of the
    bankruptcy system. Although all of ICSC's concerns are not addressed in
    H.R. 975, 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
    few years, including Ames, Bradlees, Crown Books, FAO Schwartz, Filenes
    Basement, Grand Union, Kmart, Lechters, Montgomery Ward, United
    Artists, and Zany Brainy, just to name a few. It seems as if every week
    another longstanding business is declaring bankruptcy. Furthermore,
    until our nation's economy reaches full recovery, 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 U.S. 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 may enter into an agreement
    that restricts the tenant, or an assignee, from 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. In a significant current case, Kmart has
    filed a motion to extend the time period to assume or reject their
    leases to 270 days after confirmation of their plan of reorganization,
    which would be well in excess of two years from their original filing.
        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 H.R. 975 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 H.R. 975.
       ``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).
        For example, there was recently a case involving a children's
    educational retailer in the Boston-area in which the judge allowed the
    trustee to assign two of its unexpired leases to a jeweler and a candle
    store, even though another children's educational retailer offered
    bids, albeit lower ones, on those leases. As a result, the shopping
    center owner lost the ability to maintain an educational store in his
    center--a major draw to many of its customers.
        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 H.R. 975
    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 H.R.
    975 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 H.R. 975 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
    left 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 non-monetary 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, post-rejection 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 H.R. 975 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 setoff 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 be treated as an administrative priority for three
    years, and that any remaining rents due under the lease be 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.

                                   CONCLUSION

        ICSC appreciates the opportunity to present its views on this very
    important matter, and would like to thank this Subcommittee, as well as
    the full Committee and Chairman Sensenbrenner, for all of its work over
    the past few years to enact bankruptcy reform legislation. We are
    hopeful that this bill will pass both the House and Senate soon and be
    signed into law by President Bush.

                     Prepared Statement of Robin Schauseil

        Good afternoon.
        Please let me introduce myself to you: my name is Robin Schauseil
    and I am the President of the National Association of Credit Management
    (NACM). I am pleased to present the perspectives of the National
    Association of Credit Management (NACM) to you regarding H.R. 975, the
    Bankruptcy Abuse Prevention and Consumer Protection Act of 2003. I want
    to extend our thanks to you for affording NACM the opportunity to share
    its views with you.
        Founded in 1896, NACM is a 24,000 member international trade
    association composed of corporate credit executives, who represent
    23,000 different businesses. NACM represents American business credit
    professionals from all 50 states, and is proud to have member
    representatives from more than 30 countries around the world. NACM's
    mission is the constant improvement and enhancement of the business
    trade credit profession.
        The NACM membership is comprised of American businesses of all
    kinds: manufacturers, wholesalers, service industries, and financial
    institutions. The profile of the NACM members ranges from the smallest
    businesses to a majority of the Fortune 500. NACM's members make the
    daily decisions regarding the extension of unsecured business and trade
    credit from one company to another. In fact, business credit executives
    provide billions of dollars each day through the extension of business
    and trade credit among companies around the world.
        NACM is very pleased to support H.R. 975 because of the commercial
    bankruptcy laws it improves. My comments will only focus on the
    commercial issues raised in the proposed legislation.

                   SMALL BUSINESS CHAPTER 11 REORGANIZATIONS

        Subtitle B of the legislation contains the provisions dealing with
    small business reorganizations. NACM supports the efforts to create
    substance and procedure to expedite the administration and conclusion
    of reorganization cases for small businesses. These provisions were
    originally offered to proposed bankruptcy legislation as part of the
    recommendations of the National Bankruptcy Review Commission (NBRC).
    The NBRC conducted several hearings and received considerable testimony
    regarding the problems that small businesses have in bankruptcy
    proceedings. The premise behind the need for small business
    reorganization proposal is simple: the faster a small business can
    enter and exit the bankruptcy process the better the outcome is for all
    affected parties. Languishing in bankruptcy court strips assets from
    the debtor that could be otherwise be dedicated to a plan for
    reorganization that creditors could approve. Lengthy delays also deny
    creditors any hope of recovery of payment for goods or services
    extended to the debtor should the case need to be converted to a
    Chapter 7.
        Studies and statistics continue to dramatically show that many
    small businesses have been unable to have a plan of reorganization
    approved because of the time and expense that languishing in Chapter 11
    causes. The current lengthy process of a Chapter 11 proceeding makes it
    extremely difficult for small business debtors to viably continue
    operations, balancing employment and service levels, paying taxes, and
    fully or partially satisfying claims of creditors. These delays create
    even more challenges for the small business: its own customers are
    fearful of the future for the small business in distress, impacting
    future business transactions.
        Testimony provided to the NBRC indicated that in a high percentage
    of cases, small business debtors were unable to produce a check
    register at the first meeting with creditors. Additionally, the
    overwhelmingly high conversion rate for small business debtors from
    Chapter 11 reorganization to Chapter 7 liquidation indicates that most
    small businesses should have been in Chapter 7 to begin with; greatly
    reducing court expenses, attorney fees and unclogging bankruptcy court
    dockets.
        The model contemplated under this legislation is patterned after an
    expedited procedure used in the federal bankruptcy court in eastern
    North Carolina. Under the local rules devised by Bankruptcy Judge
    Thomas Small, the period of time in which small business cases are
    adjudicated has dramatically been reduced. Most importantly, there have
    been no measurable deleterious impact on any small businesses to have a
    plan of reorganization presented and approved by the court. In fact,
    Judge Small's statistics indicate that a higher percentage of small
    business debtors are able to have their plans of reorganization
    approved than is the national average.
        If this legislation is enacted, it could have the effect of helping
    to streamline the bankruptcy process by eliminating much of the time
    consuming issues that currently involve small businesses. Moreover,
    given the very low rate of successful reorganizations of businesses
    that file Chapter 11, the improvements contained in the legislation to
    the reorganization process for small businesses should dramatically
    affect the reorganizations on a positive basis. Given that the
    overwhelming majority of business bankruptcy cases are small
    businesses, the timely consideration of such cases will have the effect
    of ameliorating the huge backlog on the court dockets. Finally, because
    these expedited procedures will apply to only those businesses with
    less than $2 million in debts, the real benefit relief will be extended
    to genuine small businesses.

                                  PREFERENCES

        NACM is equally supportive of the provisions contained in Sections
    409 and 410 of the bill to correct inequities that currently exist with
    respect to preferential transfers. While NACM supports the concept of
    the equality of treatment of creditors, the current statute creates an
    environment for the feeding frenzy of trustees, attorneys and others
    not part of the creditor body at the expense of vigilant trade
    creditors, with no ultimate benefit being derived by creditors of the
    bankrupt estate.
        Under current law, instead of having the trade creditor class be
    the beneficiary of preferential transfer recoveries, the funds that are
    recovered are paid to the professionals who are employed to recover
    them. Specifically citing small preference actions, statistics provided
    to the NBRC showed that bringing preference actions for $5,000 or less
    does nothing to substantially enhance distribution to creditors or
    restore funds to the debtor's estate. Again, it was shown that these
    activities do, however, generate substantial attorney expenses. This
    has resulted in a large ``breakdown'' of the system, forcing vigilant
    trade creditors to expend considerable sums for representation only to
    learn that the ultimate beneficiaries of the recoveries do not
    correlate to those intended by the original legislation.
        The changes address problems in two important areas. First, the
    clarification of what constitutes a transaction conducted under the
    ordinary course of business removes the doubt and uncertainty that has
    permeated case law and created difficulties for the ordinary
    transaction of business with distressed debtors. The mere fact that a
    business may be in financial distress should not create an impediment
    to ordinary course dealings. Indeed, if this were to be the case, it
    would only precipitate additional bankruptcy filings. The change
    created by Section 409 of the legislation clarifies that creditors
    willing to continue to extend credit to financially distressed
    businesses will not be penalized.
        Second, the changes with respect to when and where certain
    preference actions may be filed are equally beneficial. Bringing
    preference actions in distant courts only forces unreasonable
    capitulation by creditors when they may have legitimate defenses but
    choose not to make them because of the cost involved in securing
    representation in those courts. These changes will also afford
    protection to those creditors who act in good faith when dealing with
    financially distressed businesses.
        Sections 409 and 410 are consistent with the recommendations of the
    NBRC that took great care and time in examining these issues. NACM
    agrees with the NBRC that these changes will help to create a ``level
    playing field'' with respect to bankruptcy administration.
    Additionally, these provisions, if enacted, will eliminate unnecessary
    and unproductive litigation that can affect the already overburdened
    bankruptcy court system.

                         CREDITOR COMMITTEE COMPOSITION

        NACM wholeheartedly supports the language in Section 405 which
    permits the court to change the membership of the creditors committee
    if the change is necessary to ensure adequate representation of
    creditors and equity security holders. Presently, there is no judicial
    redress in the event that, for whatever reason, a creditors committee
    that is appointed does not adequately represent the creditors as a
    whole. This provision correctly provides for appropriate judicial
    oversight of a very important component of the bankruptcy
    reorganization process.

                                  RECLAMATION

        NACM also strongly endorses Section 1227 of H.R. 975 to modify
    specific reclamation provisions of the bankruptcy code. Currently, when
    dealing with the reclamation of goods, the bankruptcy code does not
    protect the rights of manufacturers and distributors in most cases.
        Some of the legal and practical problems that have been created are
    the following:

            1.  Vendors do not know of the filing of a bankruptcy
            proceeding in sufficient time in order to file a reclamation
            notice.

            2.  Current law permits reclamation only when the goods are
            still in the possession of the debtor when notice is received.
            With multiple operations of a debtor, this becomes impossible
            to prove or verify.

            3.  The rights of secured creditors pre-empt any reclamation
            rights.

            4.  There is no sanction on the debtor for failing to comply
            with the reclamation notice.

            5.  Vendors are required to immediately hire counsel in order
            to protect reclamation rights, only to be delayed by the
            lengthy court proceedings.

            6.  The procedure gives the debtor opportunities to force
            concessions from vendors with respect to post-petition credit
            in order to gain concessions with respect to reclamation.

            7.  Traditionally, manufacturers, distributors and other
            vendors receive little benefit from the current reclamation
            law.

        Section 1227 would rectify these problems by creating a new
    approach for the treatment of reclamation claims, providing an option
    for a creditor to consider in exerting a reclamation claim. The
    creditor would be afforded a 45-day period from the date the debtor
    received the goods for the return of goods under a reclamation claim.
    Alternatively, a creditor could choose to have an administrative
    priority for all goods delivered within 20 days of the filing. Under
    the legislation, the creditor would be able to use only one of these
    options, not both.
        Simply increasing the reclamation period from 20 to 45 days will
    not solve the problem. While this initially appears to protect vendors,
    it may have the opposite effect. If the reclamation date reaches too
    far back, Chapter 11 debtors will not be able to confirm a Chapter 11
    Plan because of the burden of administrative claims that they may be
    required to be paid on confirmation as a result of the reclamation
    demands. (Under the code, all administrative expenses must be paid in
    full before a plan can be confirmed.) Placing unreasonable burdens on
    debtors in order to effect a confirmation does not protect the
    interests of creditors in the long run.
        NACM believes that the following will be the benefits of such a
    change:

            1.  All vendors of goods will be protected.

            2.  There will be no ``race'' to the courthouse to file
            notices.

            3.  Vendors will not be adversely prejudiced if they do not
            know of the bankruptcy filing during the first days following
            the filing.

            4.  All vendors of goods will be entitled to an administrative
            priority claim for the goods actually received by the debtor
            within 20 days of the filing of the bankruptcy case. Thus,
            debtors contemplating the filing of a bankruptcy proceeding
            will have a deterrent to ``loading up'', as they will know that
            in order to confirm any Chapter 11 Plan, they will have to pay
            in full for all goods received within the 20-day period at the
            time of confirmation, not just those that are in inventory when
            notice is received.

            5.  This does not in any way alter the rights of secured
            creditors, so there should be no opposition by lenders. It
            does, however, impose a payment obligation on the Debtor which
            may have to be funded by the lenders in order for a Chapter 11
            Plan to be confirmed.

            6.  Solvency or insolvency of the debtor is no longer an issue
            to be considered or litigated.

            7.  The issue of whether the goods are on hand and are
            identifiable is no longer an issue to be considered or
            litigated.

                            RETAIL LEASE ASSUMPTION

        Previously, NACM has expressed its concern with the language
    contained in Section 205 of the bill. While NACM clearly supports the
    most expeditious administration of bankruptcy cases as possible,
    artificial deadlines should not be created merely to enhance the rights
    of one constituency. Artificially limiting a debtor's right to assume
    or reject the lease at 120 days may not always be in the best interest
    of all creditors and other parties in interest. There is no problem in
    establishing a deadline which should be the ``normal'' deadline, but
    there must be flexibility built into the law to permit the court to
    modify the deadline if facts and circumstances so warrant.
        The current Section 205 creates a burden upon large retailers and
    other similar businesses which may lead to decisions which have a long
    term effect on the reorganization process being hastily made. For
    instance, had this law been enacted and applied to the K-Mart
    bankruptcy filing, one could not comprehend the magnitude of the
    difficulties that would have developed for that debtor. NACM urges that
    the proposed legislation be modified to provide that the court may
    extend the period to be determined under the amendment within the
    discretion of the court.
        The National Association of Credit Management appreciates this
    opportunity to provide the perspectives of its members to the
    Subcommittee on the issue of bankruptcy reform. We believe that need
    for bankruptcy reform, especially in the area of commercial practices,
    is long overdue. We applaud the Chair and members of the Committee for
    their diligence in attempting to again move this legislation that is so
    very vital to America's business community.

           Prepared Statement of the National Multi Housing Council/
      National Apartment Association Joint Legislative Program, National
      Leased Housing Association, Manufactured Housing Institute and the
                      Institute of Real Estate Management

        Chairman Sensenbrenner and members of the Committee, the
    undersigned organizations thank you for this opportunity to share the
    views of rental housing providers as you consider the Bankruptcy Abuse
    Prevention and Consumer Protection Act of 2003 (H.R. 975).
        The National Multi Housing Council represents the principal
    officers of the apartment industry's largest and most prominent firms.
    The National Apartment Association is the largest national federation
    of state and local apartment associations. NAA is comprised of 163
    affiliates and represents more than 30,000 professionals who own and
    manage more than 4.6 million apartments. NMHC and NAA jointly operate a
    federal legislative program and provide a unified voice for the private
    apartment industry.
        For the past thirty years, the National Leased Housing Association
    (NLHA) has represented the interests of developers, lenders, housing
    managers, housing agencies and others involved in providing federally
    assisted rental housing. Our members are primarily involved in the
    Section 8 housing programs--both project-based and tenant-based. NLHA's
    members provide housing assistance for nearly three million families.
        The Manufactured Housing Institute (MHI) is the national trade
    organization representing all segments of the factory-built housing
    industry. MHI serves its membership by providing industry research,
    promotion, education and government relations programs, and by building
    and facilitating consensus within the industry.
        The Institute of Real Estate Management (IREM), an affiliate of the
    NATIONAL ASSOCIATION of REALTORS, is an association of property and
    asset managers who have met the strict criteria in the areas of
    education, experience, and ethics. Today, IREM members manage 24%, or
    6.2 million of the nation's conventionally financed apartment units,
    and 1.4 million units of federally assisted housing.
        Bankruptcy reform has been a long time in coming. More than 1,800
    real estate professionals, mostly small businesses, have written to the
    National Bankruptcy Review Commission and Congress since 1995,
    providing compelling evidence of the need for reform. Over the past
    several years, the rental housing industry has witnessed an increased
    number of residents who manipulate the Code in order to live in their
    apartments without paying rent. The source of this abuse is the Code's
    automatic stay provision. The undersigned organizations urge Congress
    to enact the balanced reforms found in the Bankruptcy Abuse Prevention
    and Consumer Protection Act (H.R. 975) and thereby reduce opportunities
    for abuse by those who file for bankruptcy in order to ``live rent-
    free.''
        Reform is more critical now than ever. According to a recently
    released report by the Administrative Office of the U.S. Courts, new
    bankruptcy filings continue to break records. The latest data show that
    well over 1.57 million bankruptcies were filed in 2002, up 5.7 percent
    from the previous record set in 2001. Non-business filings made up 97.6
    percent of those filed last year.
        Enactment of beneficial bankruptcy reform is long overdue. The
    widespread bipartisan support for bankruptcy reform, as evidenced by
    the more than 50 Members of Congress who have already joined as
    cosponsors of H.R. 975, reflects strong public opinion that the
    Bankruptcy Code can and must be made to work better as it becomes a
    more common means for Americans to restructure their finances.
        In particular, the undersigned organizations strongly urge Congress
    to get the job done and remove the loopholes in the U.S. Bankruptcy
    Code that allow resident debtors who no longer have a right to remain
    on the premises to stay after declaring bankruptcy. Rental housing
    residents who file bankruptcy primarily to evade their lease
    obligations impose significant economic losses on apartment owners (98%
    of which are small businesses) and prevent other renters desiring to
    move into the unit from doing so. Attorneys continue to advertise to
    rental housing residents that the Bankruptcy Code is a means to live
    ``rent-free'' for months at a time. In other cases, the automatic stay
    significantly delays the removal of rental housing residents who are
    using drugs or threatening property or other residents and guests.
        These ``free ride'' examples--more are detailed below--are abuses
    of the Bankruptcy Code's ``fresh start'' principle. If the proper
    reforms are made, small business apartment owners would regain timely
    possession of their property and lower-income families would have
    quicker access to scarce affordable housing.
        H.R. 975 includes an important, balanced step to improving the
    automatic stay for the benefit of rental housing providers and
    residents alike. Section 311 is the result of extended negotiations
    between Senators Jeff Sessions (R-AL) and Russell Feingold (D-WI) that
    have yielded an agreement that balances the concerns of residents in
    bankruptcy with property owners seeking to reclaim their property. The
    undersigned organizations are appreciative of the significant work that
    these members in particular invested to reach agreement on the language
    of this section. While the agreement is not everything that the
    undersigned organizations have sought, we believe it is a fair and
    balanced compromise that will yield important benefits to the
    availability of affordable and market-rate rental housing in this
    country.
        Before Congress and the National Bankruptcy Review Commission,
    NMHC/NAA have catalogued numerous examples of frivolous bankruptcy
    filings by residents since the 1990s. Three examples out of hundreds
    previously presented are recounted here.
        An Army Colonel leased his home to a couple with three small
    children while he was stationed overseas. Before leasing the property,
    the firm that managed the Colonel's property ran a credit check and
    found that the couple had a joint income well in excess of the monthly
    rent. There was nothing in the credit report to indicate what the
    Colonel and his family would face over the next two years.
        Over the course of the lease term, the residents occasionally made
    late payments, but their rent was always paid. Eventually, however, the
    residents failed to pay their rent despite several notices. After the
    management firm sent them a three-day notice to vacate for non-payment
    of rent, the firm decided to give the residents yet another chance and
    work out a repayment schedule.
        What the management firm representatives found when they approached
    the house was shocking: It was in shambles. The oven door had been
    ripped off its hinges; there were large and numerous holes in the sheet
    rock, some with silk flowers stuck in them; you could not tell what
    color the carpet was due to the trash and food strewn on it; the toilet
    in the upstairs bathroom had been ripped out of the floor; the air
    conditioning compressor was in pieces; several windows were broken; and
    the downstairs bathroom door had been kicked in and was hanging by one
    hinge. The management firm gave the residents a final three-day notice
    to vacate for non-payment of rent. The residents never responded to
    that notice, and after the required three-day notice period, the
    managers filed for eviction.
        Even after the eviction filing, the residents failed to pay their
    rent. Finally, a judge granted the eviction and ruled that the
    residents would have to pay all overdue rent. The residents then
    claimed that they were financially unable to post the required bond to
    appeal. At a hearing on that claim, the judge confirmed that the
    residents had both the income and the assets to post the appeal bond
    and granted the management firm a writ of possession. The next day,
    however, the managers were notified that the residents had filed for
    bankruptcy, effectively stopping the eviction process because of the
    Code's automatic stay provision.
        Following multiple failed attempts to negotiate a settlement, the
    management firm filed for relief from the automatic stay. The residents
    then demanded a hearing on that motion. During the three-month period
    before the hearing, the residents lived in the house rent-free. Seven
    months after the ordeal began, and four months after the bankruptcy
    court assumed jurisdiction, the judge agreed to a settlement that
    directed the residents to move out and repair all damages. When the
    residents had not moved out in accordance with the settlement, the
    court issued another writ of possession for the next day. Finally, the
    resident's possessions were removed from the house and their bankruptcy
    petition was dismissed. The overall cost to the Colonel (the owner of
    the property) was approximately $21,000. By the time the residents were
    finally evicted, the Colonel had to borrow on his life insurance, sell
    assets, and run up the balance on his credit cards. When the house was
    sold shortly thereafter, the Colonel received nothing.
        Sheri Perez, an owner of 8 rental units in Costa Mesa, CA, had
    renters in two of the units declare bankruptcy in the same month. ``I
    know for a fact that these two tenants used the automatic stay and
    filing bankruptcy just to get out of paying any rent,'' she wrote to
    the National Bankruptcy Review Commission. Each of the renters owed two
    months' rent when they moved out--25 percent of Ms. Perez's entire
    rental income for those months.
        Dan Snell, a property owner in Temple City, CA who manages 50
    rental properties, recounted the loss sustained on a 10-unit property
    he manages in his letter to the Bankruptcy Review Commission. A
    resident who was being evicted for selling drugs on the property
    declared bankruptcy. Before the bankruptcy court ordered relief from
    the automatic stay to permit Mr. Snell to remove this drug-seller, Mr.
    Snell had to wait two months for the court to permit the eviction to
    proceed. ``During that period,'' wrote Mr. Snell, ``the tenant
    continued his illegal activities and three of the other tenants moved
    out because of that activity. This episode cost the owner several
    thousand dollars in legal fees and lost rent.''
        These are just three examples of how abusive residents manipulate
    the Bankruptcy Code to live rent-free.
        The bankruptcy system was established to give individuals a second
    chance, not to be manipulated as a tool by residents to avoid eviction
    and live rent-free at the expense of rental housing providers and
    depriving others from moving into that rental unit.
        The undersigned organizations ask that the members of this
    Committee and the U.S. House of Representatives pass H.R. 975. We urge
    you to close the automatic stay loophole to ensure the viability of
    small business rental housing providers and the affordable and market-
    rate housing they provide.

