[Senate Hearing 109-878]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 109-878
 
OVERSIGHT OF THE IMPLEMENTATION OF THE BANKRUPTCY ABUSE PREVENTION AND 
                        CONSUMER PROTECTION ACT

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

                                HEARING

                               before the

        SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT AND THE COURTS

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                            DECEMBER 6, 2006

                               __________

                          Serial No. J-109-123

                               __________

         Printed for the use of the Committee on the Judiciary





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                       COMMITTEE ON THE JUDICIARY

                 ARLEN SPECTER, Pennsylvania, Chairman
ORRIN G. HATCH, Utah                 PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona                     JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio                    HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama               DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
JOHN CORNYN, Texas                   CHARLES E. SCHUMER, New York
SAM BROWNBACK, Kansas                RICHARD J. DURBIN, Illinois
TOM COBURN, Oklahoma
           Michael O'Neill, Chief Counsel and Staff Director
      Bruce A. Cohen, Democratic Chief Counsel and Staff Director
                                 ------                                

        Subcommittee on Administrative Oversight and the Courts

                    JEFF SESSIONS, Alabama, Chairman
ARLEN SPECTER, Pennsylvania          CHARLES E. SCHUMER, New York
CHARLES E. GRASSLEY, Iowa            DIANNE FEINSTEIN, California
JON KYL, Arizona                     RUSSELL D. FEINGOLD, Wisconsin
                 William Smith, Majority Chief Counsel
                Preet Bharara, Democratic Chief Counsel


                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa.     6
    prepared statement...........................................   125
Schumer, Hon. Charles E., a U.S. Senator from the State of New 
  York...........................................................     4
Sessions, Hon. Jeff, a U.S. Senator from the State of Alabama....     1

                               WITNESSES

Bartlett, Steve, President and Chief Executive Officer, Financial 
  Services Roundtable, Washington, D.C...........................    23
Hildebrand, Henry E., III, Chapter 13 Standing Trustee, Middle 
  District of Tennessee, Nashville, Tennessee....................    29
Jones, David C., President, Association of Independent Consumer 
  Credit Counseling Agencies, Poinciana, Florida.................    24
Lawless, Robert, Professor, University of Illinois College of 
  Law, Champaign, Illinois.......................................    27
Newsome, Randall J., Chief Judge, U.S. Bankruptcy Court for the 
  Northern District of California, Oakland, California...........    26
White, Clifford J., III, Director, Executive Office for United 
  States Trestees, Department of Justice, Washington, D.C........     9
Zywicki, Todd J., Professor, George Mason University School of 
  Law, Arlington, Virginia.......................................    21

                       SUBMISSIONS FOR THE RECORD

Administrative Office of the United States Courts, James C. Duff, 
  Director, Washington, D.C., report and attachment..............    40
American Banker, Steven Sloan, New York, New York, Oct. 17, 2006, 
  article........................................................    58
American Bankruptcy Institute, Alexandria, Virginia, letter and 
  attachments....................................................    61
American Bar Association, Robert D. Evans, Governmental Affairs 
  Office, Washington, D.C., letter and attachments...............    75
American City Business Journals, Kent Hoover, Charlotte, North 
  Carolina, Oct. 23, 2006, article...............................    85
Bankers and financial services organizations, joint letter.......    87
Bartlett, Steve, President and Chief Executive Officer, Financial 
  Services Roundtable, Washington, D.C., prepared statement......    89
Commercial Law League of America, Jerry T. Myers, President, 
  Chicago, Illinois, position paper..............................   106
Credit Union National Association, Madison, Wisconsin, letter....   121
Hildebrand, Henry E., III, Chapter 13 Standing Trustee, Middle 
  District of Tennessee, Nashville, Tennessee, prepared statement   128
Jones, David C., President, Association of Independent Consumer 
  Credit Counseling Agencies, Poinciana, Florida, prepared 
  statement......................................................   138
Judicial Conference of the United States, Thomas S. Zilly, Chair, 
  Advisory Committee on Bankruptcy Rules, Washington, D.C., 
  statement and attachment.......................................   145
Keating, Susan C., President and CEO, National Foundation for 
  Credit Counseling, Silver Spring, Maryland, statement..........   158
Lawless, Robert, Professor, University of Illinois College of 
  Law, Champaign, Illinois, prepared statement...................   170
Mecham, Leonidas Ralph, Secretary, Judicial Conference of the 
  United States, Washington, D.C., letter and attachment.........   176
National Association of Bankruptcy Trustees, Eugene Crane, 
  President, Columbia, South Carolina, statment..................   186
National Bankruptcy Conference, Sally S. Neely and Ralph R. 
  Mabey, Co-Chairs, Committee on Legislation, Fairfax, Virginia, 
  letter.........................................................   190
Newsome, Randall J., Chief Judge, U.S. Bankruptcy Court for the 
  Northern District of California, Oakland, California, prepared 
  statement......................................................   194
Wall Street Journal, October 25, 2006, article...................   203
Washington Post, Kathleen Day, Oct. 17, 2006, article............   205
White, Clifford J., III, Director, Executive Office for United 
  States Trestees, Department of Justice, Washington, D.C., 
  prepared statement.............................................   208
Zywicki, Todd J., Professor, George Mason University School of 
  Law, Arlington, Virginia, prepared statement...................   220


OVERSIGHT OF THE IMPLEMENTATION OF THE BANKRUPTCY ABUSE PREVENTION AND 
                        CONSUMER PROTECTION ACT

                              ----------                              


                      WEDNESDAY, DECEMBER 6, 2006

                                       U.S. Senate,
   Subcommittee on Administrative Oversight and the Courts,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:30 p.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Jeff 
Sessions, Chairman of the Subcommittee, presiding.
    Present: Senators Sessions, Grassley, and Schumer.

