[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


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                            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

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               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.''

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