    NMHC/NAA Joint Legislative Program
    1850 M Street NW #540
    Washington, DC 20036

    National Leased Housing Association
    1818 N Street NW #405
    Washington, DC 20036

    Manufactured Housing Institute
    2101 Wilson Blvd. #601
    Arlington, VA 22201

    Institute of Real Estate Management
    700 11th Street NW
    Washington DC 20001

                                     ______

                      Prepared Statement of Dean Sheaffer

        Good afternoon. My name is Dean Sheaffer. I am Senior Vice
    President of Credit and CRM 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 Chairman Cannon and Ranking Member Nadler 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 2002 sales of $3.6 trillion. NRF's
    members and the consumers to whom they sell are greatly affected by the
    recent surge in consumer bankruptcies.
        Mr. Chairman, I have testified several times over the past three
    Congresses on the issue of bankruptcy reform. Today, I am here to let
    you know that Bankruptcies are still out of control. In fact, they are
    even more out of control than ever. Nationally, we reached a record
    high of more than 1.5 million consumer filings last year. In fact,
    between 1995 and 2002, consumer filings rose by seventy percent (70%).
    In Pennsylvania where we are based, consumer bankruptcies more than
    doubled in that same time period. As a business, we didn't even get a
    reprieve from filings in the late 1990s when the economy was
    registering record expansion and the nation was enjoying near full
    employment. In 1996, annual consumer bankruptcies topped 1 million for
    the first time in history and they have only continued to rise.
        At Boscov's, we have approximately 500,000 billed credit accounts.
    In 2002 we closed or reduced the credit limit or took other pre-emptive
    action on about 40,000 accounts in direct response to increased
    bankruptcies. Notably, Boscov's combined January and February 2003
    bankruptcy write-off was more than 22% higher than January and February
    of 2002.
        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 by limiting 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 know that in 2003 we are living in tougher economic
    times than just a few years ago, but I would like the opportunity to
    put all the numbers in perspective. Consumer bankruptcy filings are
    almost five and one-half (5\1/2\) times higher than they were in 1980,
    a time of generally worse economic conditions. Interestingly, despite
    front-page headlines reporting the Enron collapse, the World.com
    bankruptcy and the K-mart reorganization, overall business bankruptcies
    have been down for nine of the last ten years. In fact, they have been
    cut in half from an all-time high of 71,000 in 1991. It does not, then,
    make sense that consumer bankruptcies have consistently continued to
    skyrocket. And, if the current rate of filings holds within the next
    decade, 1 in every 7 American households will have filed for
    bankruptcy. Mr. Chairman, the system is seriously, seriously flawed.
        It is estimated that over $40 billion was written off in bankruptcy
    losses in 2000, which amounts to the discharge of at least $110 million
    every day of that year. 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 $1,000 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. Last year, to make up for these losses, it cost each of
    our Nation's 100 million households several hundred dollars. Estimates
    suggest this year's number will again be higher--it will be interesting
    to see the first quarter numbers from 2003 when they are published in
    the coming weeks. As I noted above, our internal numbers reflect that
    the tide is still rising.
        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, especially in these times of economic
    downturn. The bankruptcy system exists to help those who have suffered
    a catastrophic accident, illness or divorce, or those who have
    experienced the loss of a business or job from which they cannot
    otherwise recover. It is both the safety net and the last resort for
    people in trouble. The knowledge that the bankruptcy system exists to
    catch them in a financial fall, even though it might never be used, is
    important. Finally, most people who file for bankruptcy need relief. We
    must be very careful to distinguish the average filer, who uses the
    system properly, from that smaller, but important group of others who
    misuse the system for their benefit.
        It is this trend with which we must be concerned. We believe
    changing consumer attitudes regarding personal responsibility and
    inherent flaws in our bankruptcy process have caused many individuals,
    who do not need full bankruptcy relief, to turn to the system
    regardless. They use it to wipe out their debts, without ever making a
    serious effort to pay. Some of this change in usage results from a
    decline in the stigma traditionally associated with filing for
    bankruptcy. Some of it results from suggestions by others who urge
    individuals to use bankruptcy to ``beat the system.'' According to a
    poll conducted in November, 2002, by Penn, Schoen and Berland, 82
    percent of voters say that filing for bankruptcy is more socially
    acceptable than it was just a few years ago. Whatever the cause,
    irresponsible filings must be curtailed and consumer attitudes should
    be altered.
        My experience at Boscov's, and that of credit managers at other
    stores with whom I have spoken, further convinces me that the result of
    this poll is right on target. 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, we would occasionally see customers whose payment patterns were
    more erratic. This kind of payment history suggested to us that the
    customer was experiencing some sort of financial difficulty. We would
    then monitor the account and intervene as necessary, perhaps by
    suggesting consumer credit counseling or by limiting the customer's
    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 get that an individual is experiencing financial
    difficulty is when we receive notice of his bankruptcy petition. A
    1998/1999 study at Boscov's showed that almost half of the bankruptcy
    petitions we receive are from customers who are not seriously
    delinquent with their accounts. It appears that bankruptcy is
    increasingly becoming a first step rather than a last resort.
        Mr. Chairman, consumers must have a good credit history to qualify
    for and continue to use a Boscov's card. Yet we, and other retail
    credit grantors, have been receiving bankruptcy filings without warning
    from individuals who have been solid customers for years. We all
    experience temporary financial reversals in life. Most of us learn
    that, if you grit your teeth and tighten your belt a notch, you can get
    through it. But many people no longer see it that way. The rising
    bankruptcy filings reflect this.
        Part of it is trend can be attributed to increasingly aggressive
    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'' your finances. I question
    whether these aggressive advertisers inform their clients about the
    serious downsides of filing for bankruptcy. There are also bankruptcy
    petition preparers: clerk typists who simply fill out forms for filers.
    The client may never meet a lawyer. And with the widespread use of the
    Internet, websites that proclaim ``File bankruptcy for as little as
    $99'' are multiplying. I firmly believe these low cost ``bankruptcy
    mills'' are part of the problem.
        To some degree, the rise in bankruptcy filings can also be
    attributed to the events as they have played out here in Congress over
    the past seven years. Mr. Chairman, Ranking Member Nadler, each time
    this legislation comes close to final passage we see a spike in
    bankruptcy filings. Individuals are often counseled by attorneys or
    other bankruptcy professionals to ``file quick, before bankruptcy
    reform becomes law'' in order to reap the benefits of a full Chapter 7
    discharge. In fact, distortions of this legislation run rampant in the
    press and elsewhere, and have caused many to believe that they won't be
    able to file for bankruptcy at all once this reform becomes law. As we
    all know, this is simply not correct.
        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, their car or even their
    boat. Recent polling suggests that sixty-nine percent (69%) of voters
    who know someone who has declared bankruptcy support tightening the
    law. Among these people, another fifty-three percent (53%) support
    reform because they know that they are bearing the burden of the
    current system. Furthermore, the same poll shows that fifty-six percent
    (56%) of all voters strongly favor an income test to ensure that those
    bankruptcy filers who can afford to pay back part of their debt do so.
    Mr. Chairman, responsible consumers are clearly getting fed up.
        I just want to spend a final few minutes detailing the retail
    industry's long-standing support for this bill. In 1998, during the
    105th Congress, 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 often use Chapter 7 to push their debts onto
    others regardless of the filer's ability to pay, the up front, needs-
    based test would have said, ``No. Pay what you can afford.''
        In the 106th Congress we continued to support the conference report
    that passed both the Senate and House, but was pocket-vetoed by
    President Clinton during his final days in office. Again, in the 107th
    Congress, we supported the conference report for H.R. 333.
    Unfortunately, that bill fell victim to a politically motivated debate
    over essentially unrelated issues during the final days of the
    Congress. Like last year, we are deeply concerned that if this heavily
    negotiated bill is further watered down the intended benefits will be
    lost. We are also deeply concerned that some will again wish to attach
    amendments that will act as ``poison pills'' moving forward. While
    these issues may deserve consideration, they should stand on their own
    merit. In the context of this debate, their primary effect is to derail
    critical and needed changes to bankruptcy law as demonstrated by the
    November 13, 2002 vote on the House floor.
        On behalf of the National Retail Federation, I 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 without further
    amendment, now.

        Mr. Cannon. Without objection, all Members may place their
    statements in the record at this point. Any objection? If not,
    so ordered.
        Without objection, the Chair will be authorized to recess
    the Subcommittee today at any point. Hearing none, so ordered.
        On unanimous consent, I request that Members have 5
    legislative days to submit written statements for inclusion in
    today's hearing record. Hearing no objection, so ordered.
        I am pleased to now introduce the witnesses for today's
    hearing. Our first witness is Mr. Lawrence Friedman, who is the
    Director of the Executive Office for the United States Trustees
    in the Department of Justice in Washington, D.C. Prior to his
    appointment as Director, which I know it occurred 1 year ago
    today, Mr. Friedman was a partner in the Southfield, Michigan,
    law firm of Friedman and Kohut, where his practice included
    consumer business bankruptcy matters as well as commercial
    litigation. In his capacity as a Chapter 7 trustee, Mr.
    Friedman administered more than 10,000 bankruptcy cases. Mr.
    Friedman received his undergraduate degree from Hillsdale
    College in Hillsdale, Michigan, and his law degree from Thomas
    M. Cooley Law School in Lansing, Michigan.
        Our next witness, Ms. Lucile Beckwith, is president and
    chief executive officer of the Palmetto Trust Federal Credit
    Union located in Columbia, South Carolina. Ms. Beckwith has
    served in that capacity since 1980. Today Ms. Beckwith appears
    on behalf of the Credit Union National Association, which
    represents more than 90 percent of the 10,500 Federal and State
    credit unions across the Nation. Palmetto Trust, which is a
    member of this organization, is a $21.3 million federally
    chartered credit union with approximately 3,700 members.
        Joining Ms. Beckwith will be Judith Greenstone Miller. Ms.
    Miller appears today on behalf of the Commercial Law League of
    America. Founded in 1895, the Commercial Law League is the
    Nation's oldest organization, with nearly 5,000 professionals
    engaged in collections, creditors' rights and bankruptcy
    matters. Ms. Miller is a member of the law firm of Raymond &
    Prokop, located in Southfield, Michigan. Her practice focuses
    on bankruptcy and insolvency matters, creditors' rights and
    commercial litigation. She represents secured and unsecured
    creditors, debtors, and bankruptcy trustees in Chapter 11
    organizations. Ms. Miller received her law degree cum laude
    from Wayne State University School of Law in 1978. Prior to
    that, she attended the University of Michigan where she
    obtained her undergraduate degree, also cum laude, in 1975.
        George Wallace, who is a counsel to the law firm of Eckert
    Seamans Cherin & Mellot, is our final witness. Mr. Wallace
    speaks today on behalf of the Coalition of Responsible
    Bankruptcy Laws, which represents a broad spectrum of consumer
    creditors, including retailers, banks, credit unions, savings
    institutions, mortgage companies, sales finance companies and
    financial service providers. His practice includes
    representation of debtors and creditors. He has also
    specialized in consumer mortgage credit. Beginning the
    practice--or before beginning the practice of law, Mr. Wallace
    was a professor of law for 15 years. He taught at Tulane
    University, the University of Iowa College of Law, University
    of Virginia, Stanford and Rutgers. He served as a faculty
    adviser to a low-income legal clinic that he started in Iowa.
    He also served as trustee and debtors' counsel. Mr. Wallace
    received his law degree from the University of Virginia Law
    School, where he was a member of the Order of the Coif and the
    Law Review. He received his bachelor of arts degree from Yale
    University cum laude.
        I ask that each witness present his or her oral remarks
    within the 5-minute period, as we talked about earlier. I will
    tap the gavel as soon as the red light goes on, and we will do
    that without distinction, but at that point if you could wrap
    up in a reasonable amount of time, we would appreciate that.
    Your written statements will be included in the hearing record.
    So feel free to summarize or highlight the salient points of
    your testimony.
        After the witnesses have presented their remarks, the
    Subcommittee Members in order that they arrive will be
    permitted to ask questions of the witness subject to the 5-
    minute limitation. There may also be a second round of
    questioning if the panel desires--or if the Committee desires.
        Mr. Friedman, would you now proceed with your testimony.

     STATEMENT OF LAWRENCE A. FRIEDMAN, DIRECTOR, EXECUTIVE OFFICE
    FOR UNITED STATES TRUSTEES, UNITED STATES DEPARTMENT OF JUSTICE

        Mr. Friedman. Thank you, Mr. Chairman and Members of the
    Subcommittee. I appreciate the opportunity to appear before the
    Subcommittee to discuss the United States Trustees Program'
    ongoing work to combat fraud and abuse under current bankruptcy
    law, as well as the potential enhancement of this work through
    omnibus bankruptcy reform legislation. I submit my written
    testimony for the record, and will take a few minutes now to
    focus on the bankruptcy reform legislation.
        We believe the provisions proposed in H.R. 975, the
    ``Bankruptcy Abuse Prevention and Consumer Protection Act of
    2003,'' would provide important new statutory tools to assist
    the United States Trustee Program in identifying and civilly
    prosecuting misconduct by debtors and others who misuse the
    bankruptcy system. The United States Trustee Program is the
    component of the Department of Justice with the responsibility
    for the oversight of bankruptcy trustees and cases. Our mission
    is to enhance the efficiency and the integrity of the
    bankruptcy system. The fraud and abuse provisions contained in
    H.R. 975 would increase the effectiveness of the program's
    National Civil Enforcement Initiative and other efforts
    described in my written testimony. In fact, we have already
    made significant progress in preparing to implement such
    legislation. As we reported in testimony presented to this
    Committee during the last Congress, we convened working groups
    to develop implementation plans for each of the major new areas
    of responsibility that would be imposed upon the program under
    bankruptcy reform legislation. Of course, implementation plans
    will not be completed until after legislation is enacted.
        The United States Trustee Program's current enforcement
    efforts would be aided in particular by the following
    provisions contained in H.R. 975. Section 102 amends the
    substantial abuse provisions in current law. In addition to
    permitting dismissal of cases under current standards, this
    section codifies a specific procedure and monetary standard for
    reviewing individuals in Chapter 7 who have primarily consumer
    debt, and it provides a more objective basis for determining
    which cases will be presumed abusive. This provision would
    provide much needed consistency in the application of abuse
    standards in all districts in the United States.
        Section 603 directs the Attorney General to conduct both
    random and targeted audits of Chapter 7 and Chapter 13 debtors
    to ensure against material misstatements. The debtor's
    discharge is also conditioned on cooperating and making
    information available to the auditors. This provision would
    provide a mandate for an intensive and ongoing audit program to
    greatly enhance current methods for the detection of fraud and
    abuse.
        Section 105 and 106 create new areas of responsibility for
    the United States Trustee Program with regard to debtor
    education and credit counseling. The program must approve and
    maintain a list of credit counselors who would be able to
    provide financial counseling to all individuals before they are
    eligible to file for bankruptcy. The program would also be
    responsible for approving and maintaining a list of those who
    could provide personal financial management courses, and
    debtors would have to complete such a course after they filed
    bankruptcy in order to receive a discharge. This provision
    would address the widespread problem of financial illiteracy.
    These provision would also help ensure that debtors make
    informed choices before seeking bankruptcy relief and get the
    greatest benefit from the fresh start they are given by the
    discharge of debt.
        Under section 221, bankruptcy petition preparers will be
    required to give their customers a prescribed notice that they
    are not attorneys and cannot give legal advice. Provisions for
    fines and injunctions are strengthened, and the Judicial
    Conference is given authority to set maximum allowable
    bankruptcy petition preparer fees. This provision increases the
    accountability of bankruptcy petition preparers whose actions
    can have a devastating effect on debtors who seek bankruptcy
    protection to save their residences or for other legitimate
    purposes.
        In summary, we commend the sponsors of H.R. 975 and the
    Members of this Subcommittee for recognizing the serious and
    far-reaching nature of bankruptcy fraud and abuse. The United
    States Trustee Program is committed to combatting this problem
    with the statutory tools at our disposal. In addition, we look
    forward to implementing the fraud and abuse provisions of H.R.
    975 if it is enacted. These provisions will assist the program
    in carrying out its National Civil Enforcement Initiative and
    improving the efficiency and integrity of the bankruptcy
    system.
        Mr. Chairman, that concludes my remarks. I will be happy to
    answer questions from you and the Members of your Subcommittee.
        Mr. Cannon. Thank you, Mr. Friedman.
        [The prepared statement of Mr. Friedman follows:]

                   Prepared Statement of Lawrence A. Friedman

        Mr. Chairman and Members of the Subcommittee:
        I appreciate the opportunity to appear before the Subcommittee on
    behalf of the Department of Justice to discuss the United States
    Trustee Program's ongoing work to combat fraud and abuse under current
    bankruptcy law, as well as the potential enhancement of this work
    through omnibus bankruptcy reform legislation.
        The Department believes that provisions proposed in H.R. 975, which
    was introduced on February 27th, would provide important new statutory
    tools to assist the United States Trustee Program in identifying and
    civilly prosecuting misconduct by debtors and others who misuse the
    bankruptcy system.
        The United States Trustee Program (USTP or Program) is the
    component of the Department of Justice with responsibility for the
    oversight of bankruptcy trustees and cases. Our mission is to enhance
    the efficiency and the integrity of the bankruptcy system. In October
    2001, the USTP commenced a National Civil Enforcement Initiative to
    address bankruptcy fraud and abuse. The Program undertook this
    Initiative for several reasons, including the following:

            The bankruptcy caseload is the largest in the federal court
            system. Disrespect for the bankruptcy system breeds disrespect
            for the entire judicial system. As the bankruptcy caseload
            continues to climb, more and more Americans are coming into
            contact with the nation's bankruptcy system. In addition to the
            1.5 million individuals and businesses that sought debt relief
            in Fiscal Year 2002, millions more were affected, including
            creditors, many of them small businesses; employees; retirees;
            and families. It is critical that this system of justice be
            respected as one in which the law is strictly and fairly
            enforced.

            The integrity of the bankruptcy system relies upon complete and
            accurate disclosure by debtors and other participants in the
            system. The bankruptcy system largely depends upon self-
            reporting by debtors of their assets, liabilities, and other
            financial affairs. There is a consensus among bankruptcy
            professionals, including judges and practicing lawyers, that
            documents filed by debtors, petition preparers, and even
            attorneys who represent parties in a bankruptcy case too often
            are inaccurate and ignore the requirements of the Bankruptcy
            Code and Rules.

            The monetary stakes in the bankruptcy system are substantial.
            Studies show wide disparity in potential criminal and non-
            criminal abuse of the bankruptcy system. But with more than 1.5
            million new cases filed each year, more than $5 billion
            disbursed annually by private trustees in chapter 7, 12, and 13
            cases, and hundreds of billions of dollars in corporate assets
            and liabilities subject to chapter 11 protection, potential
            recoveries are staggering.

        The National Civil Enforcement Initiative was designed for two
    major purposes:

            (1)  To Address Debtor Misconduct: Under this prong of the
            Initiative, the Program uncovers such improper conduct as
            inaccurate financial disclosure, misuse of social security
            numbers, concealment of assets, and ``substantial abuse'' by
            those who seek discharge of debts despite an ability to repay.
            The primary civil remedies sought by Program attorneys are
            dismissal under 11 U.S.C. Sec. Sec. 707(a) and (b) and denial
            of discharge under Sec. 727.