 OPENING STATEMENT OF HON. JEFF SESSIONS, A U.S. SENATOR FROM 
                      THE STATE OF ALABAMA

    Chairman Sessions. Good afternoon. I am glad to see a good 
group here for this hearing.
    Last year, after 8 calendar years and four Congresses of 
bipartisan cooperation and negotiation, needed reforms to the 
Bankruptcy Code were finally signed into law. I was proud to be 
an original cosponsor of those reforms, and Senator Grassley, 
who is with me today, was a prime original sponsor of it and 
led the fight for it, and very ably, I might add.
    By the time it became law on April 20, 2005, the Bankruptcy 
Abuse Prevention and Consumer Protection Act of 2005 was no 
stranger to the Judiciary Committee or the Senate. Eleven 
Senate hearings had been held, and the Senate had passed 
similar bankruptcy reform four times--each time by strong 
bipartisan votes of 97-1, 83-14, 70-28, and 82-16. Similarly, 
the House had held a total of 18 hearings and passed bipartisan 
bankruptcy reform legislation on eight separate occasions.
    Throughout the 8 years of debate, the underlying principles 
of the Act never changed. Fraud and abuse of the bankruptcy 
system were aggressively targeted so that the system could 
continue to provide bankruptcy relief for those truly in need. 
Individuals who were capable of paying back some or all of the 
money that they had borrowed would be asked to do so in 
exchange for receiving bankruptcy relief and protection. 
Individuals unable to pay back their debts because they 
``failed'' to meet the means test would still be able to wipe 
out all of their debts. Creditors would have to fully disclose 
rates and repayment schedules and negotiate fairly with debtors 
trying to get back on their feet. Attorneys would be required 
to conduct a reasonable inquiry into their client's cases and 
would be held accountable for filing statements they knew to be 
false. Actually, that is a basic responsibility of attorneys, 
in my view, all along, to consult with their clients, but too 
often that has not been so in the bankruptcy processes.
    If we had spent another 8 years drafting the Bankruptcy Act 
before passage, I do not think these underlying principles 
would have changed.
    In short, the Act established a ``means test'' to effect 
needs-based bankruptcy and to determine whether a debtor should 
go into Chapter 7 bankruptcy, which is the complete discharge 
of all your debts, or Chapter 13 bankruptcy, where you enter 
into a repayment plan, based on the ability of that debtor to 
repay some or all of his debts. Each and every individual 
debtor has a chance to go before a judge to make his or her 
case and have considered unique or special circumstances that 
might impact the repayment ability.
    The Act made clear that low-income debtors are not affected 
by the means test. Anyone whose household income is equal to or 
below the State average for a family of their size is exempt 
totally from the means test.
    The Act gave unprecedented protections to women that are 
owed child support or alimony. Family support obligations are 
raised to a top-priority preference over all other debts. 
Before, they held seventh place in the tier of priorities. That 
means that child support and alimony debts need to be satisfied 
before other creditors. No longer will those who need the most 
have to wait the longest for funds to pay for food, shelter, 
and medical bills.
    It limited the amount of assets debtors can shield from 
creditors through the purchase of expensive homes by 
lengthening the residency periods required to qualify for State 
homestead exemptions. We would have liked to have done more, 
but we made some progress, I believe, in that area.
    It required full disclosure from credit card companies. 
Credit card issuers will now have to disclose interest rates 
and repayment terms in a clear and conspicuous way. This will 
help consumers make informed credit decisions. The Act also 
created new penalties against creditors who act in bad faith 
and gives debtors the ability to reduce the amount of debt owed 
to credit card companies if the credit card company refuses to 
negotiate an out-of-court settlement.
    It required credit counseling for consumers in financial 
trouble who are considering bankruptcy. Additional financial 
education is required after filing for bankruptcy as a 
condition for discharging debts through the bankruptcy process. 
These provisions are extremely important, and I believe that if 
they are applied as intended, they will help significant 
numbers of people either avoid bankruptcy altogether and/or 
save their credit ratings.
    It made Chapter 12 bankruptcy protections for small family 
farmers permanent. I know Senator Grassley was proud to see 
that finally occur. No longer will these great Americans have 
to wonder if the special protections which enable them to keep 
family farm that they have lived on for generations will be 
there when the crops do not come in.
    Today's hearing will be one of general oversight--examining 
how the Act has been implemented since its general effective 
date of October 17, 2005, and examining how well the Act is 
working to date.
    As a whole, it is probably too early to draw hard 
conclusions about all of the Act's effects, for we are still in 
the initial implementation phase. In fact, some of the Act's 
provisions, such as the provision requiring the Executive 
Office for U.S. Trustees to perform random audits on consumer 
bankruptcy petitions, became effective just a few months ago, 
October 20th.
    Though it is still early, we do have some limited 
statistics indicating that the Act is working as intended: 
deterring fraud and abuse while preserving bankruptcy relief 
for those who truly need it. Today, among other things, we will 
learn the following:
    Filings: Overall, consumer bankruptcy filings fell 
dramatically in the first few months following the passage of 
the Act, falling 65 to 70 percent, and are now trending only 
slightly upward. Recent filing levels are reaching a mere 40 
percent of the pre-Act rates. Of course, we know some of that 
was the surge of filings that occurred before the new Act took 
place, but we do appear to be seeing some reducing in filings.
    Chapter 13 filings: Early evidence suggests that Chapter 13 
filings have risen, becoming a larger percentage of the total 
bankruptcy filings, from approximately 30 percent to 40 
percent. This suggests that larger numbers of debtors able to 
pay back all or part of their debts are voluntarily filing 
under Chapter 13 rather than Chapter 7. I would just note that 
in my home State of Alabama, for reasons that lawyers tell me 
are quite justified, in the Northern District of Alabama, I 
believe it is 65 percent or more file under Chapter 13 and were 
doing that before this Act. Chapter 13 has some real advantages 
for the debtors, and so I think an increase in Chapter 13 
filings has always been needed.
    On the means testing question, conversions or dismissals 
from Chapter 7, the numbers collected by the U.S. Trustees now 
indicate that means testing is directly affecting less than 1 
out of 100 files. A remarkable number.
    Credit counseling: Preliminary estimates by the Department 
of Justice indicate that 10 percent of pre-filing counseling 
certificates are not being used immediately to file for 
bankruptcy, and they are good for 6 months. This indicates that 
people may be reconsidering their options.
    So, in conclusion, my strong belief is that bankruptcy is 
entirely a Federal court responsibility and one that has a far 
larger impact on individuals and our economy than most people 
realize. I also believe that we, therefore, must monitor this 
Federal court system on a regular basis in order to stop abuses 
and eliminate unfairness. So I will pledge to work with my 
colleagues, Senator Schumer, who pretty soon I will be able to 
call ``Chairman Schumer''--
    Senator Schumer. It will not be the first time.
    [Laughter.]
    Chairman Sessions. It will not be the first time. We have 
played a little musical chairs, and you deserve some credit for 
achieving that, Mr. Chairman.
    Senator Grassley. Don't encourage him.
    Chairman Sessions. Don't encourage him, Senator Grassley 
says.
    [Laughter.]
    Senator Schumer. I will say this: One of your colleagues on 
about October 1st offered me a free paid vacation to Hawaii for 
a month and a half.
    Chairman Sessions. It would have been a bargain.
    [Laughter.]
    Chairman Sessions. Senator Schumer, it is great to serve 
with you. You are an excellent lawyer. You understand this 
issue, and I would recognize you at this time. And, Senator 
Grassley, I will recognize him because I know he has a 3 
o'clock. You know, he chairs the Finance Committee and is one 
of the masters--
    Senator Grassley. No more because of him.
    Chairman Sessions. You still do at this moment. And as one 
of the masters of the universe, he is going to have to go to a 
meeting to work out some last-minute issues.

