[House Hearing, 108 Congress]
[From the U.S. Government Printing Office]
BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2003, AND
THE NEED FOR BANKRUPTCY REFORM
COMMERCIAL AND ADMINISTRATIVE LAW
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
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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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
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
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
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
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
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
Article from the Credit Union Journal............................ 142
Letter from Fred R. Becker, Jr., President/CEO, National
Association of Federal Credit Unions (NAFCU)................... 144
Material Submitted for the Hearing Record
Questions posed to witnesses after the hearing and their
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,
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
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
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
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
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
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
Mr. Cannon. Certainly. Would you like to make an opening
Mr. Nadler. Yes.
Mr. Cannon. May I just ask, who would like to make an
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
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
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
Mr. Cannon. I thank the gentleman from New York, Mr.
[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
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
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
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
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. Just an inquiry, Mr. Chairman. Has there been
a decision made as to when there would be a markup on this
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
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
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
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
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
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
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
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.
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
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
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
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.
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
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
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
1. Vendors do not know of the filing of a bankruptcy
proceeding in sufficient time in order to file a reclamation
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
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
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
1. All vendors of goods will be protected.
2. There will be no ``race'' to the courthouse to file
3. Vendors will not be adversely prejudiced if they do not
know of the bankruptcy filing during the first days following
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
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
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-
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
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
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
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
Mr. Cannon. Without objection, all Members may place their
statements in the record at this point. Any objection? If not,
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
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
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
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
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
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
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
(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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
Thank you very much, and I would be pleased to answer
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.
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
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
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
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
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
Mr. Nadler. So you are turning the Government into a
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
Mr. Watt. And that presumption directs you either into one
form of bankruptcy or another form of bankruptcy, is that
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
Mr. Watt. I am asking about people who fall below the means
test. Is there a determination of whether there is abuse or
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
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,
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
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
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
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
[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
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
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
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
Mr. Conyers. Would the gentleman yield?
Mr. Delahunt. I will yield and I will ask for some time
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
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
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
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
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
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
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
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
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.
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
Mr. Cannon. That was the--that was my second round. So we
finished the second round, and I don't think we----
Mr. Conyers. Oh, you didn't begin the second round?
Mr. Cannon. No, I deferred.
Mr. Conyers. I see. Thank you very much, sir.
Mr. Cannon. Thank you.
I want to thank the panel. It has been long, a little bit
contentious, but, hey, the system is robust. We appreciate your
being here and your sharing your testimony with us, and if you
could answer questions that are submitted to you quickly, we
would appreciate that very much. Thank you.
We are adjourned.
[Whereupon, at 4:01 p.m., the Subcommittee was adjourned.]
A P P E N D I X
Material Submitted for the Hearing Record
Prepared Statement of Judith Greenstone Miller on behalf of the
Commercial Law League of America
March 18, 1998
Good morning and thank-you for inviting me to testify as a witness
before the House Judiciary Committee's Subcommittee on Administrative
and Commercial Law. My name is Judith Greenstone Miller. I am an
attorney and a member of the Birmingham, Michigan office of Clark Hill
P.L.C., and a member of the Commercial Law League of America, its
Bankruptcy and Insolvency Section, and its Creditors' Rights Section.
The CLLA, founded in 1895, is the nations oldest organization of
attorneys and other experts in credit and finance actively engaged in
the field of commercial law, bankruptcy and reorganization, with a
membership exceeding 4,600 individuals.
I am honored to address the Subcommittee on H.R. 3150, H.R. 2500
and H.R. 3146, and have been asked to speak about the impact of these
consumer proposals on unsecured creditors. The League believes that
adoption of many of the consumer proposals contained in H.R. 3150 and
H.R. 2500 will enhance the rights of unsecured creditors. Reform is
appropriate in circumstances where abuse has been prevalent, such as
(i) when debtors incur unsecured debt on the eve of bankruptcy when
they are clearly insolvent, in financial distress or in all likelihood
unable to pay for the goods or services, or (ii) when debtors obtain
advances and such funds are used to extinguish priority or
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
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
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
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
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
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
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
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,
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
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
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.
Jay L. Welford, Co-Chair,
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
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
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
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.
``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
``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
``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
``My thinking is we'll tap this line of credit and try to keep my kids'
lives as normal as possible while their father is away. It's very
traumatic for them,'' she said.
``People may say, `Well, he signed up for this. You knew this could
happen.' But he was away for an entire year, and then leaves four
months later. And now we don't know how long he'll be gone. I don't
think he signed up for that.''
LOAD-DATE: March 04, 2003