            (2)  To Ensure Consumer Protection: The Program also seeks to
            protect debtors and creditors who are victimized by those who
            mislead or misinform debtors, file bankruptcy petitions without
            a debtor's knowledge, make false representations in a
            bankruptcy case, or commit other wrongful acts in connection
            with a bankruptcy filing. Primary targets are unscrupulous
            bankruptcy petition preparers and attorneys. The primary
            remedies sought are fines and injunctions under 11 U.S.C.
            Sec. 110 and disgorgement of fees under Sec. 329.

        In addition to civil remedies taken by the Program, actions that
    constitute criminal misconduct are referred to the FBI and the United
    States Attorney for prosecution.
        As we have devoted more resources to civil enforcement, we have
    identified patterns of conduct that appear widespread and deserving of
    continued intensive pursuit. Some examples follow.

            Substantial Abuse: As our offices more carefully screen chapter
            7 petitions, we have ferreted out a high number of cases which,
            under almost any court standard, show substantial abuse by
            debtors who fail to disclose their true financial condition and
            seek to discharge debt despite an ability to repay all or part
            of that debt.

              On March 5, 2002, the bankruptcy court for the
            Central District of California granted the U.S. Trustee's
            motion to dismiss the case of a debtor for substantial abuse
            under 11 U.S.C. Sec. 707(b). The U.S. Trustee argued that the
            debtor's monthly mortgage and utility payments in excess of
            $6,700 were patently unreasonable. The debtor, who had filed
            for bankruptcy on the eve of foreclosure on her home which she
            valued at $900,000, had also filed for chapter 13 relief two
            times since 1997, in each case to prevent foreclosure. In her
            most recent filing, the debtor did not list her prior filings
            or other material information including rental income and a
            $93,000 second trust deed on her home. The bankruptcy court
            agreed that the debtor's excessive housing costs and the
            material omissions in her filing supported a finding of
            substantial abuse.

        In Fiscal Year 2002, the Program successfully pursued more than
    5,000 debtors under Sec. 707(b) and prevented the chapter 7 discharge
    of almost $60 million of debt.

            Concealment of Assets: Debtors who conceal or transfer assets,
            destroy or fail to provide financial records, make false
            statements, or commit other wrongful acts may be subject to
            denial of their discharge.

              On November 1, 2001, a debtor was denied a chapter 7
            discharge following an all-day trial before the bankruptcy
            court for the District of Nevada. The debtor filed his petition
            seeking to discharge almost $650,000 in debt, without
            disclosing a revocable trust into which he transferred his
            residence, personal property, and summer home. Upon its
            discovery, the debtor disclosed the transfer in the fourth
            amendment to his schedules claiming he failed to disclose it
            upon the advice of counsel. The court held that the debtor's
            desire to retain the property, together with other facts
            established at trial, provided the requisite intent to deny the
            discharge.

        In Fiscal Year 2002, more than 800 debtors were denied a discharge
    of more than $40 million of debt on the grounds of serious misconduct
    under Sec. 727.

            Credit Card Bust-Outs: Recent cases have been uncovered in
            which debtors obtained credit cards despite little or no
            income, incurred huge debts, paid those debts with worthless
            checks, and incurred debt up to the credit limit again before
            the checks bounced.

              On October 4, 2002, in Chicago, Illinois, a debtor
            who pleaded guilty to bankruptcy fraud and conspiracy charges
            was sentenced to a twelve month prison term and supervised
            release of three years, was ordered to pay restitution in the
            amount of $337,255, and agreed to waive his bankruptcy
            discharge. In his bankruptcy case, the debtor sought to
            discharge approximately $366,955 in debts; falsely represented
            that he had $270,000 in cash gambling losses during 2000-2001;
            and declared falsely under oath that he had no interest in any
            real property. The United States Trustee identified the
            debtor's credit card bust-out scheme as part of its civil
            enforcement efforts to review all chapter 7 bankruptcy cases
            filed in the Northern District of Illinois for fraud and abuse.
            Several members of the Chicago U.S. Trustee's office assisted
            law enforcement with the investigation.

            Identity Theft: The Program now requires all debtors to show
            proof of identity at the first meeting of creditors, which is
            required to be held in all bankruptcy cases. In many cases of
            identity theft, a person assumes someone else's identity before
            filing a bankruptcy case and obtains credit, along with goods
            and services, using that false identity. Often these crimes are
            not uncovered until years later when the victim tries to buy a
            home or obtain credit for some other purpose.

              On January 28, 2002, a debtor pleaded guilty in the
            Northern District of Georgia to seven counts of a nine count
            indictment charging him with wire fraud, mail fraud, the use of
            a false social security number, identity theft, and bankruptcy
            fraud. The debtor worked for a mortgage broker and originated
            and processed his own loans. He used the name, social security
            number, and credit history of another individual to obtain two
            loans to purchase real property, inducing a lender to wire
            transfer more than $428,000 to the settlement agent. When the
            debtor defaulted on the loans, he filed for bankruptcy to stay
            the foreclosure sale. The Atlanta office of the U.S. Trustee
            referred the matter to the U.S. Attorney.

        In Fiscal Year 2002, the Program identified 8,000 debtor
    identification problems and caused debtors to correct more than 6,000
    petitions. Many of these cases involved typographical errors in social
    security numbers that were corrected to prevent future injury to
    unsuspecting, potential victims. Other cases involved intentional
    fraud.

            Bankruptcy Petition Preparers: Some of the most egregious
            abuses in the bankruptcy system are perpetrated by those who
            prey upon debtors. Most people who file bankruptcy are in dire
            financial straits and are ill-equipped to scrutinize offers of
            assistance. Many of these debtors face imminent foreclosure on
            their homes. Non-attorney bankruptcy petition preparers solicit
            clients from publicly available lists of those facing
            foreclosure.

            Petition preparers sometimes charge exorbitant rates, engage in
            the unauthorized practice of law, file bankruptcy cases without
            the knowledge of debtors, use the bankruptcy process to further
            fraudulent schemes such as mortgage fraud, or otherwise violate
            the law. The victims of mortgage fraud often are both debtors
            and creditors.

              In two cases prosecuted both civilly and criminally
            in the Washington, DC area, petition preparers defrauded both
            debtors and mortgage lenders by filing bankruptcy cases in
            violation of Sec. 110 in the names of debtors who paid
            significant fees to the defendants in return for refinancing or
            real estate services that were never provided. In one case, the
            defendant, while on pre-trial release, also took over
            properties facing foreclosure, filed bankruptcy petitions to
            delay foreclosure, and then rented the properties to innocent
            families with a purported option to buy. The renters uncovered
            the scheme when the mortgage lender finally was able to restart
            foreclosure proceedings. In one case, the victimized family of
            eight faced eviction shortly before Christmas.

        In Fiscal Year 2002, the Program successfully took action under
    Sec. 110 against petition preparers in more than 1,500 cases.
        In addition to the invigorated litigation efforts described above,
    the Program has taken other significant actions to uncover fraud and
    abuse. Last summer, the Program conducted audits of a small sample of
    chapter 7 cases in a pilot program we hope to expand in Fiscal Year
    2003. The results of the pilot are being reviewed now to determine the
    best methodology to employ a more widespread audit effort. The results
    of the audit will help determine the scope of fraud and abuse in the
    bankruptcy system, as well as identify specific cases for civil and
    criminal enforcement actions.
        Because public outreach is also important, the Program is
    developing an informational video that will be distributed and made
    widely available for debtors and attorneys to view prior to filing
    bankruptcy. The video will make debtors aware of the basic bankruptcy
    process and the need to be forthcoming and accurate in their bankruptcy
    filings.
        Two other USTP activities will further strengthen our civil
    enforcement efforts. First, the Program will continue to provide
    training on the detection and litigation of abuses in the bankruptcy
    system for its attorneys and accountants. Similar training is also
    being developed for the private trustees. Second, the Program has
    designed a new data collection system to measure our success in civil
    enforcement and has begun to automate data collection to reduce the
    reporting burden on field staff and to increase the accuracy of the
    information.
        The results of our first year after implementing the National Civil
    Enforcement Initiative are dramatic. During Fiscal Year 2002, field
    offices reported that they took more than 50,000 civil enforcement and
    related actions (including cases resolved without resort to litigation)
    that yielded approximately $160 million in debts not discharged and
    potentially available for distribution to creditors. This impressive
    data demonstrates the scope of the problem, the skill and effectiveness
    of our attorneys and other staff in the field, and the need to continue
    our focused attack on bankruptcy fraud and abuse.
        The fraud and abuse provisions contained in H.R. 975 would increase
    the effectiveness of the Program's National Civil Enforcement
    Initiative. In fact, we already have made significant progress in
    preparing to implement that legislation. As we reported in testimony
    presented to this Subcommittee during the last Congress, we convened
    working groups to develop implementation plans for each of the major
    new areas of responsibility that would be imposed upon the Program
    under bankruptcy reform legislation. However, these plans would require
    modification, based upon the precise terms of the new legislation
    introduced in this Congress.
        The USTP's current enforcement efforts would be aided in particular
    by the following provisions contained in H.R. 975:

            Means Testing: Section 102 amends the substantial abuse
            provisions in current law. In addition to permitting dismissal
            of cases under current standards, this codifies a specific
            procedure and monetary standard for reviewing individuals in
            chapter 7 who have primarily consumer debt and provides a more
            objective basis for determining which cases will be presumed
            abusive. This provision would provide much needed consistency
            in the application of abuse standards in all districts.

            Debtor Audits: Section 603 directs the Attorney General to
            conduct both random and targeted audits of chapter 7 and
            chapter 13 debtors to ensure against material misstatements.
            The debtor's discharge is also conditioned on cooperating with,
            and making information available to, the auditors. This
            provision would provide a mandate for an intensive and on-going
            audit program to greatly enhance current methods for the
            detection of fraud and abuse.

            Debtor Education and Credit Counseling: Sections 105 and 106
            create new areas of responsibility for the USTP. The Program
            must approve and maintain a list of credit counselors who would
            be able to provide financial counseling to all individuals
            before they are eligible to file bankruptcy. The Program would
            also be responsible for approving and maintaining a list of
            those who could provide personal financial management courses,
            and debtors would have to complete such a course after they
            file bankruptcy in order to receive a discharge. This provision
            would address the widespread problem of financial illiteracy.
            These provisions also would help ensure that debtors make
            informed choices before seeking bankruptcy relief and then
            obtain the necessary knowledge to avoid future financial
            catastrophe.

            Bankruptcy Petition Preparers: Under Section 221, bankruptcy
            petition preparers will be required to give their customers a
            prescribed notice that they are not attorneys and cannot give
            legal advice. Provisions for fines and injunctions are
            strengthened, and the Judicial Conference is given authority to
            set a maximum allowable bankruptcy petition preparer fee. This
            provision increases the accountability of bankruptcy petition
            preparers whose actions can have a devastating effect on
            debtors who seek bankruptcy protection to save their residences
            or for other legitimate purposes.

        In summary, the Department of Justice commends this Subcommittee
    for recognizing the serious and far-reaching nature of bankruptcy fraud
    and abuse. The USTP is committed to combating this problem with the
    statutory tools at our disposal. In addition, we look forward to
    implementing any new provision of bankruptcy law that the Congress may
    enact in the future. The fraud and abuse provisions contained in H.R.
    975 would assist the Program in carrying out its National Civil
    Enforcement Initiative and improving the efficiency and integrity of
    the bankruptcy system.
        Mr. Chairman, that completes my prepared remarks. I would be happy
    to answer questions from the Subcommittee at this time.

        Mr. Cannon. The record should reflect that the gentleman
    from Ohio Mr. Chabot has joined us.
        And, Ms. Beckwith, if you would like to proceed, we do
    appreciate that now.

    STATEMENT OF LUCILE P. BECKWITH, PRESIDENT AND CHIEF EXECUTIVE
     OFFICER, PALMETTO TRUST FEDERAL CREDIT UNION, COLUMBIA, SOUTH
     CAROLINA, ON BEHALF OF CREDIT UNION NATIONAL ASSOCIATION, INC.

        Ms. Beckwith. Good afternoon, Chairman Cannon and Members
    of the Subcommittee. I am Lucile Beckwith, president and CEO of
    the 21 million Palmetto Trust Federal Credit Union in Columbia,
    South Carolina. I appreciate the opportunity to be here to tell
    you about our concerns with bankruptcies and how they are
    impacting credit unions. 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.
        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. H.R.
    975 does a good job of balancing these issues. With bankruptcy
    filings in 2002 exceeding 1.5 million, which is another new
    record, we strongly urge the 108th Congress to pass this
    compromise bill as soon as possible.
        Credit unions have become quite concerned about
    bankruptcies in the last few years. Data from credit union call
    reports to the National Credit Union Administration suggest
    that roughly 256,000 credit union member borrowers filed in
    2002. In addition, CUNA estimates that nearly 46 percent of all
    credit union losses in 2002 were bankruptcy-related. Those
    lawsuits totaled approximately $775 million.
        Concerns about the rising tide of bankruptcy filings and
    the ever-increasing number of abusive filings are shared across
    the country. A January 2003 nationwide survey found that 64
    percent of the public feels strongly that it should be made
    more difficult to declare bankruptcy. Armed with this
    knowledge, I assure you that Palmetto Trust is a careful
    lender. We cannot afford to do otherwise. We do a good job of
    scrutinizing loan applications and carefully determining that
    the applicant is credit-worthy before extending credit.
        Unfortunately, even the most rigorous screening process
    cannot prevent all abusive bankruptcy filings. I would like to
    share an example from my written statement with the
    Subcommittee that clearly demonstrates how people abuse the
    system.
        Take, for example, two members of my credit union. They
    were a couple with a six-figure income, each of which qualified
    for a $10,000 VISA card. At the same time, they were applying
    for credit cards at other places, openly gaming the system.
    During 1 month, they maximized all these credit cards with cash
    advances. They never made a payment on any of them, waited the
    required time, and then filed for a Chapter 7 bankruptcy. An
    appeal to the court for loading up was denied. Our small credit
    union lost $20,000. What did they do with the cash? Their
    daughter had a very large, beautiful and expensive wedding in
    Hawaii, a long way from South Carolina.
        Credit unions clearly recognize the value of financial
    counseling for their members. According to a recent CUNA
    bankruptcy survey, 70 percent of credit unions counsel
    financially troubled members at the credit union or refer
    members to an outside financial counseling organization. That
    is why CUNA strongly supports the provisions in H.R. 975 that
    establish the principle that people need information and
    assistance to understand what bankruptcy means and how to avoid
    financial problems.
        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 loss--potential increase to loan
    rates or a 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.
        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 part of their
    debts should be required to file a Chapter 13 rather than have
    all their debt erased in Chapter 7. Therefore, CUNA supports
    the needs-based provision that is contained in H.R. 975.
        Mr. Chairman, all of this adds up to a bill that would
    create a fair and more realist Bankruptcy Code. Credit union
    members, because they own their institutions, feel the affects
    of abusive bankruptcies directly, and while no one is arguing
    that the bankruptcy legislation will completely eliminate
    abuses, no one should argue that the bill isn't necessary
    because it isn't perfect. It is our hope that this important
    legislation finally becomes law, that judges carefully follow
    the new law so that they make a more realistic view of people's
    capacity to repay their debts, and perhaps most importantly, a
    renewed sense of individual accountability becomes apparent.
        Thank you, and I will be glad to answer any questions.
        Mr. Cannon. Thank you, Ms. Beckwith.
        [The prepared statement of Ms. Beckwith follows:]

                    Prepared Statement of Lucile P. Beckwith

        Mr. Cannon. We recognize the temporary presence of the
    Ranking Member of the full Committee, Mr. Conyers of Michigan,
    and, Ms. Miller, if you would like to proceed, I will give you
    5 minutes now. Thank you.

       STATEMENT OF JUDITH GREENSTONE MILLER, ESQUIRE, RAYMOND &
    PROKOP, P.C., SOUTHFIELD MICHIGAN, ON BEHALF OF THE COMMERCIAL
                         LAW LEAGUE OF AMERICA

        Ms. Miller. Thank you. Good afternoon, and thank you for
    inviting me to testify before the Subcommittee on behalf of the
    Commercial Law League of America. The league, founded in 1895,
    is the Nation' oldest creditors' rights organization, comprised
    of attorneys and other experts in credit and finance actively
    engaged in the fields of bankruptcy, insolvency, reorganization
    and commercial law. The league has long been associated with
    creditor interests, while at the same time seeking fair,
    efficient and equitable administration of bankruptcy cases for
    all parties in interest.
        The league has consistently advocated that bankruptcy laws
    must strike a balance that is both fundamentally fair and
    practically sound for all parties involved. The bankruptcy
    legislation that has been proposed the last three Congresses
    and most recently introduced in almost the identical form last
    Thursday is neither fair nor practically sound. It is
    unfortunate that the legislation was again introduced prior to
    the conclusion of findings of this Subcommittee, because in
    essence, the premise, fears and conditions underlying the
    original perceived need for bankruptcy reform 6 years ago do
    not exist. Moreover, the changes that have occurred over the
    last 18 months, such as the changed economy, 9/11 and the
    megabankruptcy filings such as Enron, WorldCom, K-Mart and the
    major airlines, suggests that not only the perceived need for
    bankruptcy reform be reevaluated, but the consideration be
    given to the real abuses and true issues in the Code.
        Bankruptcy is a delicate and complicated process. It is
    more than simply a two-party dispute between the debtor on one
    side and the creditors on the other. Rather, multiple parties
    and constituents, often with varying different interests, play
    significant roles in the process. Therefore, any reform must
    take into consideration not only the interests of the
    particular party seeking redress but also the impact on the
    system as a whole. The legislation suffers from such
    infirmities.
        First the majority of the hearings thus far have focused on
    the consumer rather than the business issues. The business
    issues must be subject to the same attention before enacted in
    a tenuous economy.
        Second, the final bill that ultimately evolved from the
    conference committee had numerous amendments, many of which had
    not been subject to prior comments, hearings or careful
    analysis. They also catered to many special interests at the
    expense of the general body of unsecured creditors as a whole.
    For example, the provisions for real estate lessors who already
    have enhancements in the Code are further enhanced at the
    expense of the debtor and the unsecured creditors. Moreover,
    lien stripping in Chapter 13 cases is severely limited by the
    bill in direct contravention of the stated purpose for reform,
    being greater repayment to unsecured creditors. It has been
    estimated that unsecured creditors will lose in distributions
    from the passage of this provision as much as 100 million
    annually.
        Third, despite the numerous amendments proffered as part of
    the legislation, real issues that currently confront the system
    haven't been considered, such as forum non-conveniens and
    standing to pursue causes of action. It bears note that
    throughout the last 6 years that the legislation has been
    pending in Congress, it has been consistently criticized by
    every major bankruptcy organization, bankruptcy professionals,
    judges, trustees and scholars. The bill, however, does contain
    some noncontroversial and much-needed reforms that, if passed,
    would enhance and provide significant benefits to the overall
    system.
        For example, Chapter 12, cross-border provisions, new
    judgeships, DePrizio, Claremont, Catapult, all of these
    provisions have been held hostage as placeholders with the hope
    that pressure for enactment of these individual reforms would
    ultimately fuel passage of the entire bill. Much acknowledged
    needed reforms have been held at bay. Instead, Congress has
    repeatedly reintroduced the same basic legislation rather than
    reevaluating the need for reform; and if so, on what basis.
        Reform was first suggested in 1994. At that time we were
    facing unprecedented growth and prosperity. The individual
    filings had reached and all-time high, and Congress perceived
    that many individual debtors were abusing the system and that
    filings would rise. While filings may have incrementally
    increased since that time, it has not been due to merely
    seeking to escape one's obligations, but real financial need,
    such as divorce, medical bills, loss of jobs, 9/11, displaced
    military personnel, corporate downsizing and uncertainty
    regarding the state of the bankruptcy law. Today's Washington
    Post cover story focuses on the financial hardship particularly
    being faced by displaced military personnel.
        Relying simply on the number of filings as a barometer is
    dangerous and misleading. The statistics in 2002 suggests that
    business bankruptcies declined. Nevertheless, it is
    indisputable it was the year of the large business bankruptcy.
    The country has still not begun to face all the repercussions
    that are likely to result from such large filings. Therefore,
    prior to enacting legislation that will create sweeping changes
    at a time when financial relief is likely to be needed the
    most, Congress must pause, take a step back and carefully
    analyze and reexamine that which it has proposed against the
    current realities and needs for the system of creditors and
    debtors alike.
        Thank you very much, and I would be pleased to answer
    questions.
        Mr. Cannon. Thank you, Ms. Miller.
        [The prepared statement of Ms. Miller follows:]