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

    Senator Schumer. Well, thank you. And I first want to thank 
you, Mr. Chairman, for being a gracious, courteous, and fair 
Chairman, very much appreciated, as I do Senator Grassley as a 
member of the Finance Committee as well. And at least as far as 
I am concerned, that fairness and courtesy will be 
reciprocated, so I thank both of you for that.
    It is sort of interesting to note both my colleagues--and I 
do not agree with them on a whole lot of issues, but you 
respect people when they stick to their principles even if they 
are pushed the other way. And one of the issues that was before 
us in the Judiciary Committee was whether to fill up the 
Washington, D.C. circuit fully with 12 lawyers. And the 
position had been when Clinton was President that only 10 were 
needed, and both Senator Grassley and Senator Sessions, in 
particular, had advocated that. And then when the wheel turned, 
they stuck with that position, and that is something I will not 
forget and that I have great respect for. So, anyway, I thank 
both of you, and I suppose this happens. When I was in the 
House, Jim Sensenbrenner and I kept switching as Chair of the 
Crime Subcommittee, so I am sort of used to that.
    Anyway, I want to thank you, and I thank you for holding 
this hearing. It comes at a time when many Americans are 
concerned about the high levels of personal debt in the 
country. Every holiday season, countless people, even those who 
typically pay off their credit card bills each month, borrow a 
little more and spend a little more. It is the holiday season, 
Christmas. Everybody wants to be nice to everyone in their 
family, and that is a great thing.
    Just over a year ago, Congress passed the Bankruptcy Abuse 
Prevention and Consumer Protection Act with the hope that it 
would eliminate fraudulent bankruptcy petitions. And as I often 
said while the bill was being debated, I share concerns with 
the bill's biggest supporters, especially with regard to abuse 
of our bankruptcy system by gamblers, hustlers, cheaters, and 
people who go into it simply with the idea of not paying their 
debts and sort of shirking them off. And that is not American 
and that is bad.
    But I believe the bill that passed did not go far enough to 
ensure that those who have really suffered ruinous losses, 
often through no fault of their own and not any of the 
motivations mentioned in the previous paragraph, are able to 
try and get a new start. The so-called reform must distinguish 
between the reckless high roller and the single working mother 
or the hard-working breadwinner of the family who just becomes 
ill and loses his or her job.
    All provisions apply to all debtors regardless of how they 
ended up bankrupt in the first place, and the immediate 
aftereffect of the passage of this bill was a rush to file that 
resulted in a record number of bankruptcy petitions last year. 
Since then, the number appears to have leveled off, but it is 
still too early to assess the actual success the bill has had 
in fulfilling its stated goals.
    Here is what we do know. A number of studies have shown 
that the vast majority of individuals who filed for bankruptcy 
are in the second category. They file because of factors beyond 
their control: catastrophic medical problems, job loss, the 
death of a spouse, business failure. And in many cases, the 
petitioners actually experience multiple personal tragedies.
    We also know that 60 percent of all credit card users--that 
is about 85 million Americans--carry a balance month to month 
and that the credit card companies are eager to go out of their 
way to target those who have recently emerged from bankruptcy. 
That I really do not like. There is too much preying, 
unscrupulous preying on those who are the most vulnerable 
consumers.
    We know that at least three Federal courts have struck down 
certain provisions of the bill--or a single provision of the 
bill as unconstitutional. And we know from the testimony here 
and studies done that there is still a lot of unfairness in the 
system. So we need to make sure the bill is targeted at the 
Nation's cheats and not its cheated. And we did not do that as 
well as we might have in the previous bill.
    For example, among the cheated are too many single- parent 
families in my home State and across the country who are worse 
off financially because a deadbeat mom or a deadbeat dad won't 
pay the child support. Those single parents are some of our 
hardest workers and some of our greatest heroes. I have met 
some of them. Boy, do they struggle. And we should have been 
trying to help them, not make their lives more difficult. New 
provisions, credit card counseling requirement, increased fees, 
complicated paperwork, have steered many deserving people away 
from filing, and even though who cannot afford to pay for 
credit counseling are required to undergo financial literacy 
training before they can file a petition to erase their debt.
    By some accounts, at least, this is an ineffective 
bureaucratic hurdle. The survey results from credit counseling 
firms have shown that fewer than 1 out of 20 consumers were 
actually candidates for paying off their debt under a debt 
management plan; 96.7 percent still needed to file for 
bankruptcy as they would have even prior to the passage of this 
bill.
    So the bottom line here is that in an attempt to rewrite 
the fraud and abuse out of our bankruptcy laws, we may have 
written in some complications and confusion. It may well be--
and this is something I guess we will continue to examine--that 
this Act was too blunt an instrument, however noble its goals.
    The one-size-fits-all approach doesn't take into account 
the majority of people whose only crime is a catastrophic 
illness, the death of a loved one, or some other similar 
tragedy. It imposes fee increases on people who cannot afford 
them, mandates counseling requirements that may be ineffective 
and counterproductive.
    So let me say, in conclusion, this is a complicated and 
important issue. There are many points of view. I am glad we 
have such a distinguished panel of experts, judges, trustees, 
and professors to help us sort out some of the complexities. 
And, again, Mr. Chairman, I thank you for holding this hearing.
    Chairman Sessions. Thank you, Senator Schumer.
    Senator Grassley, do you want to make some opening 
comments?
    Senator Grassley. I think I will just put it in the record 
because I have to go.
    Chairman Sessions. You have to go this very minute.
    Senator Grassley. I think so. My staff is out there.
    Chairman Sessions. I thought they worked for you, not you 
working for them.
    [Laughter.]

STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM THE 
                         STATE OF IOWA

    Senator Grassley. I just got the signal that I have got a 
little bit of time, and I am going to take advantage of it.
    Chairman Sessions. You are absolutely entitled to it. You 
have worked this issue for many years, and I know you are proud 
to see it come to fruition.
    Senator Grassley. Everything that has been said on this 
subject has probably been said, but I haven't said it, and, by 
golly, I am going to say it.
    [Laughter.]
    Senator Grassley. First of all, congratulations to you, Mr. 
Chairman, for your help in getting this bill passed in the 
first place, and I thank you for these continued efforts, as 
demonstrated by this hearing, to make sure that our new 
bankruptcy system law works.
    As you well know, this law was a result of more than a 
decade of comprehensive study and intense debate in Congress, 
and whatever criticism one may do about this legislation, I 
think there are some essentials that you have to remember about 
it. It was spread out over so many Congresses, the debate, that 
it was surely well vetted, and there was a lot of compromise on 
both sides. And in the end, the large bipartisan majorities, 
Republicans and Democrats voting together, to enact it showed a 
very serious need for the reform and that this reform was the 
way to do it; otherwise, you do not get those kinds of votes of 
75-25 and one time 97-2.
    Why so much support for bankruptcy? Well, the majority of 
Americans knew that the bankruptcy system was broken and needed 
to be improved. The central premise of bankruptcy reform is 
that if an individual who wants to file for bankruptcy can 
repay some of his debt, then he ought to pay some of his debt 
and not get off scot free. As I have said many times before, we 
needed to restore balance to the bankruptcy process, that it 
had become too easy where clever lawyers gamed the integrity of 
the bankruptcy system for the benefit of individuals who wanted 
to get out of their debts entirely and to the detriment of 
people who played by the rules. That is why bankruptcy rates of 
the 1990s soared, and despite the fact that the economy was so 
strong during that period of time.
    With the new bankruptcy laws, Congress closed some of these 
loopholes and enacted some important consumer protections. The 
new bankruptcy law created a means test. The law injected more 
integrity and fairness into the bankruptcy system.
    So how has the new bankruptcy law worked? Well, that is the 
purpose of this hearing. But early reports indicate that it is 
working very well by the number of bankruptcies that have gone 
down that the Chairman has already referred to, and I am not 
going to repeat those numbers.
    So in my mind, fewer bankruptcy filings are bound to boost 
the American economy. When considering the effects of 
bankruptcy on the economy, I often recall Clinton 
administration Treasury Secretary Larry Summers saying that the 
high levels of bankruptcy tended to push up interest rates. So 
lowering bankruptcy rates would reduce upward pressure on our 
economy based merely on these decreased filing rates. I think 
it is fair to say that bankruptcy reform has been a success for 
our economy.
    Earlier this year, I stated on the Senate floor that the 
numbers indicated that bankruptcy reform has saved our economy 
$60 billion. That is a substantial savings. That is around $60 
billion that would have been lost, that would have been a drag 
on our economy, and I am confident that at least some of that 
money has been or will be directed toward economic growth and 
the creating of American jobs.
    It is also important to remember that there were a number 
of consumer protections included in the new bankruptcy law. 
People considering filing for bankruptcy have access to no-cost 
or low-cost credit counseling and financial education. We want 
people who make bad financial choices to learn how to deal with 
their finances and not get caught up in a bankruptcy recycling. 
After all, better educated consumers are a benefit to everyone. 
The law even encourages education of young people how to handle 
their finances, and credit card companies are required by the 
new law to warn consumers about the dangers of making only 
minimum payments.
    But there are challenges. The power special interest groups 
here in Washington that opposed bankruptcy reform in the first 
place have not gone away. They are still trying to undermine 
the common-sense reforms by filing lawsuits challenging these 
reforms and by supporting regulations to water down the law.
    The Federal courts produced a bankruptcy form that is 
supposed to measure repayment ability, but it is my 
understanding that this form actually directs consumers to 
claim deductions for expenses a debtor may not even have. That 
certainly was not the intent of the law. The form legitimizes 
gaming of the law, reduces the integrity of the system, and 
ultimately undermines reforms.
    Moreover, everyone who has followed this issue for any 
length of time will recall how the Federal Trade Commission had 
to issue a public warning over sleazy business practices in the 
bankruptcy mills. Congress responded to this by enacting some 
dramatic consumer protections. But how has the bankruptcy bar 
responded? You would think by cleaning up their act and by 
increasing professionalism. Unfortunately, that does not seem 
to be the case. The bar has responded to our attempts to help 
consumer by seeking to declare these consumer protections 
unconstitutional. In fact, right now in a Connecticut court, 
consumer bankruptcy lawyers are trying to convince a Federal 
judge that they have a right to advise people to commit fraud 
by telling consumers to run up debt that they have no intention 
of ever repaying. Right now these lawyers are trying to get out 
of disclosing to their clients what their fees are.
    No wonder even the American Bar Association has 
acknowledged that there is a real need for special disciplinary 
rules of consumer bankruptcy lawyers, and there is growing 
evidence that consumer bankruptcy lawyers are trying to deny 
consumers access to valuable credit counseling by trying to buy 
off the counselors.
    Just recently I joined Chairman Sessions in a letter to the 
Justice Department asking about one counseling agency that 
actually solicited business by promising not to advise 
consumers about alternatives to bankruptcy. The Department of 
Justice has done an admirable job in defending the law, but 
they shouldn't have to use precious time and resources 
defending needed consumer protections. They should be free to 
use their resources to protect the consumers directly.
    I have seen even more than one instance of bankruptcy 
judges criticizing the new law in very inappropriate ways, and 
that is extremely disappointing. Of course, any judge should be 
free to exercise his or her judgment about how to interpret a 
law, and I certainly would never infringe on that core work. 
But when judges give press interviews and call the new law 
``garbage'' or question Congress' motives for passing 
bankruptcy reform during a court hearing, I think that clear 
line has been passed. Congress writes the laws. Judges are 
supposed to interpret and apply the law impartially.
    The bottom line is Congress passed bankruptcy reform by a 
wide margin with both Republicans and Democrats supporting it. 
That is how the American legal system is supposed to work. We 
have a democracy. Unelected Federal judges do not get to 
substitute their own personal policy preferences for the 
considered judgment of the elected branches. But that does not 
appear to matter to some bankruptcy judges who have decided 
they know better than everyone else how this country ought to 
be run.
    That is why I intend to write a letter to Chief Justice 
Roberts asking him whether this conduct violates ethical rules 
for judges. Judges are supposed to be neutral. They are 
supposed to understand their role in our legal system. I hope 
that Chairman Sessions will join me in looking into this matter 
and will sign onto that letter to the Chief Justice.
    All in all, Mr. Chairman, I think the new law is working 
well. We need to be vigilant here in Congress as the law is 
implemented and to make sure that people who do not want to 
follow the law's mandates and good reforms are not undermining 
the law and the integrity of the bankruptcy system or shirking 
their responsibilities to enforce the law.
    So this hearing and others I am sure you will have will 
help up keep a watchful eye on the developments in the 
evolvement of this legislation in the future.
    Senator Schumer. Mr. Chairman?
    Chairman Sessions. Yes, sir?
    Senator Schumer. Could I just ask unanimous consent to put 
the American Bar Association's entire statement in the record?
    Chairman Sessions. We would be pleased to make that a part 
of the record.
    Our first witness on this first panel is Mr. Cliff White. 
He serves as the Director of the Executive Office for U.S. 
Trustees here in Washington, D.C. He has served in the Federal 
Government for 26 years, including previously as Assistant 
United States Trustee and Deputy Assistant Attorney General 
within the Department of Justice and as Assistant General 
Counsel at the U.S. Office of Personnel Management. He is an 
honors graduate of George Washington University and the George 
Washington University Law School. He has been recognized with a 
Presidential Rank Award for Meritorious Executive Service in 
2006 and with the Attorney General's Award for Distinguished 
Service in 2003.
    They do not give many of those, do they, Mr. White?
    Mr. White. In my case, maybe too many.
    [Laughter.]
    Chairman Sessions. No, that is a rare award. I got one one 
time. I cherish it.
    Also, we expected to have on the panel Judge Thomas Zilly 
of the U.S. District Court for the Western District of 
Washington, who currently serves as Chairman of the Judicial 
Conference Advisory Committee on Bankruptcy Rules. He submitted 
an excellent statement, and we will make that a part of the 
record. And I think it is fair to say that he is supportive of 
the Act.
    Mr. White, we would be delighted to hear from you at this 
time.