                 Prepared Statement of Judith Greenstone Miller

        Good afternoon. Thank you for inviting me to testify before the
    Subcommittee on behalf of the Commercial Law League of America
    (``League''). The League, founded in 1895, is the nation's oldest
    creditors' rights organization, comprised of attorneys and other
    experts in credit and finance, actively engaged in the fields of
    bankruptcy, insolvency, reorganization and commercial law. The League
    has long been associated with creditor interests, while at the same
    time seeking fair, equitable and efficient administration of bankruptcy
    cases for all parties in interest. The Bankruptcy Section, comprised of
    1,200 bankruptcy professionals (lawyers, judges and other workout
    professionals) from across the country, represents divergent interests
    in bankruptcy cases. The League has testified on numerous occasions and
    submitted position papers before Congress as experts in the bankruptcy
    and reorganization fields.
        The League has consistently advocated that bankruptcy laws must
    strike a balance that is both fundamentally fair and practically sound
    for all parties involved. The bankruptcy legislation that has been
    proposed the last three Congresses, and most recently introduced in
    almost the identical form last Thursday, February 27, 2003, is neither
    fair nor practically sound. It is unfortunate that the legislation was
    again introduced prior to the conclusion and findings of this
    Subcommittee, because, in essence, the premise, fears and conditions
    underlying the original perceived need for bankruptcy reform six years
    ago do not exist. Moreover, the changes that have occurred over the
    last eighteen months, such as the changed economy, the terrorist events
    of 9-11 and the mega-bankruptcy filings, such as Enron, WorldCom, K-
    Mart and the major airlines, suggest that not only the need for
    bankruptcy reform be reviewed and analyzed, but moreover, that
    consideration be given to the real abuses and true issues that need to
    be addressed as the Bankruptcy Code (``Code'') currently exists.
        Bankruptcy is a delicate and complicated process. It is more than
    simply a two-party dispute between the debtor on the one side, and
    creditors on the other. Rather, multiple parties and constituents,
    often with vastly different interests and goals, play significant roles
    in the overall process. Therefore, any reform effort must take into
    consideration not only the interests of the particular party seeking
    redress, but also the overall impact on the bankruptcy estate as a
    whole. This legislation suffers from such infirmities.
        First, the majority of the hearings devoted to the legislation have
    focused on consumer, rather than business issues. The business issues
    must be subject to the same attention before enacted in a tenuous
    economy.
        Second, the final bill that ultimately evolved from the conference
    committee had numerous amendments, many of which have not been subject
    to prior comment, hearings or careful analysis regarding their impact
    and consequences on the system. Many of these amendments, like the
    overall bill, cater to special interests, thereby enhancing the right
    of a few at the expense of the general body of creditors of the estate.
    For example, lessors of non-residential real property currently have
    extensive power over debtor lessees. Despite the protections already
    contained in the Code, the legislation seeks to enhance their rights in
    a manner that is likely to deprive the debtor and the unsecured
    creditors of valuable assets of the estate needed to reorganize or
    alternatively create large administrative priority claims from a
    pressured, and subsequently determined to be an improvident assumption.
    Lien stripping in Chapter 13 cases is also severely limited by the bill
    in direct contravention of the stated purpose for reform--greater
    repayment to unsecured creditors. Losses to unsecured creditors from
    passage of this proposal have been estimated to approach $100 million
    annually. The League has repeatedly objected to legislation that favors
    special limited interests as being fundamentally unfair and
    inappropriate to the creditors of the estate.
        Third, despite the numerous amendments proffered as part of the
    legislation, real issues that currently confront the system haven't
    even been considered. For example, the issue of forum non-conveniens,
    governing the location where a bankruptcy case should be filed so as
    not to negatively impact the creditors, is not addressed in the bill.
    The administration of a bankruptcy case is often dealt with in a
    location that has minimal contacts to the operation and assets of the
    debtor.
        Moreover, in a number of the large national corporate scandals and
    mega-filings, many of which were precipitated by fraudulent conduct,
    one of the major assets that creditors' committees seek to pursue in
    order to provide recovery and a distribution to the creditors is causes
    of action against the officers, directors, principals and affiliates,
    i.e., the ``insiders.'' Generally, the actions allege breaches of
    fiduciary duties, transfers of assets on the eve of bankruptcy and
    other improper and/or fraudulent conduct. Standing to pursue such
    avoidance actions on behalf of the creditors has been seriously
    questioned by some courts recently based on rules of statutory
    construction that preclude a court from looking at legislative intent
    and history.
        The Third Circuit Court of Appeals in Official Committee of
    Unsecured Creditors of Cybergenics Corp. v. Chinery (In re Cybergenics
    Corp.), 304 F.3d 316 (3rd Cir. 2002), vacated, 310 F.3d 785 (3rd Cir.
    2002), interpreted Section 1103(a) of the Code to preclude the
    creditors' committee from pursuing avoidance actions based on its use
    of the phrase ``the trustee may,'' to imply a limitation of those
    parties-in-interest that may actually proceed to avoid impermissible
    transfers. In a number of instances, debtors and debtors-in-possession
    refuse or fail to act because it would require them to sue their own
    principals, officers, directors and affiliates to seek recovery of
    assets improperly transferred to them prior to or on the eve of
    bankruptcy. While the initial decision of the court has been vacated
    for rehearing and determination by the entire Third Circuit, this
    holding, if upheld, will make it increasingly difficult for creditors
    to seek recovery of valuable assets.
        It bears note that throughout the last six years that the
    legislation has been pending in Congress, it has been consistently
    criticized by every major bankruptcy organization, bankruptcy
    professionals and scholars. The bill, however, does contain some
    noncontroversial and much needed reforms, that if passed, would enhance
    and provide significant benefits to the overall system. Such things,
    for example as, the permanent extension of Chapter 12, adoption of the
    international cross-border provisions contained in chapter 15 of the
    bill, the addition of thirty-six (36) new bankruptcy judgeships, cure
    and elimination of the DePrizio problem in Sections 547 and 550 of the
    Code, elimination of the Claremont nonmonetary penalty cure under
    Section 365(d)(2) of the Code, remediation and clarification of the
    ability to assign and assume personal services contracts and other
    nonassignable interests under Section 365(c) in response to Catapult,
    rules governing appellate procedure of bankruptcy cases and trustee
    liability and removal provisions, have been held hostage, as
    placeholders, with the hope that pressure for enactment of these
    individual reforms would ultimately fuel passage of the entire bill.
    Much acknowledged and needed reforms have been held at bay. Instead,
    Congress has repeatedly reintroduced the same basic legislation, rather
    than reevaluating the need for reform legislation, and if so, on what
    basis.
        Congress first suggested the need to review and address bankruptcy
    reform as part of the 1994 amendments to the Code through the creation
    of the National Bankruptcy Review Commission (``Commission''). Even
    before the Commission issued its final report, Congress introduced the
    legislation. At that time, we were facing unprecedented growth and
    prosperity in the country. At the same time, individual bankruptcy
    filings had reached an all time high. Congress perceived that many
    individual debtors were abusing the system and that filings would
    continue to rise. While filings may have incrementally increased since
    that time, the individual filings, in large part, have been
    attributable to real needs triggering financial relief (i.e., divorce,
    medical bills, loss of jobs, 9-11, displaced military personnel,
    corporate downsizing and uncertainty that the current pending
    legislation and its predecessors would be enacted into law by
    Congress), not merely to escape one's obligations.
        Relying simply on the number of filings as a barometer is dangerous
    and misleading. For example, while the statistics of filings for 2002
    suggest that business bankruptcies declined, it is indisputable, based
    on the number of mega-filings during that time, that 2002 will go down
    as the year of large business bankruptcies. The country still has not
    even begun to face all of the repercussions that are likely to result
    from these large filings, such as closure of facilities, decreased work
    forces and elimination of retirement benefits. The economic climate of
    the country has also changed dramatically since bankruptcy reform was
    first envisioned. The reticence of the country to expend resources in
    the wake of 9-11 and the continued fears of war and terrorism suggest
    that recovery is going to be slow at best. Therefore, prior to enacting
    legislation that will create sweeping changes, at a time when financial
    relief is likely to be needed the most, Congress must pause, take a
    step back, and carefully analyze and reexamine that which it has
    proposed against the current realities and needs of the system for
    debtors and creditors alike.
        Thank you for the opportunity to address the Subcommittee this
    afternoon. In addition to the filing of this written testimony, the
    League has also submitted a written position paper setting forth its
    critical issues for consideration by Congress.

        Mr. Cannon. We would like to welcome our friend from
    Michigan Mr. Conyers.
        Thank you, Ms. Miller, and, Mr. Wallace, if you would like
    to proceed, we will give you 5 minutes now.

       STATEMENT OF GEORGE WALLACE, ESQUIRE, OF COUNSEL, ECKERT
    SEAMANS CHERIN & MELLOT, LLC, WASHINGTON, DC, ON BEHALF OF THE
               COALITION FOR RESPONSIBLE BANKRUPTCY LAWS

        Mr. Wallace. Thank you, Chairman Cannon, Congressman Watt,
    Members of the Committee. Thank you for this opportunity to
    express my views on consumer bankruptcy in H.R. 975. My name is
    George Wallace. I think you are familiar with me. I speak today
    on behalf of the Coalition for Responsible Bankruptcies, 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 H.R. 975 because it will
    take significant steps toward reforming today's consumer
    bankruptcy laws. Those laws are fundamentally flawed, and the
    need for reform is urgent. Today over 1.5 million or 1.6
    million consumer debtors file for bankruptcy relief every year.
    That rate of filing has more than doubled over the last decade
    and gone up more than six times since the last sweeping
    revision to our bankruptcy laws occurred in 1978. Some
    predicted that by the end of 2003, filings could be as high as
    1.7 million or more.
        There are too many additional Americans each year filing
    for bankruptcy to permit continued toleration of this
    fundamentally flawed system. Particularly in this flat economy
    with higher levels of unemployment than in the past, it is
    important that consumer bankruptcy relief be reserved for those
    who need and deserve it. Our economy can ill afford a situation
    in which bill-paying American consumers and debtors who deserve
    bankruptcy relief pay higher prices because others have run up
    large debts and then used bankruptcy irresponsibly and often
    dishonestly. The consumer bankruptcy system continues to reward
    those who lie under oath about their income and expenses and
    assets. Despite laudable new efforts by the United States
    Trustee Program, bankruptcy continues to allow debtors and
    unfortunately sometimes their counsel to abuse the system.
        In many places even when a debtor fully discloses that he
    or she has the ability to repay a significant portion of
    unsecured debts, a full discharge is granted, no questions
    asked. The amounts involved are huge. We estimate that each
    year over $44 billion of debt is discharged in consumer
    bankruptcy cases. These losses are recovered in the price
    American consumers pay for credit, an average of $400 for each
    American household as an estimate. We also estimate that
    upwards of 4- through 5 billion of those losses could be saved
    by the means test reforms in the bill. Yet without legislative
    intervention this year, the situation can only worsen. As more
    Americans recognize that their neighbors are using bankruptcy,
    they, too, are tempted to file bankruptcy and take the easy way
    out. Corruption and abuse breeds more corruption and abuse.
        At the same time, it is important to remember that this
    legislation is clearly the result of extensive bipartisan
    compromise over more than 6 years. Reform legislation was
    originally introduced in the 105th Congress and then in the
    106th Congress and then in the 107th Congress. In each Congress
    extensive revisions were made both in Committee and in
    conference. The bill has significantly changed. The bill before
    you today improves controls on abuse of bankruptcy law by
    preserving all that is best about our current bankruptcy
    system. Honest debtors can obtain bankruptcy relief no matter
    what their income, expenses or assets as long as they honestly
    disclose the economic facts about their economic situation.
        The improvements to bankruptcy law in H.R. 975 are badly
    needed, and we support this legislation because of these
    provisions. Most importantly the bill takes steps to require
    responsible use of bankruptcy's broad, sweeping remedies. In
    general the bill provides that if a debtor's case is abusive,
    the court is to dismiss the debtor's case to obtain bankruptcy
    relief. This flexible general standard will be applied in a
    wide range of cases as demanded to thwart the ingenuity of
    those who would wrongfully or fraudulently try to use the
    bankruptcy system.
        To assist enforcement of this general standard, the bill's
    most widely recognized innovation, the means test, creates a
    presumption that the Chapter 7 bankruptcy cases of debtors with
    incomes over the State median will be dismissed if they can
    afford to repay a significant part of those debts over a period
    of 3 to 5 years based on monthly budgets set under court
    supervision. We expect this innovation alone to provide those
    responsible to enforce the honesty of the bankruptcy program
    with significant new tools to carry out their duties.
        Significantly the bill also aids the United States Trustee
    Program in its enforcement efforts, increases funding for that
    program significantly, provides for more information about
    debtors' affairs to be provided and checks up on that
    information with a program of audits.
        Some of the most important provisions of the bill
    significantly also improve the position of women and children
    who are dependent upon child support, alimony and marital
    property settlements to receive the money they are entitled to.
    Today consumer bankruptcy can be used to delay or evade those
    important family obligations. The bill closes the loopholes the
    unscrupulous seek to use to delay or evade paying child support
    or alimony.
        Balanced reform is needed to put our consumer bankruptcy
    laws back on track. After years of negotiation and compromise,
    this bill has found a middle ground. We urge you to support it.
        Thank you very much, Mr. Chairman, and Members of the
    Committee. I will be glad to answer questions later on.
        Mr. Cannon. We congratulate you, Mr. Wallace, for ending
    exactly on time.
        Mr. Wallace. Sometimes you do it enough times, and you get
    it right.
        Mr. Cannon. Thank you.
        [The prepared statement of Mr. Wallace follows:]

                    Prepared Statement of George J. Wallace

        Chairman Cannon, Congressman Watt and Members of the Committee,
    thank you for this opportunity to express my views on consumer
    bankruptcy and H.R. 975, The Bankruptcy Abuse Prevention and Consumer
    Protection Act of 2003.
        My name is George Wallace. I am a lawyer practicing in Washington,
    D.C., and have been associated with efforts to reform our bankruptcy
    laws since the 105th Congress, when a reform bill was first introduced.
        I speak today on behalf of 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 H.R. 975 because it will take
    significant steps toward reforming today's consumer bankruptcy laws.
    Those laws are fundamentally flawed and the need for reform is urgent.
    Today, over 1.5 million consumer debtors file for bankruptcy relief.
    That rate of filing has more than doubled over the last decade, and
    gone up more than six times since the last sweeping revision to our
    bankruptcy laws occurred in 1978. Some predict that by end of 2003,
    filings could be as high as 1.7 million.
        There are too many additional Americans each year filing for
    bankruptcy to permit continued toleration of this fundamentally flawed
    system. Particularly in this flat economy with higher levels of
    unemployment than in the past, it is important that consumer bankruptcy
    relief be reserved to those who need and deserve it. Our economy can
    ill afford a situation in which bill paying American consumers and
    debtors who deserve bankruptcy relief pay higher prices because others
    have run up large debts, and then used bankruptcy irresponsibly and
    often dishonestly. The consumer bankruptcy system continues to reward
    those who lie, under oath, about their income and expenses and their
    assets. Despite laudable new efforts from the United States Trustee
    program, bankruptcy continues to allow debtors--and unfortunately,
    sometimes, their counsel--to abuse the system. In many places, even
    when a debtor fully discloses that he or she has ability to repay a
    significant portion of unsecured debts, a full discharge is granted, no
    questions asked.
        The amounts involved are huge. We estimate that each year over $44
    billion of debt is discharged in consumer bankruptcy cases. These
    losses are recovered in the price American consumers pay for credit, an
    average of $400 for each American household. We also estimate that
    upwards of $4 through 5 billion of these losses could be saved with the
    means test reforms in the bill.\1\ Yet without legislative intervention
    this year, the situation can only worsen. As more Americans recognize
    that their neighbors are using bankruptcy, they too are tempted to file
    bankruptcy and take the easy way out. Corruption and abuse breeds more
    corruption and abuse.
    ---------------------------------------------------------------------------
        \1\ Estimates on the number of debtors with ability to pay who
    obtain Chapter 7 relief and the amount they could have paid ranges from
    a low of 30,000 debtors a year and approximately $1.2 billion per year
    based on a study by the debtor oriented American Bankruptcy Institute
    to approximately 100,000 per year and nearly $4-5 billion based on
    studies by Ernst & Young.
    ---------------------------------------------------------------------------
        At the same time, it is important to remember that this legislation
    is clearly the result of extensive bipartisan compromise over more than
    six years. Reform legislation was originally introduced in the 105th
    Congress. After extensive compromise and revision, the bill sponsored
    by Congressmen Gekas, Boucher and many others cleared Conference
    Committee and passed the House with over 300 votes, but it ran out of
    time in the Senate.
        At the beginning of the 106th Congress, Congressman Gekas
    reintroduced as H.R. 833 the Conference Report from the 105th Congress.
    H.R. 833 was extensively amended in Committee and on the floor. It
    eventually passed the House with a large bipartisan majority. On the
    Senate side, Senator Grassley introduced a version of the Conference
    Report as S. 625. Likewise after extensive amendment, the Senate passed
    its bill with extremely strong bipartisan support. H.R. 833 and S. 625,
    however, had significant differences. After extensive compromises
    between House and Senate negotiated from February until the end of
    July, 2000, a compromise bill was worked out which became H.R. 2415 in
    the last days of the 106th Congress. It passed the House by voice vote
    and the Senate with a veto-proof majority. However, President Clinton
    pocket vetoed the legislation and the 106th Congress ended without
    enactment.
        In the 107th Congress, the bill was reintroduced in essentially the
    form it had passed both houses. As H.R. 333, it passed the House early
    in the Session without significant changes. A companion bill, S. 420,
    passed the Senate shortly thereafter with the addition of a substantial
    number of amendments. Among other changes, the means test of section
    102 was significantly altered, a cap was placed on the homestead
    exemption, and the discharge of debts arising from liability for
    obstruction of access to those selling lawful goods or services,
    popularly known as the ``Schumer amendment'' was added. Assembling the
    Conference and working out differences took much of the rest of the
    Session. The Conference Report issued in July of 2002 contained a
    number of compromises, including a homestead provision that
    significantly reforms this area of bankruptcy law and a version of the
    Schumer amendment.
        The bill before you today is the Conference Report compromise from
    the 106th Congress without the Schumer amendment. The bill improves
    controls on abusive use of bankruptcy law while preserving all that is
    best about our present bankruptcy system. Honest debtors can obtain
    bankruptcy relief no matter what their income, expenses, or assets, as
    long as they honestly disclose the economic facts about their
    situation. The bill also imposes extensive additional disclosures and
    regulation on the consumer credit industry. For example, the bill makes
    major changes to the credit card disclosure rules under the Truth in
    Lending Act, requiring extensive new disclosures on credit card
    solicitations and monthly statements. It also creates extensive, new
    regulation for reaffirmation agreements. This additional regulation
    will not come cheap to the American consumer. Creditor experience
    complying with a California law which has similar credit card
    solicitation provisions indicates that the additional compliance cost
    will be significant--costs passed on to consumers in higher credit
    prices.
        Whatever doubts we may have about whether the additional regulation
    of the credit industry will bring commensurate benefits to American
    consumers, we are confident that the improvements to consumer
    bankruptcy law are badly needed, and we support this legislation
    because of these provisions. Most importantly, the bill takes steps to
    require responsible use of bankruptcy's broad sweeping remedies. In
    general, the bill provides that if a debtor's case is abusive, the
    court is to dismiss the debtor's effort to obtain bankruptcy relief.
    This flexible general standard will be applied in a wide range of cases
    as demanded to thwart the ingenuity of those who would wrongfully or
    fraudulently try to use the bankruptcy system. To assist enforcement of
    this general standard, the bill's most widely recognized innovation,
    the means test, creates a presumption that the Chapter 7 bankruptcy
    cases of debtors with incomes over the State median will be dismissed
    if they can afford to repay a significant part of those debts over a
    period of 3 to 5 years, based on a monthly budget set under court
    supervision. We expect this innovation, alone, to provide those
    responsible to enforce the honesty of the bankruptcy program with
    significant new tools to carry out their duties. Significantly, the
    bill aids the United States Trustee program in its enforcement efforts,
    increases funding for that program significantly, provides for more
    information about debtor's affairs to be provided in each case, and
    checks up on that information with a program of audits.
        Some of the most important provisions of the bill significantly
    improve the position of women and children who are dependent upon child
    support, alimony, and marital property settlements to receive the money
    they are entitled to. Today, consumer bankruptcy can be used to delay
    or evade these important family obligations. The bill closes the
    loopholes the unscrupulous seek to use to delay or evade paying child
    support or alimony.
        At a time when the States are increasingly pressed for revenue, the
    bill includes major provisions to improve and streamline the collection
    of state taxes. It also includes the homestead exemption compromise
    worked out in Conference in the 107th Congress.
        In addition, the bill imposes new forms of consumer protection on
    both the bankruptcy process and on consumer credit and recognizes the
    importance of low priced secured credit to Americans by improving the
    ability of the creditor to either get repaid or get the security back
    promptly. In an important change we believe will better help debtors
    having debt difficulty to understand their options, the bill requires
    every individual debtor to go to a brief consumer credit counseling
    session either before filing or shortly after filing bankruptcy, and
    gives debtors who do file for bankruptcy new, informative disclosures
    about the bankruptcy process, what they can expect from it, and how
    much and when they are going to have to pay for it.
        Of course, there are those who oppose this legislation. As someone
    has said, a true compromise satisfies no one, and this legislation is
    clearly the product of hard fought compromise. Many continue to think
    this legislation does not go far enough. Others claim it goes too far.
        The complaints of the critics should not obscure what is happening
    here. The critics are those with a vested interest in the system
    staying exactly as it is. They do not want reform. They do not care if
    the bankruptcy system remains a place where fraud and abuse are every
    day events. The American people, on the other hand, recognize all too
    clearly that bankruptcy is being used by some people to evade their
    responsibilities. In repeated polls of the public, they respond that
    bankruptcy reform is needed and necessary to limit bankruptcy to those
    who need it.
        Make no mistake about the point I am making. We support the
    availability of consumer bankruptcy relief. The bill before you today
    would continue to make available to every American, on demand, the
    ability to go into bankruptcy, obtain the benefit of the automatic stay
    and a discharge for unsecured debts, and emerge with a ``fresh start''.
    Nothing in this bill will prevent a person from getting prompt,
    effective and compassionate bankruptcy relief. Those who claim the
    contrary are simply uninformed.
        But reform is urgently needed. Today's present bankruptcy system is
    really two systems.

             There is the system for those who are overburdened
            with debt and are responsibly using the bankruptcy system. This
            is the vast majority of bankruptcy users. By our estimates, it
            is 80% to 90%, although some would suggest that this estimate
            is too high.

             There is another group which uses the bankruptcy
            system irresponsibly or fraudulently. These people usually have
            a great deal of debt. But they also have significant income or
            assets and use the bankruptcy system to evade their personal
            responsibilities. We estimate this group to be in the 10% to
            20% range of bankruptcy users, although, again, some suggest a
            higher percentage is in fact the case.

        In other words, bankruptcy is a good social program which provides
    benefits to Americans, but which is sometimes used inappropriately. We
    do not tolerate abuse of other social programs such as Medicare and
    welfare, nor should we tolerate abuse of bankruptcy.
        How can you misuse the bankruptcy system? Let me give you a few
    examples.

             Do you owe $40,000 of unsecured debt but have a
            comfortably steady income so that you could repay it over a few
            years, perhaps with the help of credit counseling? You can file
            for chapter 7 relief and discharge that $40,000 without
            repaying anything to your creditors. Enjoy your comfortably
            steady income.

    The legislation addresses this misuse with the ``ability to pay''
    provisions of section 102 as long as the debtor's income is in excess
    of the State median income level.

             Owe a $40,000 property settlement payment to an ex-
            wife? Or perhaps as part of that property settlement you are
            supposed to pay the mortgage every month on the house she
            occupies with the children. File chapter 7. If she doesn't hire
            a lawyer and file an action to declare the obligation you owe
            her nondischargeable, it will be discharged. If she does,
            dismiss the chapter 7 and file a chapter 13. You can discharge
            property settlement obligations in a chapter 13 proceeding.

    This misuse is addressed by making property settlement agreement
    obligations nondischargeable. No longer will the bankruptcy court be
    able to undo the results of domestic relations court.

             Have you defrauded your creditors? Use chapter 13 to
            discharge the debts you incurred by fraud.

    The bill stops this abuse. If you incurred debt by fraud, it is not
    discharged.

             Do you owe significant nondischargeable debts (e.g.,
            fraud or tax debts) and have you recently purchased a new car
            on credit? Use chapter 13 and its cramdown provisions to take
            money from your secured creditors and use it to pay your
            nondischargeable debts.

        Under the legislation, if you purchased a car on credit within 2
    years of filing and go into chapter 13, you have to pay for the car the
    same way your neighbor has to. The same result occurs if you purchase a
    large screen TV one year before filing. No longer can you take money
    from your secured creditor and use it to pay other bills, or in some
    instances, to cover your own living expenses--while you keep the car.
        Each of the examples I have given of what you can do may be
    perfectly legal strategies under today's Bankruptcy Code, and they all
    illustrate what is wrong. We have created a form of debt relief that
    rightly takes care of those who need it, but fails to identify and
    treat differently those who do not, or who are using it irresponsibly.
    How could this have happened? Briefly, in a well meaning attempt to
    help those in debt trouble, a statutory scheme was enacted in 1978
    which generously provides relief to those who need it--but also to
    those who do not deserve it. Unfortunately, bill paying Americans pay
    for that unnecessary largess in higher credit prices and reduced credit
    availability.
        Critics of bankruptcy reform efforts have claimed that the
    provisions in the legislation aimed at those with ability to pay are
    excessively harsh on debtors who need and deserve bankruptcy relief.
    For example, they claim it is an unacceptable burden on those seeking
    relief to require them to attend a brief credit counseling session in
    which they will learn how credit counseling might help them. They
    similarly claim that requiring that debtors receive some brief
    additional disclosures to explain the bankruptcy process and their
    relationship with their attorney also imposes an unacceptable burden on
    obtaining relief. Nothing could be farther from the truth. Exposure to
    credit counseling before filing bankruptcy can save some debtors from
    the damage bankruptcy does to their credit rating. It introduces them
    to budgeting, which experts tell us is often the problem. Other critics
    urge that the educational features of the program won't work, or are
    too expensive. To be sure, there are questions about how to best
    develop an effective program as there always are. But the bill contains
    flexible standards which give the United States Trustee Program the
    ability to structure and refine an effective program over time. It also
    provides for a pilot project which will enable the Program to evaluate
    and experiment with innovative approaches to carrying out this mission.
    The need for debtor education and improved financial literacy is great
    if bankruptcy is to be truly rehabilitative. The catalyst of this
    legislation has resulted in much constructive work already being done
    on how to best structure the educational process, and it will continue
    to have that effect. Given the need, there can be no doubt that the
    counseling and educational programs included in the bill are worth the
    effort and cost.
        Balanced reform is needed to put our consumer bankruptcy laws back
    on track. After years of negotiation and compromise, the bill has found
    a middle ground. We urge you to support it.
        In closing, let me stress again the significance of this
    legislation to close loopholes that today permit debtors to delay or
    evade child support, alimony and property settlement obligations. I
    have heard no one who says that these provisions are not strong enough.
    And they are needed to make sure that these important social
    responsibilities are not evaded in bankruptcy court. Bankruptcy court
    should not be a court of second resort after domestic relations court
    where you can undo your obligations to your children and society.
        Thank you for the opportunity to address the Committee.