STATEMENT OF CLIFFORD J. WHITE III, DIRECTOR, EXECUTIVE OFFICE 
FOR UNITED STATES TRUSTEES, DEPARTMENT OF JUSTICE, WASHINGTON, 
                              D.C.

    Mr. White. Thank you and good afternoon, Mr. Chairman. I 
thank you for the opportunity to appear before you today to 
discuss the progress made by the U.S. Trustee Program to 
enforce and implement the new bankruptcy reform law. I am 
pleased to report to the Subcommittee that the program has made 
major progress in achieving its goal of making bankruptcy 
reform work for all stakeholders in the system--debtors, 
creditors, and the general public. And although, as the members 
said in their opening statements, it is still far too early to 
determine the long-term impact of the reform law, the reforms 
have been workable, and there are promising signs for positive 
results in the future.
    Chairman Sessions. Mr. White, before you go much further, 
would you just basically tell those who do not understand the 
role of the U.S. Trustee what kind of role you play in the 
bankruptcy court system?
    Mr. White. We are called, in the words of the legislative 
history, the ``watchdogs'' of the system. Our basic mission is 
to enhance the efficiency and the integrity of the system. So, 
for example, we appoint the private trustees who administer 95-
plus percent of the bankruptcy cases. We also litigate in 
bankruptcy court, enforcing the bankruptcy law on such matters 
as debtor wrongdoing or attorney wrongdoing, and bring matters 
to the court. So we have administrative responsibilities in 
overseeing the trustees, litigation enforcement 
responsibilities against debtors or others in the system going 
before the court. And we have jurisdiction in all districts of 
the United States except those judicial districts in Alabama 
and in North Carolina.
    Chairman Sessions. Those are the trustees remaining under 
the court system, but overwhelmingly they are part of the 
Department of Justice, and you are involved in all the cases 
that come through the bankruptcy courts in the country?
    Mr. White. That is correct.
    Chairman Sessions. So you have a unique perspective, and I 
just wanted to get that point in. Go ahead, please.
    Mr. White. Thank you very much for that.
    One of the reasons, I suggest, Mr. Chairman, that we have 
been able to meet the challenges presented by the reform law is 
that we are building on 5 years of progress realized through 
our civil and criminal enforcement initiatives. These 
enforcement efforts reflected a balanced approach to address 
both the debtor wrongdoing as well as to protect consumer 
debtors who were victimized by attorneys, petition preparers, 
or others.
    In the last fiscal year, fiscal year 2006, we estimate that 
we took more than 58,000 civil enforcement and related actions 
with a monetary impact in the system of more than $878 million 
in debts not discharged, fines, penalties, and other relief. 
And since we began tracking our results in 2003, we have taken 
more than 220,000 actions with a monetary impact in excess of 
$2.6 billion. We also--
    Chairman Sessions. Could you explain what an enforcement 
action is, typically?
    Mr. White. Certainly. They come in a variety of modes, but 
the most common ones, for example, would be if a debtor had an 
ability to repay. Even before the statute, there was some 
ability that we would have to bring an action. We have more 
tools through the new statute to bring these actions. But if a 
debtor was abusing the system because the debtor had run up 
debts and had the ability to repay those debts but still sought 
Chapter 7 relief, we could file a motion to dismiss that case 
in bankruptcy court. So the debtor would either have to repay 
part of those debts in Chapter 13 or have the case dismissed, 
in which case the debts would not be discharged at all.
    In a consumer protection context, which has also been an 
important part of our civil enforcement efforts, if a debtor 
was victimized by, say, a non-attorney petition preparer, 
someone who claimed to be a credit doctor could fix the credit 
woes and might, for example, file a bankruptcy petition, 
sometimes even without knowledge of the debtor, we would have 
jurisdiction to go to the bankruptcy court to seek relief 
against the party who had victimized the debtor.
    So we have taken those kinds of actions, as well as more 
serious ones. So, for example, if the debtor has actually lied, 
concealed assets in the bankruptcy papers filed under penalty 
of perjury in bankruptcy court, we can take action which will 
cause not just a dismissal of the case but a denial of 
discharge of those debts.
    So those are three of the more common examples of the kind 
of cases that we have brought in the past and which the 
Congress has given us now new tools to be able to continue to 
do in the past year since the general effective date of the new 
law.
    If I may go on, Mr. Chairman, as well, we have also 
enhanced our criminal enforcement efforts. We have a 
responsibility under the statute to make referrals to United 
States Attorneys where we have evidence that a bankruptcy crime 
has been committed. And some of our results in this regard were 
illustrated as recently as just a few weeks ago when the Deputy 
Attorney General, Paul McNulty, announced the conclusion of 
what we called ``Operation Truth of Consequences,'' which was a 
nationwide bankruptcy fraud sweep, in which United States 
Attorneys filed criminal charges against 78 defendants in 36 
judicial districts.
    Now, under the reform law, or BAPCPA in the shorthand, the 
program has taken on, as the Chairman well knows, substantial 
new responsibilities in several key areas which are covered in 
my written statement, and if I may, I would like to highlight 
just three of the consumer provisions and some of our 
activities in those areas.
    The first is means testing. Under the new Section 707(b), 
the former subjective ``substantial abuse'' standard has been 
replaced by a more transparent and a more objective means test 
formula to determine whether a case is, in the terms of the 
statute, ``presumed abusive.''
    While it is still too early to determine the long-term 
impact of means testing, I would like to suggest to the 
Subcommittee two preliminary conclusions. The first is that 
means testing is a workable system. There is now a system in 
place by which debtors can obtain the necessary IRS and Census 
Bureau information that is needed to complete the means test 
and to make the required calculations. And there is now a 
system in place for the U.S. Trustee staff to process that 
information, to make a determination of ``presumed abuse,'' and 
then decide in those cases of presumed abuse whether the facts 
warrant bringing a motion to dismiss.
    My second preliminary conclusion on means testing is that 
the early data suggests that means testing provides a promising 
approach to identifying abuse. Of the individuals debtors with 
above median income--those who are subject to the full means 
test--the U.S. Trustee has determined--and this was reflected, 
I know, in the Chairman's opening statement. We have determined 
that slightly less than 10 percent of those debtors are 
presumed abusive. And of the presumed abuse cases that did not 
voluntarily dismiss or convert, the U.S. Trustee filed motions 
to dismiss in about three-quarters of those cases, meaning we 
declined to file in about one-quarter of the cases. So to us, 
these data would suggest that the means test has been a useful 
screening device to identify abusive cases, and it also 
suggests that the statute has indeed provided the U.S. Trustees 
with sufficient discretion so that decisions on filing motions 
can be made on a case-by-case basis and not solely upon a 
statutory formula. We can take into account special 
circumstances under the statute.
    Another major aspect of bankruptcy reform is financial 
education. Individual debtors must receive credit counseling 
prior to filing bankruptcy and receive debtor education prior 
to receiving a discharge. These are potentially among the more 
far-reaching consumer protection provisions of the new code 
because these requirements are designed to ensure that debtors 
enter bankruptcy knowing what their options are and they will 
exit bankruptcy with more tools to avoid future financial 
catastrophe.
    Among the jobs of the U.S. Trustee in this regard is to 
approve qualified providers to provide those services if they 
meet certain statutory qualifications.
    I would suggest that, as with means testing, there are 
positive signs that the credit counseling and debtor education 
provisions are workable. The credit counseling industry has 
been a troubled industry, so our first priority in the U.S. 
Trustee Program was to put into place a system so that we could 
try to screen out those agencies that might seek to defraud 
debtors. And we developed our approval and our monitoring 
criteria within enormous assistance from the FTC and the IRS. 
And just this past September, we further strengthened our 
efforts by commencing a new post-approval, onsite review 
process to better verify an applicant's qualifications.
    Through the end of last August, we had received about 700 
initial applications from providers. About two-thirds were 
approved, but about one-third were either denied or voluntarily 
withdrawn after we asked additional questions and withheld 
approval.
    In addition, to date there is adequate capacity to serve 
the debtor population. There are currently 155 approved credit 
counseling agencies nationwide and 285 approved debtor 
education providers. Let me add as well that we did exempt 
debtors from the credit counseling and debtor education 
requirements in those judicial districts that were most heavily 
affected by Hurricane Katrina. And as the number of bankruptcy 
filings nationwide increases, we are going to continue to 
monitor that 155/285 number to ensure that there is adequate 
capacity.
    Finally, the third and final aspect I would like to 
highlight are debtor audits because, as the Chairman noted in 
his statement, a new regimen for debtor audits commenced with 
cases filed on October 20 of 2006. We believe that these audits 
will help us to identify cases of fraud and abuse, to enhance 
deterrence, and also to help us better measure the magnitude of 
fraud, abuse, and errors in the system. So in the current 
fiscal year, in 2007, we will use contractors to conduct up to 
7,000 audits of cases filed by individual debtors.
    So the bankruptcy reform law has presented many challenges 
to the U.S. Trustee Program, but we believe that the diligence 
and professionalism of the program staff at all levels have 
allowed us to make some substantial progress, and we look 
forward to making continued progress in the coming year. I 
would be happy to answer any questions from you, Mr. Chairman, 
or other members of the Subcommittee.
    [The prepared statement of Mr. White appears as a 
submission for the record.]
    Chairman Sessions. Thank you very much, Mr. White. Those 
are impressive remarks, and I can tell that you have taken this 
seriously and you have the capability of being an effective 
leader of the trustees.
    We have seen a substantial decline in filing rates, 40 
percent perhaps. What is your view of why that has occurred?
    Mr. White. Well, I do not think that I have a definitive 
answer, so let me suggest several factors that I think there is 
perhaps even consensus in the bankruptcy community, or at least 
factors that are commonly cited by commentators of differing 
points of view in bankruptcy reform.
    One is the surge in filings that occurred just prior to the 
general effective date of the statute. There were 600,000 cases 
filed in the 2 weeks prior to the October 17 general effective 
date. Three-quarters of a million cases were filed in the 1 
month prior to the general effective date. So with that number 
of filings, it is not at all surprising you would have a 
smaller number thereafter.
    Also, the nature of the new bankruptcy reform law or the 
means testing provision is to make the system more transparent, 
more objective, meaning there can be more self-policing, if you 
will. Debtors and their counsel should know when they file the 
petition if it is going to trigger a finding of presumed abuse. 
So that may lead debtors to file 13 or not to file at all. We 
cannot measure the direct impact of that, but that is certainly 
a plausible reason.
    A third that I have heard many debtors' counsel talk about 
themselves is the learning curve that was involved for debtors' 
counsel getting used to a new system.
    Another factor I would point to is misinformation. There 
was a great deal of misinformation prior to the effective date 
and afterwards with regard to the Act, suggesting honest and 
needy debtors no longer had that relief available. And that may 
have had a deleterious effect on debtors who were entitled to 
the relief but have not sought it because the strident rhetoric 
suggested it was not available to them anymore.
    Others have also referred to additional costs to the 
system. Debtors' attorneys fees have gone up. Some of that 
could be due to, among other factors, again, the learning curve 
of debtors' counsel, retooling their systems, and maybe some of 
those costs can come down as they realize new economies of 
scale and get further along the learning curve.
    So those are five factors commonly cited. I cannot point to 
empirical evidence that says any one or a combination of those, 
but those are some plausible explanations that are commonly 
heard.
    Chairman Sessions. Thank you. I do not think, do you, that 
a mere decline in number of cases a bankruptcy office may be 