        Mr. Cannon. In deference to your schedule, Mr. Coble, we
    would like to give you the first opportunity to ask questions.
        Mr. Coble. Thank you, Mr. Chairman. I will be brief.
        And the Chairman imposes the red light rule against us as
    well, folks. I will try to get through in 5 minutes.
        Mr. Friedman, what are some examples of how debtors can
    abuse the present consumer bankruptcy system?
        Mr. Friedman. Congressman, there are a number of areas
    which the provisions of this bill will help strengthen and
    enforce for us. Examples are abuse of serial filings, where
    people file over and over again to stop a foreclosure on a
    home, and filings where people run up credit cards in what we
    call credit card bustout scams, and they therefore run up the
    credit cards, pay the credit cards down with insufficient
    funds. The minute that the funds are posted to the account,
    they would then max out the credit cards again and thus break
    out--double the limit on their credit cards and abuse the
    bankruptcy system. These are just a couple of the examples of
    abuse in the system.
        Mr. Coble. Thank you, sir.
        Has section 707(b) been a success or a failure? If you can
    say one or the other?
        Mr. Friedman. I would say section 707(b) has been a tool
    that we have used so far, but it will be enhanced by the
    provisions of this bill such that it will set forth a uniform
    standard that can be applied consistently throughout the United
    States, and that strength is needed.
        Mr. Coble. Thank you, sir.
        Ms. Miller, now, your organization purports to represent a
    creditor's perspective, but yet Mr. Wallace's organization, the
    Coalition for Responsible Bankruptcy Laws, U.S. Chamber of
    Commerce, the Financial Services Roundtable, the National
    Association of Credit Managers, the National Retailers
    Federation, the Bond Market Association, et cetera, they are
    some of this legislation's most avid supporters. You are on the
    other side of that. Both of you, you and these groups I just
    mentioned, purportedly speak for creditors. And I realize
    reasonable people can disagree, but illuminate on that for me.
        Ms. Miller. Let me suggest there are a number--the
    Commercial Law League of America is not the only organization
    that has opposed the legislation because it doesn't protect
    creditors' rights. Every major bankruptcy organization that has
    honed in on--has been criticizing this legislation since it was
    first enacted, number one.
        Number two, a number of the provisions in the bill
    ultimately deprive unsecured creditors of maximizing a
    distribution from the estate. One of those provisions that I
    alluded to is the lien-stripping provision. While Mr. Wallace
    and I may disagree on the overall perspective of what the bill
    does, I don't think anybody has contended that unsecured
    creditors aren't going to suffer if the lien-stripping
    provision is enacted. Why should secured creditors be treated
    any differently as a result of the filing of the bankruptcy
    than they would be treated outside of bankruptcy? Why should
    unsecured creditors not receive a distribution from the estate?
        Mr. Coble. Well, bankruptcy organizations ofttimes include
    debtors' attorneys. Would that be perhaps one reason why the
    disparity in the other groups I mentioned?
        Ms. Miller. The Commercial Law League represents both
    debtor interests and creditor interests, but we have always
    pushed forward for fair and balanced legislation. We are
    primarily a creditors' rights organization, and having looked
    at the bill and analyzed it over the last 6 years, it simply
    doesn't protect the interests of the general unsecured
    creditors.
        Mr. Coble. Ms. Beckwith, if you or Mr. Wallace want to
    weigh in before my time runs out, either of you.
        Mr. Wallace. I would say the Commercial Law League is an
    association of attorneys who refer business amongst one
    another. It is an old organization. I think that they are
    concerned about protecting how they make their money. They have
    made their money in bankruptcy for a number of years, and they
    are concerned about continuing to do that. I understand that
    they have general interests and that they are well-intentioned,
    but I think in this interest they are somewhat deflected from
    those concerns and focusing more upon how the system now works
    for them rather than how it should work for all of us.
        Mr. Coble. Thank you, sir.
        Mr. Chairman, thank you for letting me do the--I will go
    back and forth to my meeting and hopefully will return.
        Mr. Cannon. Thank you, Mr. Coble.
        The Chair now recognizes Mr. Watt for 5 minutes.
        Mr. Watt. Thank you, Mr. Chairman.
        Mr. Friedman, if a person falls below the means test in
    this bill, will there be any substantial changes to that
    person's processing of his bankruptcy?
        Mr. Friedman. I don't believe there would be any
    substantial change in the processing, because the provisions of
    the means test with regard to qualification only kick in above
    a certain level, which I believe is the median level.
        Mr. Watt. So if people fall below the means test and are
    abusing the system now, they will continue to have the same
    rules apply to them, and they cannot continue to abuse the
    system?
        Mr. Friedman. No. I wouldn't say that. I----
        Mr. Watt. Is there anything in this bill that will make
    circumstances different for somebody who falls below the means
    test?
        Mr. Friedman. The income portion of the means test. But the
    change that this bill makes to that section of the Code also
    has a provision for people who otherwise abuse the system, and
    we currently look at those people. We would continue to look at
    those people with regard to the abuses in the system they may
    have.
        Mr. Watt. So bankruptcy judges and trustees then will
    continue to have some discretion, same kind of discretion they
    have under the current system; is what you are saying?
        Mr. Friedman. What I am saying is that the current system
    has a standard which is not as uniformly applicable as I
    believe the enhancements would be under this legislation.
        Mr. Watt. Ms. Beckwith--well, let me just go back to Mr.
    Friedman for a second. Are you at all concerned that this whole
    means test approach creates two categories of bankruptcy courts
    in the country now if this bill passes, or is that not a
    concern to you?
        Mr. Friedman. Congressman, the means test as written in the
    current legislation provides an additional tool for
    identifying----
        Mr. Watt. Can you answer yes or no and then explain? Are
    you concerned that after this bill passes, if it passes in its
    current form, there will, in effect, be two different
    bankruptcy courts?
        Mr. Friedman. No.
        Mr. Watt. All right. Ms. Beckwith, you testified that
    256,000 credit union members in 2002----
        Ms. Beckwith. Yes, sir.
        Mr. Watt [continuing]. Filed bankruptcy?
        Ms. Beckwith. Yes, sir.
        Mr. Watt. Has CUNA or the credit union association done any
    analysis to determine what percentage of those 256,000 people
    fall above the means test and what percentage falls below the
    means test?
        Ms. Beckwith. Not to my knowledge, sir.
        Mr. Watt. So if there is no substantial difference in the
    way their bankruptcies are processed for people who fall below
    the means test, you don't think that would be a relevant
    consideration in your evaluation of this bill?
        Ms. Beckwith. Sir, I think it will protect those who fall
    below the means test. If I did not feel that way, I would not
    support this bill. It is important that the people who have a
    real crisis in their life are protected.
        Mr. Watt. The credit card example that you talked about in
    your testimony, is there anything in this bill or otherwise
    that would impose upon lenders any additional responsibilities
    to assure that this couple that you described that was going
    around just taking the credit line--had any greater
    responsibility in evaluating whether a borrower was doing that?
        Ms. Beckwith. Sir, at the time we extended the credit to
    these two members, there was no way we could legally deny them
    credit. You know, they met all of the credit tests.
        Mr. Watt. I am saying--and I don't like to refer to people
    in my family or myself, but I consistently get credit card
    offers extending substantial credit. Are other people applying
    the same type of criteria that you are applying?
        Ms. Beckwith. Sir, I believe the educational opportunities
    in this bill over time will educate the people of this Nation
    to where they will be able to handle their financial
    obligations better and be less apt to fall into that trap.
        Mr. Watt. Thank you, Mr. Chairman.
        Mr. Cannon. Thank you, Mr. Watt.
        Mr. Chabot, would you like to take 5 minutes?
        Mr. Chabot. Yes. Thank you, Mr. Chairman.
        We have been through this issue so many times before, I
    don't know if I will take the full 5 minutes. It has been a
    long road, and I sympathize with many of the panel members and
    many of the folks that are here today who have been fighting
    this battle for such a long time. I am cautiously optimistic
    that we will be successful this time. I hope that we don't get
    sidetracked by issues which are only marginally related to
    abortion and probably shouldn't have been brought up in the
    first place, but hopefully we can get it done this time.
        And whenever I think about this issue, I think about how
    the American people literally are paying more for products
    because some of their fellow citizens aren't living up to their
    obligations, and bankruptcy should be there for people who
    really need it, for people who have sustained a particular
    trauma in their family. Perhaps there has been a loss of job or
    even a death in the family sometimes, or pretty substantial
    medical bills. I mean, there are people who legitimately need
    to file bankruptcy, but unfortunately, some of our fellow
    citizens have found a way to scam the system and run up credit
    cards and basically leave the rest of us holding the bag. And
    hopefully--I mean, this bill will not eliminate that
    completely, but it will certainly be a step in the right
    direction, and that is why I think it would be good for the
    country, good for the economy, good for personal responsibility
    if we can get the job done this time. And I hope that we are
    successful.
        Just a couple of questions. What are the most common ways--
    what are the--Ms. Beckwith, you mentioned the Hawaiian wedding
    and the $20,000 as I think a particularly egregious example of
    somebody scamming the system. I mean, that is certainly not
    what bankruptcy was intended to be used for, but if you are--
    Mr. Wallace or Ms. Beckwith or any of the panel members would
    like to give us any other examples of things that they have
    seen happen or particular ways that people do avoid their debts
    and use bankruptcy in a way that it was not intended to be
    used. So I would be happy to hear from any of the panel
    members.
        Ms. Beckwith. Sir, a lot of times people--you can look at
    their credit reports and you can see where they have loaded up
    at furniture stores and things, and then you look at the credit
    report, and then you notice where they got a mortgage about a
    year earlier. They have decorated their house at the expense of
    my other members.
        At other times we have seen people--when we looked at their
    credit reports--who have taken expensive vacations and this
    sort of stuff and then again file bankruptcy.
        There was a credit union in Minnesota who had a $30,000
    loss. This is in my written testimony. And they received his--
    he moved to Florida, and his hometown paper received an article
    with a picture of him in front of his new power boat talking
    about his multiple golf memberships and what fun he was having
    fishing.
        And the people of the credit union in that town paid a
    great loss, you know, I mean it was just that they paid for his
    retirement, and I think that is wrong. That is abusive.
        Mr. Chabot. Thank you.
        Mr. Wallace. Let me give you two examples of situations
    that the bill would address and that are important to address.
    For example, it is--one of the things that bankruptcy can be
    used for is to get rid of property settlement obligations that
    arise out of a marital breakup, and you can use chapter 7 and a
    combination of chapter 7 and chapter 13 to get rid of those
    obligations today. It is a combination of substantive and
    procedural laws the way you do it. There is even a book that
    shows you how to do that. That is one of the examples of the
    kinds of things that would be blocked by this bill. Marital
    property provisions of the bill block that.
        The second way is that if you have committed fraud today
    and become liable for debt, there is a way in which you can use
    chapter 13 today to discharge the fraudulent debt, the debt
    that arises from fraud, and that is also blocked by the bill.
        These are important changes. There is one other thing I
    wanted to mention in terms of what Congressman Watt was
    mentioning before. The standard for the 707(b) today is
    substantial abuse. You have to prove that there is substantial
    abuse and there is a presumption that the debtor has not
    abused. However, under the bill the standard is changed to
    abuse. You have to prove that the debtor has engaged in abuse,
    which is a lower standard, and the presumption in favor of the
    debtor is taken away. This will enable the United States
    Trustee's Office and trustees to handle the cases that
    Congressman Watt was raising, which I would agree are abusive
    and need to be dealt with in the situation where the debtor is
    below the median income.
        Ms. Miller. I would also like to make a comment,
    Congressman Chabot, and also to respond to something that
    Congressman Watt indicated.
        Mr. Chabot. It is actually pronounced ``Chabot.''
        Ms. Miller. I am sorry. I apologize.
        Mr. Chabot. As long as you don't use the French
    pronunciation, ``Chabot.''
        Mr. Cannon. Wait a minute, Steve. We don't call you
    ``Chabot'' anymore? I might just remind the witness that the
    time has run, but if you would like to finish up your answer.
        Ms. Miller. Thank you very much. While there are
    educational provisions that are geared at educating debtors in
    terms of securing credit and incurring financial obligations
    under the bill, there are no equivalent provisions with regard
    to policing the manner in which credit cards are issued or
    credit card applications arrive at people's homes. I can't tell
    you personally how many I have received, or how many my minor
    children received.
        In fact, one of my colleagues that is a member of the
    Commercial Law League got a new dog and the dog--he applied for
    a dog tag for the dog. And lo and behold, after the dog tag
    arrived, a credit card application arrived for the dog. Was the
    dog going to put his paw on it?
        Mr. Cannon. Mr. Nadler, I think you are next.
        Mr. Nadler. Thank you, Mr. Chairman. Let me say first to
    Mr. Friedman, I would request that if you haven't done so,
    would you prepare a section-by-section analysis and give it to
    the Committee of all the new duties that the U.S. Trustees and
    the private trustees will have if this bill passes and itemize
    the cost of each new function, such as audit, storage of
    additional paperwork and additional notices?
        I am especially interested in the section 102(c) of the
    bill which requires the U.S. Trustee to do a lot of things. I
    think we would be very interested in seeing exactly what new
    public costs this bill imposes in this time of fiscal
    stringency, great tax cuts and no provision for any public
    expenditure. So I would be interested in your analysis if you
    could get that to the Committee after today.
        Thank you.
        Ms. Beckwith, the one provision we have been told in
    negotiations is the deal breaker for the credit unions and you
    mentioned this, as one of the three requirements, is the title
    and reaffirmation agreements. The bill provides that the court
    may reject a reaffirmation agreement if it would cause undue
    hardship, which is astonishingly defined in the bill as
    requiring payments in excess of the debtor's disposable income.
    Even more astonishingly, credit unions are exempt from this
    pathetic restriction on reaffirmations.
        Can you justify stripping a bankruptcy court of the ability
    to reject under any circumstances a reaffirmation agreement
    that would require a debtor to pay more than his total
    disposable income? Is this really a deal breaker for the credit
    unions or would you approve of the Committee placing the credit
    unions under the same rules that in the bill apply to all other
    creditors seeking reaffirmation?
        Ms. Beckwith. That was a lot of questions.
        Mr. Nadler. Well, I will summarize it. Do you really think
    that credit unions should be exempt from the requirement that a
    reaffirmation cannot impose the obligation to repay more than
    total disposable income on the debtor? Yes or no.
        Ms. Beckwith. No, I don't. I don't think the credit union
    would ask that.
        Mr. Nadler. Well, you have asked. So you would be perfectly
    willing to have the bill amended so that the credit unions
    would be subject to this provision of the bill as is every
    other creditor?
        Ms. Beckwith. Sir, it is in the members best interest most
    of the time that they be able to reaffirm.
        Mr. Nadler. That it is not my question. I don't have a lot
    of time. Please answer my question, not a question I didn't
    ask. Would be willing to have the bill amended so that credit
    unions would be subject to the same provision in the bill as
    every other creditor, that they cannot do a reaffirmation of
    such a nature that the creditor has to pay--the debtor has to
    pay back more than his total disposable income?
        Ms. Beckwith. Sir, I would have to have some research done
    on that and get back to you.
        Mr. Nadler. I think that that answer says all I need to say
    about the honesty of this presentation.
        Let me ask Mr. Wallace. This bill imposes substantial costs
    on the Government to investigate and audit debtors. Why should
    the public funds be used to do the due diligence for major
    banks and other creditors when they are unwilling to do the
    investigation themselves or to seek more substantial
    information about the borrower before making extension of
    credit? We know that they are flooding people who don't have an
    ability to repay a lot of money with credit card applications.
    And what this bill suggests is that the Government should pay
    for their due diligence. I assume you are aware that a creditor
    may examine the debtor at the 341 meeting. So why are--why
    should the Government assume this--the duty to investigate and
    audit the debtors? Why isn't this the responsibility of the
    banks and the credit card issuers before they issue the credit
    card?
        Mr. Wallace. This is a bank--the bankruptcy is a
    governmental program, Congressman. And it seems to me that the
    Government has a responsibility of keeping a governmental
    program honest. Under some circumstances I guess it is possible
    for a creditor to participate in a 341 proceeding and they do
    do so. However, they do not have either the power of the
    Government nor the sweep of the Government's inquiry in order
    to try to find out and ferret out all fraud. They are
    determined by profit and expense.
        Mr. Nadler. I understand.
        Mr. Wallace. Whereas what the Government is concerned about
    is honesty.
        Mr. Nadler. Sir, I understand. But are you aware that a
    creditor has the right under section 343 of the Code, in rule
    2004 to conduct an extensive examination under penalty of
    perjury of the debtor's financial circumstances, including the
    production of documents?
        Mr. Wallace. Yes, I have done these things and they do take
    a fair amount of time and I bill my clients for them. They are
    expensive.
        Mr. Nadler. So why should the Government obtain--why should
    the Government have to spend public money to do the job that
    the creditors should be doing?
        Mr. Wallace. Because it is a governmental program, sir.
    Because it is not the job of the creditor. It is the job of the
    Government, sir, to conduct a fair, honest and clean bankruptcy
    system.
        Mr. Nadler. So you are turning the Government into a
    credit----
        Mr. Cannon. The gentleman's time has expired, but I will do
    a second round if you would like to do that.
        Mr. Nadler. Thank you.
        Mr. Cannon. Mr. Delahunt, would you like to take 5 minutes?
        Mr. Delahunt. Yes. Thank you, Mr. Chairman. I think it was
    you, Mr. Wallace, and it is good to see you again. I have
    missed you through the years and it is good to know that you
    are back. I hope you come back in 2 years.
        Mr. Wallace. I am sure you do and I do not.
        Mr. Delahunt. You know, Mr. Friedman, you talk about--I
    mean we heard Mr. Wallace talk about people lying under oath,
    and you talked about enhanced tools. I mean the reality is the
    kind of fraud and abuse that you reference is susceptible to
    criminal investigations. Is that a fair and accurate statement?
        Mr. Friedman. The question was, is it susceptible to
    criminal prosecution?
        Mr. Delahunt. Absolutely.
        Mr. Friedman. It is in some cases.
        Mr. Delahunt. In many cases presumably. In my former career
    I was a district attorney and you know if, Ms. Beckwith, you
    would come to my office with that case I would have assigned
    the matter to my white collar crime fraud squad and they would
    have been out and hopefully that would have, you know, sent a
    loud and very clear message and hopefully resulted in some
    deterrence. But I am really interested in the response by Ms.
    Miller to Mr. Wallace's suggestion that those lawyers that make
    up your League are really doing this out of self-interest.
        Ms. Miller. I am glad you asked that question.
        Mr. Delahunt. I bet you are. Can I just--let me just follow
    that up. And let's just really get, you know, let's cut to the
    quick here, so to speak. I understand your major concern is
    that unsecured creditors are being displaced here. Their chance
    at getting their fair share is reduced. Am I correct on that?
        Ms. Miller. Absolutely.
        Mr. Delahunt. Now, I don't hear you singing any great songs
    of sympathy for debtors. I mean, at least I haven't heard it to
    date. Now I am sure in your heart of hearts you are concerned
    about the poor debtor. But can you tell us in very simple terms
    so that all the Members of the Committee can understand what
    the import of this bill is in terms of under secured creditors?
    You referred to the lean stripping provisions. Why didn't you
    explain to us in very simple terms that we can all understand?
    Who is making out in this bill? Maybe that is the bottom line.
    No pun intended.
        Ms. Miller. No, you have asked me a number of questions and
    I guess I would like to first respond to the fact that somehow
    because my pockets are being padded that influences my
    testimony here today. I have been a member of the League since
    1993. I have been involved in the academic pursuit of fair and
    balanced legislation for the League since 1994 and have chaired
    the League's legislative effort in that regard. I am pleased to
    report to the Committee that I haven't had any--I don't get
    referrals from the League. I am involved there because it is a
    wonderful network for connections and it has been a wonderful
    opportunity for me to be able to get involved in commenting on
    the legislation.
        So Mr. Wallace's comments really don't bear out the proof,
    number one. Number two, with regard to the lean stripping,
    normally the way that the Bankruptcy Code is worded today,
    under section 506 of the Code, a secured creditor's claim is
    limited with respect to the secured portion based on the value
    of its collateral. Therefore, if you have bought a piece of
    property that at the time was worth $100 and at the time that
    the bankruptcy was filed the property is only worth $50, the
    secured creditor has a claim for $50 secured and the deficiency
    is treated as an unsecured claim. Under the proposed bill it
    seeks to change that process in the case of car loans that have
    been outstanding for 2\1/2\ years, or with regard to any
    purchases that have been made within a year of bankruptcy, such
    that the full amount owed to the secured creditor at that time
    regardless of the value of the property, is treated as a fully
    secured claim, even though outside of bankruptcy if there were
    a default and the secured creditor sought to foreclose under
    Revised Article 9 of the Uniform Commercial Code it would be
    limited only to the value of its collateral and the deficiency
    would still be treated as an unsecured claim.
        Mr. Delahunt. So who is making out in this? You talked
    about the car loans. The secured creditors are making out to
    the disadvantage of unsecured creditors?
        Ms. Miller. Absolutely.
        Mr. Delahunt. If I could just indulge you for 30 seconds
    more, Mr. Chairman.
        Mr. Cannon. Without objection.
        Mr. Delahunt. And is there anything in this bill that
    elevates an unsecured creditor to the status of a secured
    creditor?
        Ms. Miller. Not that I am aware of. But I might even point
    out further there are some unsecured creditors. I mean you have
    to look at some of the special interests that are being taken
    care of in the bill. For example, if you can indulge me, the
    real estate lessors currently under section 365 are entitled to
    get paid currently for all their obligations as they become
    due. Under the bill it enhances the protections for the real
    estate lessors such that there is a limited period of time by
    which the debtor must decide to assume or reject a commercial
    real estate lease. And at that point if they haven't taken the
    action the lessor can withhold the right for them to have any
    additional time. If the debtor makes the wrong decision and
    either decides wrong, doesn't assume the lease and loses a
    valuable asset and can't reorganize, ultimately the creditors,
    the unsecured creditors have lost the option of being able to
    maximize the going concern value of those assets for the
    benefit of everybody. On the other hand, if the debtor makes
    the wrong decision and assumes that lease improvidently and
    then finds out it really shouldn't have done so, then it has
    created the huge administrative expense claim for the estate,
    thereby depriving unsecured creditors of money. As long as the
    landlord is getting paid currently there is no abuse that needs
    to be addressed.
        Mr. Cannon. Thank you, Ms. Miller. Presumably we have saved
    the Subcommittee 5 minutes on the second round of questioning,
    Mr. Delahunt. The Chair recognizes the gentleman from Michigan,
    Mr. Conyers, if you would like to.
        Mr. Conyers. Thank you, Mr. Chairman. I want to welcome
    Attorney Miller to these proceedings. I am happy to have her
    testimony on behalf of the organization, Commercial Law League
    of America, and I am astounded by the fact that there is a
    general approval of these witnesses before this Committee,
    perhaps save one, about means testing, which in our last
    hearing was determined by some to be arbitrary, unworkable and
    bureaucratic, that the means testing provisions will harm low
    income, middle income people, and will have adverse impact on
    women, children, minorities, seniors as well as victims of
    crime.
        Did any of that, Ms. Beckwith, come to your attention in
    examining the measure that you support here this afternoon?
        Ms. Beckwith. Sir, I believe that the means testing will
    help those who indeed have a critical crisis in their life and
    need to file for bankruptcy, and it also does move up the
    position of child support and alimony and, you know, pushes
    down the attorney's fees. So it is going to help in several
    ways.
        Mr. Conyers. Did you find anything, Ms.--Attorney Miller,
    about means testing that you might want to reiterate or bring
    to the Committee's attention this afternoon?
        Ms. Miller. Attached to--a number of position papers have
    been submitted over the term that the bills have been pending
    in Congress. The League has been opposed to means testing
    because it is difficult to apply. It is subject to
    manipulation. It is not necessarily applied in the standard
    fashion. It relies on IRS guidelines which are not necessarily
    easily understood or necessarily were drafted in a way with
    bankruptcy in mind. It also--depending upon the circumstance in
    which you are, it sometimes penalizes those that--for instance,
    that are not paying, that are current with their child support
    obligations as against those that are not current. It also
    seems to have differing impacts depending upon whether you own
    a house versus you lease premises. It just doesn't seem to
    work. And moreover, as long as the bill has been pending I am
    not aware of any retrospective analysis of how the means test
    would have worked or if it would have worked and how much it
    even would have been applied to. And it seems as though over
    the number of years that the legislation has been pending at a
    minimum some kind of studied analysis would be done before we
    go forward with the proposed means test that has been
    criticized so significantly.
        Mr. Conyers. Now, Ms. Beckwith, again, please, have you
    been--your organization been disturbed by the great number of
    credit cards that leaflet America, everybody and their dog gets
    one, kids in college, people with no credit, bad credit? Is
    this a problem that may have come to your attention?
        Ms. Beckwith. Sir, the parts of this bill that deal with
    member education are very, very important to me. In my own
    credit union we do not give a college student a credit card
    above $700 without a parents cosigning with them. We feel it is
    wrong to do that. But again, education of people is what is
    important. They have to be financially educated and we are a
    firm supporter of the NEFE program, which is the National
    Endowment for Financial Education, and are involved in that in
    South Carolina to a great degree.
        Mr. Conyers. Gee, I am happy to hear that. I don't know
    what the college kids are going to do with that education as
    these credit cards are mailed directly to the university or
    they are waiting for them at their house. And a lot of adults,
    not even kids, get caught up in this. Don't you think we got a
    little bit more of a problem? Couldn't it be possible that we
    could get some restraint on the credit card companies?
        Ms. Beckwith. Sir, again, I think it is a matter of
    personal responsibility and in our credit union we also have a
    program called Young Trust, which is for members between 16 and
    25 years old, where we have special programs for them where
    they learn about credit. They learn about the loan process and
    what we actually look at and how important retaining a good
    credit rating is. They also learn about debt to income ratios
    and, you know, several other things that we help them with in
    order to educate them. In America we need more financial
    education, sir.
        Mr. Conyers. Thank you.
        Mr. Cannon. Thank you, Mr. Conyers. Mr. Friedman, Mr. Watt
    asked you earlier about whether this bill would create two
    bankruptcy courts and you seem to have had a longer answer
    which you then gave a one-word response to. Would you like to
    expand on that for a moment?
        Mr. Friedman. Certainly, Mr. Chairman. The provisions which
    Congressman Watt were discussing and questioning me about
    provide a test which is much more focused in ferreting out
    cases where there is possibly fraud and abuse and in giving us
    a uniform standard that could be applied coast to coast for
    determining what is or is not abusive under the Code as opposed
    to the current legislation that we act under.
        Mr. Cannon. Great. Thank you.
        Ms. Miller, Mr. Delahunt raised the issue of responding to
    Mr. Wallace's particular statements and then asked several
    questions. If you would like to take a few moments to respond
    with particularity, I would be pleased to have you do that.
        Ms. Miller. I think I had already responded, and quite
    frankly I was somewhat shocked at his suggestion. The League
    has repeatedly been asked to appear before Congress as experts
    on bankruptcy. We have been repeatedly contacted with regard to
    pending legislation to submit position papers. We have always
    taken a fair and balanced approach, both with regard to debtors
    and creditors, because we feel that is imperative in the type
    of multi-constituent process in which you are involved.
        Mr. Cannon. You don't want to deal with the specifics or
    would you like to deal with those specific statements that you
    made?
        Ms. Miller. I guess I am--can you redefine to me the
    specifics that you were----
        Mr. Cannon. No. Mr. Wallace, would you like to repeat
    those?
        Mr. Wallace. Well, what I was pointing out and without any
    personal animus or anything, I just pointed out that the
    Commercial Law League is a referral organization. I mean it is
    part of the bankruptcy establishment. It is concerned
    principally with the improvement of bankruptcy law for the
    purposes of its members and its members make money in the
    bankruptcy system. That is all I suggested.
        Ms. Miller. I think any organization that is here has--that
    people belong to memberships in order to be able to network and
    ultimately market who they are and what they do in order to
    secure business. I think that Mr. Wallace represents a number
    of people that are interested in pursuing a similar set of
    goals for their members.
        Mr. Cannon. Thank you. You have in fact testified in the
    past and I--as you were giving your opening statement, you
    talked about times being different right now. And I am
    wondering, obviously we have had more bankruptcies, so we are
    moving up and it is not like we are declining in the number of
    bankruptcies. Were you trying to express a concern in your
    opening statement that if we do this bankruptcy bill that we
    will somehow turn consumers off and that would be bad for the
    economy?
        Ms. Miller. No. What I was suggesting is that the economy
    is in a much more serious and fragile condition today than it
    was when bankruptcy reform was first considered and since the
    last time that I appeared before this Committee and that there
    are numerous causes for the increase in bankruptcy, but one
    cannot necessarily assume it is due to abuse. I think we all
    know there is some abuse out there and there is fraud out there
    and that it should be addressed. But the increase alone is not
    due to abuse and fraud, and that presumption is what is
    erroneous and in view of the changed economy, being slowed down
    and all of the repercussions that we haven't begun to see from
    the large bankruptcies, where there are going to be corporate
    shutdowns, where people are losing their jobs, how many people
    do we hear where corporations are downsizing and people are
    losing their jobs?
        Mr. Cannon. Let me just--I only have one more minute. I
    want to you to flesh this out. But it seems to me that in the
    past you have testified in favor of harsher provisions than in
    this bill in this particular. I am just wondering, do you
    believe that the number of bankruptcies--there are some
    underlying changes in society that is being masked; in other
    words, we have an increase in bankruptcies because of short-
    term problems with the economy instead of a fundamental
    turnaround in the economy or a turnaround in the bankruptcy
    understanding and proceedings?
        Ms. Miller. I think that the economy is much more fragile,
    and as a result Congress has to take pause and really consider
    what the impact of passing this legislation will be and whether
    or not it really addresses----
        Mr. Cannon. Pardon me. Just so I can do this before--I see
    the distinction between abuses and a fragile economy. But when
    you are talking about a fragile economy, are you saying that
    this Subommittee should defer these rules until the economy is
    more robust?
        Ms. Miller. I am not necessarily saying that they should
    defer. I think that they should carefully consider whether or
    not this is the appropriate vehicle to address bankruptcy
    reform.
        Mr. Cannon. Thank you. We are going to do a second round of
    questioning. I think that--may I just have an indication of who
    would like to do a second round? Okay.
        Mr. Watt, do you want to then take 5 minutes?
        Mr. Watt. Thank you, Mr. Chairman. I want to go back to
    this issue that Mr. Friedman and now Mr. Wallace has addressed
    because I still am concerned that we are setting up two
    separate systems of bankruptcy here and I think that is bad
    public policy. I confess that I am one of the few people that
    is out here expressing this concern, but I just think it is
    very bad public policy.
        Now, as I understand where we are now, the standard is
    abuse, as Mr. Wallace has pointed out to us, is substantial
    abuse, and under the new bill we are going to abuse being the
    standard. Is that correct?
        Mr. Wallace. That is correct.
        Mr. Watt. But under the existing law judges have the right
    to determine what is substantial abuse and, as I understand it,
    under the new law judges will only be able to determine what is
    abuse for people who fall below the means test. Is that
    correct?
        Mr. Wallace. I don't think I would agree with that
    characterization quite. The standard is whether or not there is
    abuse. If you are above the State median income then there is a
    presumption that you have abused the system; i.e., that there
    is abuse.
        Mr. Watt. Okay, And if you are below it there is a
    presumption that you have not?
        Mr. Wallace. No. There is no presumption if you are below.
    There is just nothing. It is just the standard of abuse.
        Mr. Watt. So you are saying that if you are above it you
    presume that you have; if you are below it there is no
    presumption at all?
        Mr. Wallace. That is correct.
        Mr. Watt. And that is not a presumption that you have not?
        Mr. Wallace. That is correct, sir, yes, because--yes. That
    is correct. I think that is right. There are a lot of double
    negatives in that, but I believe that that is correct.
        Mr. Watt. And now, Mr. Friedman, you say that the standards
    for these new standards are going to give you a uniform
    national standard to apply. That is what you said in response
    to somebody's question. I can't remember whose it was. But
    those standards that you are talking about are standards that
    will be applicable only for people above the means test. Isn't
    that right?
        Mr. Friedman. I don't believe that that is true,
    Congressman. What 707(b) in the draft legislation does is set
    forth objective standards, specific objective standards.
        Mr. Watt. For people above the means test?
        Mr. Friedman. It sets forth objective----
        Mr. Watt. For people above the means test?
        Mr. Friedman. The only thing that the means test does is
    set forth objective standards by which the presumption is
    thought of one way or another. It doesn't mean the people below
    the means test are not subject to having their case dismissed
    because they abuse the system and it doesn't mean that those
    above the means test are subject to having their cases
    dismissed unilaterally because they were above it. It creates a
    presumption.
        Mr. Watt. And that presumption directs you either into one
    form of bankruptcy or another form of bankruptcy, is that
    correct?
        Mr. Friedman. That is not the way I understand the statute.
    The presumption sets forth a determination, at which point if
    you were above the presumption the debtor would have the burden
    if a motion were filed to dismiss the case of substantiating
    that it is not abuse for them to get the granting of relief.
    But it is all within the same court and the same context and
    the same statute.
        Mr. Watt. And what happens if you are below the means test?
        Mr. Friedman. Then if someone files a motion to dismiss
    your case it is upon the burden of the filing party objecting.
        Mr. Watt. And who makes that determination of whether there
    is abuse or not?
        Mr. Friedman. I don't think it is a determination of
    whether there is an abuse. The application of the standard to
    the United States Trustee Program would be that the United
    States Trustee Program perform a certification.
        Mr. Watt. So you are saying there is no determination made
    of whether there is an abuse if you fall below the means test?
        Mr. Friedman. There is only--there are determinations made
    under the section 707(b). If the median income is above the
    standard----
        Mr. Watt. I am asking about people who fall below the means
    test. Is there a determination of whether there is abuse or
    not?
        Mr. Friedman. Well, absolutely. Our program currently----
        Mr. Watt. And who make that determination?
        Mr. Friedman. The United States Trustee Program for one
    reviews a lot of chapter 7 cases.
        Mr. Watt. Who has the ultimate responsibility for making
    the determination?
        Mr. Friedman. Well, the court.
        Mr. Watt. The court makes that determination?
        Mr. Friedman. That's right.
        Mr. Watt. And they make it without the benefit of any kind
    of presumption, whereas if you are above the means test there
    is a set of arbitrary rules that say you have got to overcome
    this presumption otherwise you go to one court or the--one kind
    of bankruptcy or another kind of bankruptcy. Isn't that right?
        Mr. Friedman. I wouldn't agree with that characterization,
    Congressman.
        Mr. Watt. Okay.
        Mr. Cannon. Thank you.
        Mr. Chabot, would you like to take 5 minutes?
        Mr. Chabot. Yes. Thank you, Mr. Chairman.
        Mr. Wallace, in light of your prior experience as a faculty
    advisor for a low income legal clinic, I believe in Iowa it
    was, what is your response to those who say that these
    bankruptcy reforms, especially with regards to the need-based
    provisions would, if enacted, hurt poor people?
        Mr. Wallace. Well, I don't think they will hurt poor people
    in any significant way at all. The reforms in fact were rather
    finally tailored so as to catch those people who are dishonest
    and, i.e., abusing the system and not to effect those people
    who are honestly trying to obtain relief. That is the whole
    purpose of the presumption that was mentioned before and the
    standard of abuse in 707(b). I don't see how you can argue that
    a debtor who hasn't abused the system is going to be
    significantly limited in terms of their relief. There are some
    other provisions in the Bankruptcy Reform Act that apply
    regardless of whether or not you are above or below the means
    system. But each one of those is tailored to stop a specific
    form of abuse. So I think that the simple answer is that if you
    are poor and you are honest and you are trying to get relief
    honestly and making full disclosure of your assets liabilities,
    incomes and expenses, you will get relief just as you do today.
    And that is the whole point of the bill, is to preserve that
    relief, and that is why this bill will not have any significant
    effect upon those who deserve bankruptcy relief in this economy
    in its flat period.
        Mr. Chabot. Thank you.
        Ms. Miller, will you agree that the current pending
    legislation is, for lack of a better term, less harsh on
    debtors than the bills that we considered back in the 105th and
    106th Congresses?
        Ms. Miller. It would be hard for me to conclude that
    because I still think it is harsh on debtors. It is the means
    test that is harsh.
        Mr. Chabot. Well, I said less harsh. So I mean----
        Ms. Miller. It is hard for me to calculate whether or not
    it is less or more. I still--I think that the League's general
    position is that it does contain harsh provisions and that is
    going to have a negative impact on relief being available for
    debtors, both those that are businesses as well as those that
    are individuals. And if this bill were to pass, you are likely
    to see an immediate spike in filings as a result of people
    trying to fall under the current code, which is much less harsh
    than the proposed legislation has been.
        Mr. Chabot. Would any of the other panel members like to
    comment on whether this legislation is less harsh than the
    previous bills that we considered?
        Mr. Wallace. Well, a number of significant changes have
    been made since the bill was introduced in the 105th Congress.
    The means test has been substantially amended to protect--for
    example, I will just give you a specific example. If you have a
    special expense because of home heating oil costs that is
    specifically taken account of in the means test although the
    IRS guidelines did not specifically deal with that. These kinds
    of changes have been made over time step by step in compromise
    after compromise so as to moderate the effect of the means
    test, and I think that it is very hard to argue today that the
    means test is in any way harsh. I didn't think it was harsh
    when it was originally introduced and certainly isn't now.
        Mr. Chabot. Mr. Wallace, let me ask you another question.
    Ms. Miller had commented on a dog, for example, getting an
    application for a credit card. How would you respond to those
    who blame the credit card industry for the increase in consumer
    bankruptcy filings?
        Mr. Wallace. Well, I think that what is happening here in
    terms of consumer bankruptcy filings is at least two or three
    things are all interacting. First of all, there is the shift in
    the economy. Second of all, the bankruptcy profession, each
    time Congress gets close to passing this, encourages their
    clients to file and we get another bump. But in some very
    sophisticated research that was done by professors at Wharton
    and University of Chicago, research was done as to whether or
    not debtor willingness to use the bankruptcy system so as to
    discharge debt when they had the ability to pay was increasing,
    and they found that was increasing. We have also done studies
    which were introduced and presented to Congress in the 105th
    and 106th Congress which showed this was happening.
        So I think we have a number of things that are happening
    here. Insofar as credit card solicitation, in this country of
    course we encourage companies to market their products.
    Sometimes people resist that marketing. I think that Ms.
    Beckwith's response is probably the best one. In a free economy
    where you are trying to allow companies on the one hand to
    market their products and on the other hand you want people to
    be able to protect themselves, education is the best way to
    deal with that. We all resent sometimes what those mailings
    are, but nonetheless the short answer is that can be handled
    best by education.
        Mr. Chabot. Thank you.
        Mr. Cannon. Thank you.
        Mr. Nadler, would you like 5 minutes?
        Mr. Nadler. Thank you. Mr. Wallace, in your testimony you
    stated that the bill's critics are those with a vested interest
    in the system staying exactly as it is, close quote. Your
    client you describe as, quote, a broad coalition of consumer
    creditors, close quote. Could you please provide the Committee
    a list of your members so that the Committee can better assess
    whether they have any--whether your clients have any
    particularized interest in tilting the Code in their favor
    against the interests of our creditors or the broader public
    policy goals of the Code? So I am just requesting you supply us
    with a list of those clients. Could you do that?
        Mr. Wallace. I don't know. I mean I will talk with the
    people at the Coalition, sir.
        Mr. Nadler. You don't know if you can supply a list of the
    people on whose behalf you are testifying so that we can assess
    the----
        Mr. Wallace. I assume I can, sir.
        Mr. Nadler. Can you name some of them now?
        Mr. Wallace. No, I can't.
        Mr. Nadler. So right now you are a stealth witness? Thank
    you. Ms. Beckwith. But we look forward to that list.
        Ms. Beckwith, when I was talking to you last, you
    astonished me by saying that you couldn't state whether you
    really would insist that a provision remain in the bill that
    exempted the credit union from the requirement that you can't
    reaffirm agreement in such a way as to require the debtor to
    pay more than their total disposable income. I now request that
    you submit to the Committee as soon as possible a definitive
    answer. Do you insist on that unconscionable provision or do
    you not insist on that unconscionable provision? That will tell
    us frankly about the--how much we should pay attention to your
    testimony.
        [The material referred to follows:]

        Mr. Nadler. And, Mr. Wallace, coming back to you, according
    to a credit card industry funded study which you just quoted a
    moment ago that what you suggest by this bill, some of them
    done by Dr. Staten, the rates of discharge debt that might
    otherwise be paid are in the range of 25 percent, according to
    Dr. Staten's testimony before this Committee in 1999. You
    dismissed the only nonindustry study commissioned by what you
    call the, quote, pro-consumer American Bankruptcy Institute,
    close quote, which found using the same data that it was only
    approximately 3 percent. Do you really believe first of all
    that the ABI, which is composed of bankruptcy professionals
    from all parts of the profession, including creditor counsel,
    is really pro-creditor because that would come as a shock to
    the creditor attorneys who are members and serve on the board?
    But secondly, are you aware that Dr. Staten, who testified
    before this Committee that it was 25 percent back in 1999 and
    whom you have quoted today, speaking on a panel on consumer
    debt sponsored by the FDIC last week, commented that the bill
    would have no effect on the number of bankruptcies and that it
    would at most move 5 percent of debtors from chapter 7 to
    chapter 13?
        Mr. Wallace. Actually, I exchanged e-mails with Mike Staten
    yesterday on this topic, and he pointed out that at the time
    that he said that he didn't realize the bill was being
    introduced. He was unfamiliar with its provisions.
        Mr. Nadler. He has been working on this bill for the last 5
    years. It is the same bill as last year.
        Mr. Wallace. He also pointed out that there are a number of
    provisions in the bill, a wide range of provisions in the bill
    and his opinion was addressed only to specific narrow
    provisions of the means test, and that if he was asked the
    question with regard to the whole bill, he would say that it
    would have a substantial impact. I am just giving you the
    answer that he gave me, sir.
        Mr. Nadler. Well, so you are saying he was only talking
    about the means test. The means test would only move 5 percent.
    Do you agree with that?
        Mr. Wallace. I don't know what his research is, sir.
        Mr. Nadler. I see. So, well, I can't believe that Dr.
    Staten was saying he was unfamiliar with this bill, which is
    the same as last year, which he has been working on for the
    last at least 5 years.
        But let me come back to the question I asked a moment ago.
    Do you really think that the American Bankruptcy Institute is
    one-sided, pro-debtor; is that your testimony?
        Mr. Wallace. Well, I am a member of ABI and I think that in
    general that the ABI's positions with regard to that study were
    decidedly pro-consumer; that is, they were pro-debtor.
        Mr. Nadler. Could Ms. Miller comment on that? Do you think
    the ABI has been fairly dispassionate on this question down the
    line or not?
        Ms. Miller. I really couldn't comment right now. I mean----
        Mr. Wallace. I mean one thing is that the study
        design--you mentioned two different studies. If you want to
    get into the details of the study design, the study design
    changed. ABI changed the study design and they got a different
    result even though they were using the same data. So I mean you
    have to be very careful about these things.
        Ms. Miller. Congressman, I will note, however, that this
    week the ABI did submit a proposal to Congress setting forth a
    number of proposed amendments to this bill and criticizing
    substantially a number of the provisions that would be before
    Congress.
        Mr. Nadler. Thank you.
        Mr. Cannon. Thank you, Mr. Nadler. Did we accomplish your
    objective in the 30-second extension?
        Mr. Delahunt. No, Mr. Chairman, and since we are here in a
    nice relaxed environment----
        Mr. Cannon. The gentleman is recognized for 5 minutes.
        Mr. Delahunt. If you will indulge me. Mr. Wallace, I want
    to be clear. I mean, you are not refusing to disclose who the
    members are?
        Mr. Wallace. Oh, no, sir. I just don't know. I represent--I
    mean, American Financial Services Association is here today and
    they just told me that I can disclose their name.
        Mr. Delahunt. Sure. Oh, come on. Who else makes up the
    Coalition for Responsible Bankruptcy Laws? I mean, you are
    here.
        Mr. Conyers. Would the gentleman yield?
        Mr. Delahunt. I will yield and I will ask for some time
    from you.
        Mr. Conyers. Is this another secrecy deal here? I mean, I
    guess we have to assume--you are not under oath, sir, but you
    are testifying before a Congressional Committee and I am--I
    think you are aware of what that implies.
        Mr. Wallace. I am trying to.
        Mr. Conyers. I guess you are aware.
        Mr. Wallace. I don't know who.
        Mr. Delahunt. Reclaiming my time, you know, you have been
    here on three separate occasions, Mr. Wallace. Presumably, your
    fees are being paid by the Coalition for Responsible Bankruptcy
    Laws. Who are the constituent members of the Coalition for
    Responsible Bankruptcy Laws?
        Mr. Wallace. I am a lawyer. I come here and I testify. I
    haven't talked to anybody. I don't know who is in the coalition
    at this particular moment.
        Mr. Delahunt. Well, you know, please. I mean, you know, it
    says right here on behalf of the Coalition. You are here
    testifying on behalf of the Coalition for Responsible
    Bankruptcy Laws. Is that a misstatement?
        Mr. Wallace. No. The Coalition members are----
        Mr. Delahunt. It is not. So then you don't know who your
    client is. Is that what you are telling me?
        Mr. Wallace. My client is the Coalition. You asked who the
    constituent members of the Coalition are. It is a large group
    of creditors.
        Mr. Delahunt. Give me five of them.
        Mr. Wallace. Well, American Financial Services Association
    is here. The Credit Union National association is here. The
    National Retail Federation is here. The Bond Marketing
    Association I understand is a member of it. The American--the
    Landlords Association is here.
        Mr. Delahunt. That is fine. That is all we were looking
    for. You know, again, let me get back to----
        Mr. Wallace. I mean, I didn't mean to be nonresponsive.
        Mr. Delahunt. Well, you were nonresponsive.
        Mr. Wallace. You asked me a question and I don't know what
    the answer was.
        Mr. Delahunt. You know, you are not here, I presumably out
    of the goodness--this isn't an act of altruism on your part.
    Usually we know who is paying our fees, and I am sure you are
    being well paid and that is good. But, you know, to the
    American Bankruptcy Institute that study that you seem to
    question, it is my understanding that the results of that study
    were supported by the Executive Office of the United States
    Trustees, which conducted a similar effort that reached similar
    results, estimating that the passage of the conference report
    on H.R. 33 probably would have netted creditors no more than 3
    percent of the $400 per household they claim to be losing.
        Now, is that a fair and accurate statement, Mr. Friedman?
        Mr. Friedman. Congressman, first of all, this is the
    anniversary of my 1 year at the Executive Office, and I must
    confess to you that I haven't reviewed that study.
        Mr. Delahunt. Have you heard rumors about it while you have
    been in the, you know, while you were in the building?
        Mr. Friedman. I was not reclusive prior to my life here as
    Director.
        Mr. Delahunt. Okay. Well, I won't press the issue with you.
    But we keep hearing these $400 and we are going to save
    interest rates and the cost to the taxpayer and you are
    familiar, you know, with the study that over a 10-year period
    Federal funds rates went down 13 percent to 3 percent and the
    cost of interest on credit cards went from 17.20 to 17.6.
        So let's just be honest and candid. This is a bill by and
    for the credit card industry. That is the bottom line. And with
    that, I will yield back.
        Mr. Cannon. Thank heavens. It is amazing how quickly the 5
    minutes go when it is your own time and how long it takes some
    other times.
        Does the gentleman from Michigan wish 5 minutes?
        Mr. Conyers. Thank you, Mr. Chairman. I want to thank the
    gentleman from Massachusetts, Mr. Delahunt, for getting us
    beyond this attempted cover-up. We have got the Vice President
    of the United States who refuses to tell us who he was meeting
    with. We are in court about that. We have foreign affairs
    expert, Mr.----
        Mr. Cannon. If the gentleman would yield, I think we are
    actually out of court on that with no obligation to disclose.
        Mr. Conyers. Oh, you made it out? Okay. Well, that is
    great, and I am glad you are relieved about that. Now, we also
    have Henry Kissinger, who declined a presidential appointment
    because he refused to reveal his client list and so he quit
    rather than do that. And now we have you, a distinguished
    lawyer who has been before the Committee on several previous
    occasions on the same subject that had a great deal of
    difficulty recalling a few of the names of the member
    organizations of the Coalition for Responsible Bankruptcy Laws,
    which of course leads a person like myself to wonder who else
    is in this organization that causes so much amnesia, which I
    will deal with at another time.
        But I want to turn to Ms. Beckwith and this is in all
    friendliness. Ms. Beckwith, you have indicated that you have
    people in your credit union, a couple, that did three, four,
    five, six, seven credit cards all at once and ripped off. How
    do you handle that now?
        Ms. Beckwith. Congressman, at the time these people----
        Mr. Conyers. Well, you have got to answer real briefly and
    succinctly, please.
        Ms. Beckwith. Yes, sir. We handle it by checking everyone's
    creditworthiness just like we did with that couple. They were
    out to beat the system and they did.
        Mr. Conyers. Well, in other words, has this happened since
    that couple that you reported? Has there been another occasion?
        Ms. Beckwith. We have had other occasions where people have
    done something similar.
        Mr. Conyers. In other words, you are telling the Committee
    that without this law, this bill that we are trying to turn
    into a law, your credit union--and I happen to be a strong
    supporter of all unions, not to mention credit unions.
        Ms. Beckwith. Thank you, sir.
        Mr. Conyers. You are telling us that you have no remedy
    unless you get this law, or are you telling me that?
        Ms. Beckwith. Yes, sir, I am telling you that. We need this
    law desperately. The expenses to my credit union are growing
    year by year and it is affecting our bottom line. It is
    affecting----
        Mr. Conyers. Because people are doing what you--like the
    couple you related in your testimony?
        Ms. Beckwith. Yes, sir.
        Mr. Conyers. And if you don't get this law you are going to
    still get ripped off some more?
        Ms. Beckwith. Yes, sir, we are.
        Mr. Conyers. Well, has it occurred to anybody in the union
    to track, keep track of the people you give credit to after you
    give them a credit card?
        Ms. Beckwith. Yes, sir, we do.
        Mr. Conyers. Well, if you do, that would show up, wouldn't
    it, if they get other credit cards from somewhere else?
        Ms. Beckwith. Yes, sir. We check our members as they come
    up for renewals every 2 years.
        Mr. Conyers. Every 2 years.
        Ms. Beckwith. Yes, sir. We are a small credit union. It is
    only 11 of us.
        Mr. Conyers. Eleven people working there?
        Ms. Beckwith. Yes, sir.
        Mr. Conyers. How many members?
        Ms. Beckwith. Thirty-seven hundred.
        Mr. Conyers. Well, it is funny to me that I haven't been
    hearing this from most other unions. Of course you are
    testifying on behalf of a much larger organization. But it
    seems to me that there must be some way we can protect this
    other than passing a bill to help out the credit unions that
    may have somebody that wants to rip them off. I mean, can't you
    check? What about banks? What about all other financial
    institutions that give out credit cards? Are they all subject
    to this same sort of policy as well?
        Ms. Beckwith. Yes, sir.
        Mr. Conyers. They are?
        Ms. Beckwith. Yes, sir.
        Mr. Conyers. Okay. Thank you very much.
        Mr. Cannon. Thank you, Mr. Conyers. We have had a unanimous
    request, consent request that we allow 2 days for Members of
    the Committee to submit written questions to the members of the
    panel and that the members of the panel be given an additional
    3 days to answer those questions. That would be questions would
    be due by Thursday at 5 and answers would be due next Wednesday
    at 5. Without objection, so ordered.
        Thank you. You know, I personally believe that the law is a
    great teacher and, in looking at what is going on, I think that
    we have a fundamental trend and, Ms. Miller, if we could get
    back to what we were talking about before, I would just like to
    have you help me make that distinction. Do we have a
    fundamental trend in society where people have learned that
    bankruptcy is an easy out, that you can con the system, you can
    actually make money by doing this credit card busting process
    and other processes and so we are increasing a very bad trend
    with bad law today, or do you believe that this increase in
    bankruptcy is temporary, that there is some turnaround in
    society's mores and that when we get to a more substantial
    economy the bankruptcy filings will tail off or decline
    significantly?
        Ms. Miller. It seems as though today focus has been on not
    only abuse but the egregious cases, and everybody can point to
    egregious cases that exist out there. But where are the studies
    on abuse and, as Congressman Delahunt pointed out, there are--
    --
        Mr. Cannon. Pardon me.
        Ms. Miller [continuing]. There are other remedies.
        Mr. Cannon. But my question is different. Do you--I am not
    so much talking about abuse because that is part of the
    question. But are we seeing a tendency? We need to correct the
    law here and, Mr. Wallace, I would like to turn this to you in
    just a moment. But we need to correct the law because people
    have a fundamentally wrong idea, as Ms. Beckwith has been
    talking about, the educational process of credit and what the
    law means for people and their understanding of what to do. We
    have talked about the very painful results of taking out
    bankruptcy, which people apparently aren't paying attention to.
    Is this a fundamental problem in your mind?
        The reason I am asking this is because you are talking
    about--you are taking today a very different position from what
    you have taken in the past on this issue. I am just trying to
    focus on whether your rationale for that is that the
    transformed society is what is causing increased bankruptcy as
    opposed to the--what you testified earlier about this.
        Ms. Miller. I don't believe my testimony before this
    Subcommittee previously is different than what it has been
    today. I think the economy is definitely different. Do I think
    that the increase is going to continue? I guess it depends on
    the strength of the economy. But, you know, all--we have been
    focusing so much on the consumer issues today and abuse
    regarding individual debtors. There hasn't been much attention
    paid to the business provisions. There hasn't been much
    analysis done to the business provisions. Small businesses,
    family-owned businesses are facing financial crises. The bill
    makes it much harder for these businesses to reorganize. It
    takes away discretion from the court to be able to deal with
    them and ultimately doesn't provide for a maximization of their
    assets for the benefit of creditors. It is--the increases--we
    all know there is some abuse out there. But the presumption
    that the increase is all due to abuse or that it is easy to
    file, I don't think people easily make the decision to file
    generally.
        Ms. Miller. I think they try every which way and go into
    denial not to file as long as they can, and it is only when
    they reach the end of the rope or they have no other
    alternative but to file----
        Mr. Cannon. If I might suggest, knowing people who have
    filed bankruptcy and--I am not sure that is the case. I am not
    sure that people--I don't think that this--two things you have
    here. One is abuse. The other one is filing stupidly and then
    finding out you have massive problems that your friends, who
    told you how cool it was to get out of the debt, didn't tell
    you about after the fact.
        There are--the third category, of course, is what you are
    talking about, generally speaking, which is people who have
    problems, either health problems or they lose their job. There
    are a whole bunch of reasons why--those are the two biggest--
    why people need to take out bankruptcy. But the marginal people
    that are going to I think destroy their lives is the question I
    am asking you--and then maybe, Ms. Beckwith, if you want to
    respond to this as well--is that not unfair to these people and
    shouldn't the law be a harder guide, a clearer guide?
        Ms. Miller. You are changing the law to be--or you are
    taking the pendulum and moving it from one extreme to the other
    to address the potential abuse by a few and making it harder
    for those that have honest problems, have lost their jobs, on
    the eve of a foreclosure are trying to file to save their home
    and to figure out how to reorganize they lives. It seems as
    though, rather than taking a hammer and moving the pendulum
    from one extreme to the other, that there is a halfway moderate
    approach that could be taken that is not making it more
    difficult for even those that are honest debtors out there who
    have filed legitimately and need financial relief.
        Mr. Cannon. I have very little time, and I don't want to
    abuse the system. If you would like to just answer, Ms.
    Beckwith?
        Ms. Beckwith. Mr. Chairman, there are some people out there
    who use bankruptcy as a financial planning tool; and there are
    no ifs, ands and buts about that. It happens. When we look at
    credit reports after a bankruptcy is filed, we can see this.
    Many of the bankruptcies we receive, the debtor is not even
    delinquent when we received the bankruptcy.
        Mr. Cannon. Thank you. I would like to thank the panel.
    This has been----
        Mr. Conyers. Mr. Chairman, aren't others being heard
    besides yourself?
        Mr. Cannon. That was the--that was my second round. So we
    finished the second round, and I don't think we----
        Mr. Conyers. Oh, you didn't begin the second round?
        Mr. Cannon. No, I deferred.
        Mr. Conyers. I see. Thank you very much, sir.
        Mr. Cannon. Thank you.
        I want to thank the panel. It has been long, a little bit
    contentious, but, hey, the system is robust. We appreciate your
    being here and your sharing your testimony with us, and if you
    could answer questions that are submitted to you quickly, we
    would appreciate that very much. Thank you.
        We are adjourned.
        [Whereupon, at 4:01 p.m., the Subcommittee was adjourned.]