filing would justify increasing fees, do you?
    Mr. White. No. Well--
    Chairman Sessions. I have a little suspicion, frankly, that 
some lawyers are raising their fees simply to maintain their 
current level of income even though filings may be down. Do you 
have a similar suspicion?
    Mr. White. I really don't know the reasons. We often do ask 
debtors' counsel. Their fees must be reasonable. Courts can 
correct excessive fees. And I think that it is a dialog we try 
to have with debtors' counsel as to if fees are raised, why are 
the fees raised, because I do think that it is an important 
factor that needs to be scrutinized. But I just cannot come 
before you and say I have a strong suspicion or knowledge as to 
what any single cause of that is.
    Chairman Sessions. I can understand that. Somebody said 
recently, ``I don't know much, but I have a lot of 
suspicions.''
    [Laughter.]
    Chairman Sessions. So perhaps we should not even raise 
suspicions.
    On the means test effectiveness, you said it is workable. 
Some thought it might not be, but I always thought it had 
enough clarity that the system would work pretty well and the 
largest number of people would be unaffected by the change. 
Since they would be making below median income, it would have 
virtually no impact on them. But if they make above the median 
income, they can be presumed to be an abuser.
    When this happens, the Department of Justice can move to 
dismiss the case or decline to do so. Do you know the number 
you filed on, the number of objections you filed to Chapter 7?
    Mr. White. Since October 17 of the 707(b), which is mainly 
the means test, not exclusively, the number is relatively 
modest because the number of filings is so low. About 1,300 
cases were actually filed. But that is after we exercised 
discretion, and one out of every four presumed abuse cases we 
found had special circumstances.
    Chairman Sessions. But that would indicate, would it not, 
that 99 or whatever percent is filed are filing correctly, and 
the projections that there would be disaster from this would be 
overblown. Is that correct? Would you say that?
    Mr. White. I would say that the means test has been an 
effective screening device and that we have tried to exercise 
discretion and believe that the statute has given us discretion 
so that we are not filing motions in cases that are not 
meritorious.
    Chairman Sessions. Is it true that less than 1 in 100 
filers have been challenged by these motions?
    Mr. White. I believe that is the way the ratios finally 
work out, yes.
    Chairman Sessions. I am informed that no creditors have 
filed 707(b) motions, but that only the trustees have done so. 
Is that correct?
    Mr. White. I do not have any specific data, but that is my 
understanding. But I do not have the data that would prove 
that. We do not collect it on the creditor motion.
    Chairman Sessions. Senator Grassley had some harsh words 
about the deductions for expenses form, deductions that debtors 
do not actually have. The Judicial Conference, I understand, 
developed a standardized form for implementing the means test. 
Is there any part of these forms, particularly Form 22, which 
calculates the means tests, which in your judgment permits 
debtors to claim a deduction for expenses they do not actually 
have?
    Mr. White. Let me first say we have been a part of the 
Advisory Committee on Bankruptcy Rules, which is chaired by 
District Judge Zilly, and I believe that Judge Zilly has done a 
tremendous job in guiding that committee. There have been 
scores of new rules and forms that have been issued, and what 
the Committee is doing now--it put out the interim rules for 
public comment. It is reviewing comments and will at the March 
meeting review again the rules and forms to see if additional 
modifications are necessary.
    Now, we are litigating one issue related to what you said, 
Mr. Chairman--and it is not a product of the form--having to do 
with whether or not an ownership expense for an automobile may 
be claimed by all debtors even if they do not own an 
automobile. The IRS says if you own an automobile, you get a 
certain amount that is allowed, and the statute allows you 
also, if you have a higher secured debt. But if you do not own 
an automobile, we argue and have argued in court, not always 
successfully, that you do not get that deduction for owning an 
automobile. So some issues like that do arise. And there may be 
some issues that some have raised with regard to the means 
testing form, but I would have to say that we believe that the 
Rules Committee has acted very responsibly and in good faith.
    Chairman Sessions. Thank you for those insights. You do 
feel that you represent and have a responsibility to advocate 
for integrity and forms that actually work to ensure the 
integrity of the process. So you see your role--you do not have 
any hesitation to advocate improvements in the form if you 
think there are difficulties, do you?
    Mr. White. Not at all.
    Chairman Sessions. You understand that is your role and you 
will do so.
    Mr. White. It is a fundamental duty of ours, Mr. Chairman.
    Chairman Sessions. I think the question arose from, I 
guess, line 22 in the form, and I would ask you to look at 
that.
    Mr. White. Certainly.
    Chairman Sessions. It says you are entitled to an expense 
allowance in this category regardless of whether you pay the 
expenses of operating a vehicle or regardless of whether you 
use public transportation. That is the issue you just raised. 
It strikes me that it is almost like saying if you own a home, 
you can deduct the interest, but if you do not own a home, you 
can deduct the interest anyway. So I do not think that is good 
legal policy the way that is suggested there.
    In both 2006 and 2007, the Senate Committee on 
Appropriations included language in their reports supporting 
use of data-enabled forms. In your presentation to the ABI last 
month, you argued for the same. You said, ``My concern about 
our long-term ability to efficiently process the forms rises 
largely out of the fact that courts have not yet mandated smart 
forms with data tags that could allow us to automate most of 
our procedures. We are hopeful that the Judicial Conference 
will adopt mandatory technical standards for petitions and 
schedules.''
    Can you explain for the non-computer-savvy listener what a 
smart form data tag is?
    Mr. White. I will try as a non-computer-savvy person 
myself. The data tags are really a software that embeds codes 
into forms that are filed electronically with the court. 
Bankruptcy forms largely are filed electronically. And what 
that allows is for data from those forms to be aggregated in an 
automated way, less person-intensive, to do such things as in 
means testing, a vital concern to us, to be able to segregate 