                                A P P E N D I X

                                  ----------

                   Material Submitted for the Hearing Record

        Prepared Statement of Judith Greenstone Miller on behalf of the
                        Commercial Law League of America
                                 March 18, 1998

        Good morning and thank-you for inviting me to testify as a witness
    before the House Judiciary Committee's Subcommittee on Administrative
    and Commercial Law. My name is Judith Greenstone Miller. I am an
    attorney and a member of the Birmingham, Michigan office of Clark Hill
    P.L.C., and a member of the Commercial Law League of America, its
    Bankruptcy and Insolvency Section, and its Creditors' Rights Section.
    The CLLA, founded in 1895, is the nations oldest organization of
    attorneys and other experts in credit and finance actively engaged in
    the field of commercial law, bankruptcy and reorganization, with a
    membership exceeding 4,600 individuals.
        I am honored to address the Subcommittee on H.R. 3150, H.R. 2500
    and H.R. 3146, and have been asked to speak about the impact of these
    consumer proposals on unsecured creditors. The League believes that
    adoption of many of the consumer proposals contained in H.R. 3150 and
    H.R. 2500 will enhance the rights of unsecured creditors. Reform is
    appropriate in circumstances where abuse has been prevalent, such as
    (i) when debtors incur unsecured debt on the eve of bankruptcy when
    they are clearly insolvent, in financial distress or in all likelihood
    unable to pay for the goods or services, or (ii) when debtors obtain
    advances and such funds are used to extinguish priority or
    nondischargeable claims.
        H.R. 3146 appears to be based on the premise that virtually all of
    the financial ills faced by consumers today and the increase in
    bankruptcy filings are caused by credit granters. Credit card issuers
    in particular cases seem to bear the brunt of the legislation. It is
    the opinion of the CLLA that H.R. 3146 is unnecessarily punitive and
    ItS provisions are onerous.
        Reasonable people may disagree on some of the specific provisions
    contained in H.R 3150 and H.R. 2500, however, the CLLA believes that
    those two bills provide a more balanced and equitable approach to the
    very real and troubling financial problems being faced by consumers
    today. While the CLLA generally supports the consumer proposals
    contained in H.R. 3150 and H.R. 2500, the CLLA wishes to make the
    following observations and comments:

            1.  Section 141 of H.R. 3150 and Section 106 of H.R. 2500 grant
            en unsecured creditor who advances funds used to pay a priority
            or nondischargeable claim the same attributes as the ultimate
            recipient of the funds. The CLLA supports this proposal, but at
            the same time recognizes that it does not contain any time
            limits, and ultimately the benefit to be derived by the
            unsecured creditor who has advanced the credit will depend on
            its ability to trace the funds advanced.

            2.  Section 142 of H.R. 3150 and Section 107 of H.R 2500 grant
            nondischargeable status to debts incurred within 90 days of
            bankruptcy, thereby providing such unsecured creditors with the
            ability to seek repayment outside the bankruptcy case. While
            the CLLA recognizes that certain debts incurred on the eve of
            bankruptcy may be entitled to additional safeguards geared
            toward repayment, the CLLA believes that the section, as
            proposed, is overly expansive. It shifts the burden to prove
            the claim is dischargeable from the creditor to the debtor,
            which involves the commencement of an adversary proceeding.
            With such limited funds and resources, debtors are unlikely to
            be able to rebut the presumption of nondischargeability--
            thereby impairing the ``fresh start'' which bankruptcy is
            intended to provide them. In its written materials, the CLLA
            has suggested an alternative 2-prong approach, which Congress
            may wish to consider:

                    (i) shorten the time period for the rebuttable
                    presumption from 90 to 30 days, and

                    (ii) increase the time period for nondischargeability
                    for purchases of luxury goods from 60 to 90 days.

            This alternative 2-prong test would address the concerns of
            unsecured creditors by protecting them from nonpayment for
            goods purchased by debtors on the eve of bankruptcy and provide
            debtors experiencing financial difficulties disincentives to
            purchase luxury goods, while at the same time preserving the
            debtor's ``fresh start'' and providing fairer treatment to
            honest debtors, not otherwise abusing the system.

            3.  The CLLA supports the adoption of Section 143 of H.R. 3150
            (which is more expansive than its parallel provision in H.R.
            2500) and Section 104 of H.R. 2500, which generally make
            fraudulent debts incurred in a Chapter 13 bankruptcy proceeding
            nondischargeable. This represents sound public policy, is
            consistent with Chapter 7 substantive law, and as a
            consequence, debtors will no longer be able to discharge such
            debts by electing Chapter 13 treatment.

            4.  The CLLA also supports Section 145 of H.R. 3150, which
            proposes to amend Section 523(a)(2) and make nondischargeable
            debts incurred by a debtor when there is ``no reasonable
            expectation of repayment.'' However, as proposed, this
            amendment is likely to present significant evidentiary
            problems. Therefore, if Congress seeks to provide unsecured
            creditors with a tangible and effective remedy under these
            circumstances, the Subcommittee may wish to consider inclusion
            of a codified standard setting forth specific factual criteria
            to prove the debtor's financial state at the time the debt was
            incurred.

            5.  The CLLA supports Section 181 of H.R. 3150, which proposes
            to increase the time period an individual must be domiciled in
            a state from 180 to 365 days in order to take advantage of a
            particular state's exemption scheme. Adoption of this provision
            would impact bankruptcy planning by debtors and negate forum
            shopping for the purpose of exempting property from the estate.
            Moreover, in some circumstances, it may result in an increase
            of the property of the estate to be liquidated by the trustee,
            thereby increasing the pot of funds available for unsecured
            creditors.

            6.  Section 109 of H.R. 2500 proposes that the automatic stay
            terminate 30 days after the filing of a petition if a prior
            petition was dismissed under Chapter 7 unless the subsequent
            petition was filed in ``good faith.'' The CLLA believes that
            this provision is extreme and will result in impairing the
            delicate balance contained in the Bankruptcy Code, and further
            impact the fair treat to be accorded debtors.

            7.  Section 113 of H.R. 2500 recommends the establishment of a
            Bankruptcy Exemption Study Commission. While the CLLA does not
            believe that a study is necessary because the National
            Bankruptcy Review Commission (the ``Commission'') extensively
            reviewed this issue, nevertheless, the CLLA would support such
            a study. The CLLA also supports the recommendations of the
            Commission in so far as they foster and promote ``uniformity''
            of exemptions on a national basis to preclude forum shopping.
            However, the CLLA does not necessarily support the limits
            contained in the Commission's Final Report.

            8.  Section 210 of H.R. 2500 expands the debtor's duties upon
            commencement of a bankruptcy proceeding to file various
            financial documents (federal tax returns, evidence of payments
            received, monthly net income projections and anticipated debt
            or expenditure increases). Debtor's compliance under this
            provision is required within 10 days of the request by a
            Chapter 7 or Chapter 13 creditor. The CLLA believes that such
            enhanced mandatory disclosure will provide additional
            information for creditors to assess the financial condition of
            the debtor, a benefit which the CLLA endorses.

        The Commercial Law League of America appreciates the invitation to
    testify on H.R. 3150, H.R. 2500 and H.R. 3146 and their impact on
    unsecured creditors. I would be happy to respond to any additional
    inquires or concerns of the Subcommittee contained in my presentation,
    the written materials or other provisions of these bills. Thank you.

                                  ----------

      Prepared Statement of the Commercial Law League of America and Its
                       Bankruptcy and Insolvency Section
                                 March 11, 1999

                                I. INTRODUCTION

        The Commercial Law League of America (the ``League''), founded in
    1895, is the nation's oldest organization of attorneys and other
    experts in credit and finance actively engaged in the fields of
    commercial law, bankruptcy and reorganization. Its membership exceeds
    4,600 individuals. The League has long been associated with the
    representation of creditor interests, while at the same time seeking
    fair, equitable and efficient administration of bankruptcy cases for
    all parties involved.
        The Bankruptcy and Insolvency Section of the League (``B&I'') is
    made up of approximately 1,600 bankruptcy lawyers and bankruptcy judges
    from virtually every state in the United States. Its members include
    practitioners with both small and large practices, who represent
    divergent interests in bankruptcy cases. The League has testified on
    numerous occasions before Congress as experts in the bankruptcy and
    reorganization fields.
        The League, its B&I Section and its Legislative Committee have
    analyzed the ``needs based'' provisions of H.R. 833, the Bankruptcy
    Reform Act of 1999 (the ``Bill''). The League supports changes to the
    Bankruptcy Code (the ``Code'') to limit possible abuses by debtors and
    credit grantors. Any proposed change will have consequences on the
    system. It is the goal of the League to help Congress carefully
    consider the practical implications of each change in order to maintain
    the delicate balance between the debtors' rights and creditors'
    remedies and to effectuate fair treatment for all parties involved in
    the process.

             II. ANALYSIS OF SECTION 102--DISMISSAL OR CONVERSION;
                   THE ``NEEDS BASED'' PROVISION OF THE BILL

        This section of the Bill provides the circumstances under which a
    Chapter 7 proceeding can be dismissed or converted by the Court.
    Congress has proposed to substantially modify Section 707(b) of the
    Code as follows:

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

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

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

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

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

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

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

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

              Congress has created a new and different standard for
            the award of fees and costs associated with the bringing of a
            motion to dismiss or convert under Section 707(b). There is no
            need to create a new standard, e.g., ``substantially
            justified,'' when sufficient standards for such relief already
            exist under Federal Rule of Bankruptcy Procedure 9011 and
            Federal Rule of Civil Procedure 11. Appropriate sanctions are
            already available when it can be demonstrated that a creditor
            has filed a Section 707(b) motion solely for the purpose of
            coercing the debtor into waiving a right guaranteed under the
            Code. Moreover, the potential imposition of penalties on the
            attorney for the debtor if the case is deemed abusive will
            likely translate into increased costs and fees attendant to
            preparation and filing of a bankruptcy petition. Lastly,
            subsection 4(B) exempts a creditor with a claim of less than
            $1,000 from the imposition of costs and fees. The amount of
            one's claim should not be a consideration in the award of fees
            and costs by the Court.

     III. THE PROPOSED ``NEEDS BASED'' CHANGES DO NOT WORK, WILL NOT CURE
     THE PERCEIVED ABUSES TO THE BANKRUPTCY SYSTEM AND WILL OVERBURDEN AND
                                 TAX THE SYSTEM

        The National Bankruptcy Review Commission (the ``Commission'')
    conducted an exhaustive study and analysis of consumer bankruptcies
    over the period it was created by Congress. While the Commission
    recognized the import of a promise to pay, it also acknowledged the
    need for appropriate relief for those in financial trouble and
    equitable treatment for creditors within a balanced system. Bankruptcy,
    in most cases, is the ``last stop'' for financially troubled individual
    consumer debtors. The Commission also conceded that there were abuses
    in the system, but did not ultimately recommend the adoption of a needs
    based formula or otherwise denying individuals in financial distress
    access to the courts.
        Although bankruptcy filings have increased three-fold during the
    last 20 years, one cannot conclude that the reason for this increase is
    solely on account of debtor abuse, unwillingness of individual debtors
    to honor a promise to repay under a contract and the lack of social
    stigma associated with bankruptcy--the key factors, on which the needs
    based formula is erroneously premised. The Commission, bankruptcy
    organizations, practitioners, academicians and judges have dismissed
    each of these factors on the basis of the following substantial
    empirical data:

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

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

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

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

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

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

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

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

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

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

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

              Congress is operating from the premise that filing
            bankruptcy is per se abusive. Rather, the focus of Congress
            should be on debtors who abuse the system by serial filings and
            those provisions of the Code which encourage abuse of the
            system (e.g., unlimited exemptions). Ultimately, the courts
            should be given the tools (e.g., the totality of the
            circumstances, including consideration of a discretionary,
            flexible means test) and the express authority to determine
            when abuse is present and how such abuse should be remedied--
            the concept of a fresh start and maintenance of the delicate
            balance between debtors' rights and creditors' remedies must be
            preserved. Under the current Code, the courts do not have the
            authority to affirmatively look for abuse or fashion an
            appropriate remedy except in the most egregious circumstances.
            Adoption of a ``totality of circumstances'' test, in
            conjunction with a discretionary means test, would represent a
            major change and a vehicle by which abuse could be addressed
            and remedied.

                                 IV. CONCLUSION

        Maintaining and enhancing a fair, balanced and effective bankruptcy
    system requires consideration and debate of all the issues. Any
    individual change has an impact on the entire system, and cannot and
    must not be evaluated in a vacuum. The League takes seriously its role
    in this process, and believes that other options beyond the current
    mandatory needs based formula should be explored that would address the
    real abuses and preserve the bankruptcy system which Congress
    acknowledged it was generally satisfied with in 1994 when this process
    began and that the system was not in need of radical reform. Adoption
    of a fixed, rigid needs based formula, as contained in the Bill,
    represents ``radical reform,'' which has not been justified and will
    impair the delicate balance inherent in the system; nor is it likely to
    rid the bankruptcy system of the perceived abuses.
                Respectfully submitted,
                                      Jay L. Welford, Co-Chair,
                                          Legislative Committee
                                      Judith Greenstone Miller,
                               Co-Chair, Legislative Committee.

                                  ----------

                        Article from The Washington Post
                     March 04, 2003, Tuesday, Final Edition

    SECTION: A SECTION; Pg. A01

    LENGTH: 1159 words

    HEADLINE:  Called-Up Reservists Take Big Hit in Wallet; Families
    Struggle on Military Salary

    BYLINE: Christian Davenport, Washington Post Staff Writer

    BODY:

    Spring should be the busy season for the Brinkers' Columbia home
    improvement business. But instead of cashing in on the jobs that will
    come up as the weather improves, Lynn Brinker is calling customers to
    cancel thousands of dollars' worth of work.

    It was less than five months ago that her husband, Sgt. Mark Brinker,
    an Army reservist with the 400th Military Police Battalion, returned
    from a year-long, post-Sept. 11 deployment to Fort Sam Houston in
    Texas. To get through that tour, Lynn Brinker cashed in savings bonds
    meant for the education of their three children, took out a bank loan
    and borrowed $15,000 from a relative.

    Now, Mark has been called up again, this time for the impending war in
    Iraq, and she doesn't know what they're going to do.

    ``There is just no way we can make ends meet with him gone again,'' she
    said. ``It's just ridiculous. We're in our forties, we've worked hard,
    and we didn't expect to have to be starting all over again like this.''

    As the Pentagon continues to activate reserve and National Guard
    troops, some of the biggest sacrifices are being made on the home
    front. In addition to risking their lives, many soldiers, sailors,
    airmen and Marines are risking their livelihoods, leaving civilian jobs
    that pay much better than the military. Families are selling second
    cars, canceling vacations and postponing paying bills as they steel
    themselves for drastic reductions in income.

    For the reservist on inactive status, the duty can be a welcome source
    of extra cash. A private with less than two years' experience can pick
    up $2,849 a year for one weekend a month of drilling and an annual two-
    week training exercise. A staff sergeant with six years can get $4,628.
    With a call to active duty, the pay bumps up--$16,282 for a private
    first class and $26,448 for the staff sergeant, which is tax-free while
    the military member is in a combat zone.

    There are other benefits. Mortgage and credit card rates are reduced.
    In some cases, the law prohibits landlords from evicting military
    families even if they haven't paid rent. And employers are required to
    take reservists back once they return from duty, with no loss in
    pension benefits or seniority.

    But the package comes nowhere near making up for many civilian
    salaries.

    The reservists are volunteers, of course. They have been reminded
    repeatedly that active duty could come at any time. But many say they
    signed up for the several thousand a year in extra pay and other perks,
    not for war.

    ``I thought I could get some money for school,'' said Spec. Robert
    Moore of Pasadena, who spent a year on active duty with the Army's
    443rd Military Police Company after the Sept. 11, 2001, terrorist
    attacks and was shipped off again last week for training at Fort Lee,
    Va.--most likely a prelude to deployment overseas. ``I think most
    people just thought: `We're just the reserves. We're not going
    anywhere.' ''

    Sgt. Kevin Green hears similar comments from his Army National Guard
    troops in the 1229th Transportation Company.

    ``They don't want a weapon in their hands, riding around in another
    country, worried that they won't come back,'' he said.

    As of last week, 168,083 reserve and National Guard troops were on
    active duty, including thousands from Washington, Maryland and
    Virginia. They have guarded al Qaeda and Taliban detainees from
    Afghanistan at Guantanamo Bay in Cuba and patrolled Iraq's no-fly zone.
    Now, area troops are getting ready to set up refugee camps in northern
    Iraq and to transport equipment to the front lines. In the Maryland
    National Guard, 3,000 of 8,000 members have been called up since Sept.
    11, 2001.

    ``The military can't conduct a war without the National Guard and
    reserve components,'' said Maj. Charles Kohler, a spokesman for the
    Maryland National Guard.

    Green's unit probably will be placed somewhere in the Middle East, he
    said. He doesn't yet know where, but it will be a world away from his
    civilian life, where he has two children and is in charge of Sears
    deliveries in Maryland. While on active duty, he expects to lose about
    $1,000 a month, the equivalent of his monthly mortgage payment.

    Green was called up during the Persian Gulf War, and this time around,
    he thought he knew how to prepare. But still he was caught somewhat off
    guard.

    ``You try to put a few dollars away in case of an emergency,'' he said.
    ``But this isn't an emergency; this is a crisis.''

    Now, he's praying for two things: ``I hope we win the lottery, or at
    least that our car doesn't break down.''

    His fiancee, Wanda Jones, will have to work overtime at her
    pharmaceutical company job to help make up the difference. And they've
    already had a conversation about finances when he's gone.

    ``I'm going to cut out shopping at the mall,'' she said.

    Some firms continue to pay troops on active duty, or at least to make
    up the difference between military and civilian pay. A survey by the
    Reserve Officers Association of the United States found that of the 154
    Fortune 500 corporations that responded to a query, 105 make up the
    difference in pay. Last year, just 75 of 132 responding companies did
    so, and in 2001, the number was 53 of 119.

    Army Reserve Sgt. Jeffery Brooks, a fraud detection manager from
    Woodbridge, said his company, Capital One, has agreed to pay him the
    difference. Otherwise, he would be losing $2,200 a month. ``I'd be in
    real trouble,'' he said.

    Daniel Ray, editor in chief of bankrate.com, an online financial
    information service that helps reservists, said many people are not so
    lucky. ``Those are generous bosses to have,'' Ray said. ``But if you're
    self-employed, or you've built up your practice over the years, it can
    be very hard. When you go away, your practice dries up. Then it doesn't
    just affect you but your secretary and the people who rely on you.''

    Not everyone takes a financial hit. Army Reserve Lt. Orlando Amaro
    would make the same amount guarding a POW camp in Iraq as he does as a
    D.C. police officer patrolling the streets of Columbia Heights. If he
    is shipped overseas, where his income wouldn't be taxed, he may come
    out ahead.

    ``It won't affect me at all,'' he said.

    Lynn Brinker isn't thinking about coming out ahead. She may sell the
    Chrysler she and her husband recently bought. She wants desperately to
    let her 12-year-old son, Chris, continue private viola lessons, and for
    Kevin, 10, to keep up with the trumpet. She wonders whether she'll be
    able to afford the registration fees and equipment for youth hockey in
    the fall.

    ``My thinking is we'll tap this line of credit and try to keep my kids'
    lives as normal as possible while their father is away. It's very
    traumatic for them,'' she said.

    ``People may say, `Well, he signed up for this. You knew this could
    happen.' But he was away for an entire year, and then leaves four
    months later. And now we don't know how long he'll be gone. I don't
    think he signed up for that.''

    LOAD-DATE: March 04, 2003