cases that are above median income, that require the full means 
test, versus below.
    If we are able to aggregate data through these smart forms, 
if everyone files or most filers file with smart forms embedded 
per the court's mandate, then we would be able to better 
achieve the Congress' objective as well with regard to non-
random debtor audits where we have to make determinations of 
whether or not debtors in cases have unusually high expenses in 
a particular judicial district so to best carry out those non-
random audits, according to the Congressional criteria.
    The GAO has a need for them. Recently, for example, we met 
with the GAO as it commenced a study of domestic support order 
treatment under the new Bankruptcy Code. And one of the issues 
that we discussed was how to identify the cases, and they have 
to do it more through a random, manually intensive way. If 
there were these invisible data tags in the forms, it would be 
much easier for GAO to identify those cases, and it would have 
great benefit for scholars, too.
    We have been working with the courts on that for 19 months. 
I am very hopeful that something will be done very soon, 
particularly as filings go up, because I think it is going to 
allow us to administer the system more efficiently and will 
have great benefits for policymakers and scholars.
    Chairman Sessions. Thank you.
    What is your assessment of the credit counseling 
provisions? And how is that working? That is an entirely new 
concept, and I would be interested in your opinion.
    Mr. White. Well, as with other aspects of bankruptcy 
reform, no definitive conclusions do we believe we can draw at 
this point, but we think there are, again, some positive signs, 
and let me suggest three from the perspective of the U.S. 
Trustee.
    One of the first challenges, as I noted in the testimony, 
was to put together a screening system--it was a troubled 
industry--to ensure that the applicants, the agencies that are 
allowed to provide these services to debtors met statutory 
qualifications, were legitimate agencies and not seeking to 
defraud debtors. And we believe that with the help of other 
agencies we have had an effective screening process. We have 
rejected about one- third of the applicants that have come 
before us.
    Chairman Sessions. These are one-third of the credit 
counseling agencies.
    Mr. White. Credit counseling and debtor education put 
together.
    Chairman Sessions. They want to be approved for the 
bankruptcy court. You have turned them down for reasons--
    Mr. White. That they did not meet the qualifications, and 
some of the common reasons, for example, if they are under an 
IRS audit; if they failed to provide us with the information 
that they gave to the IRS, which the IRS for good reason 
statutorily could not provide us; if the board of directors was 
not independent; among other reasons, if we found that there 
was a tie-in on credit counseling--or the credit counseling 
agencies which must be not-for-profit, if, in fact, they had a 
tie-in with a for-profit agency, so we looked very much for 
integrity issues. And we scrutinized these applications quite 
carefully. We think we will get better at it as we get more 
experience. But we do think we have a very useful device, and 
it did screen out one-third.
    Second, we were concerned and there remains a concern about 
capacity, because you have a new market, a lot of potential new 
debtors in the system. The number of filings has been low, so 
it is easier for there to be capacity. Capacity is there. We 
are going to have to continue to watch that somewhat carefully.
    We were pleased that, despite certain issues raised by 
credit counselors in terms of cost and their long-term 
financial wherewithal, all of the major agencies that were 
approved for their initial 6-month period also reapplied for 
another year. But we are going to continue to watch that.
    And the third--
    Chairman Sessions. All that were approved reapplied?
    Mr. White. All of the major agencies. There were very few 
that had originally applied and been approved who did not 
reapply.
    Chairman Sessions. So their experience was such that they 
did not feel they needed to drop out of the program. They must 
have felt like it had some workability for them.
    Mr. White. That is correct. But we certainly are 
sympathetic to concerns they have, and we will continue to work 
with them to see if there is any way in a regulatory way--if 
there is any way we can relieve burdens on them but still 
preserve the integrity of the system, we want to be sure that 
we do that.
    A third element you referred to, Mr. Chairman, I believe, 
in your statement--although we need time series data, we need 
more of a period of time to reach a conclusion--is that we do 
track the number of certificates that are issued. A debtor who 
goes in for credit counseling must produce a certificate with 
the petition. Ten percent more certificates were issued by 
agencies than bankruptcy filings. Some of that could be just a 
delay before there is a filing, or it could show that, in fact, 
the counseling has led some debtors to see that they had a 
better alternative than filing of bankruptcy.
    So those are three positive signs. We need to continue to 
look at all of those things. They are preliminary and no firm 
conclusions, but they do provide some encouraging data.
    Chairman Sessions. That was my thought from the beginning, 
that some people--and I have often said, I predicted a 10 
percent or so--I would say if 10 or 15 percent who go to credit 
counseling might find they have an alternative to bankruptcy, 
they might choose that. I know a friend who went to 
extraordinary lengths to not file bankruptcy and really worked 
exceedingly hard. He just did not want to do that. And credit 
counseling sometimes can help people to avoid it and give them 
additional options.
    We did see and heard some concern about counseling agencies 
that advertise as being in virtual partnership with the lawyers 
who might be referring their clients to the credit counseling, 
virtually promising to not dissuade them or suggest anything 
other than their filing bankruptcy. Have you seen that 
information? And does it trouble you?
    Mr. White. Yes, to both questions. It is critical for the 
integrity of the process for the counseling to be direct and 
for it to be unbiased. So anything that interferes with the 
direct, unbiased nature of that counseling would undermine the 
integrity of the system.
    There was one instance that comes to mind that arose in 
October, and a website by an agency was changed because it 
contained some language that suggested the lack of that 
objectivity. Obviously, as you can understand, I cannot comment 
with regard to any additional investigation that may be 
ongoing.
    We also issued interim rules on credit counseling, and we 
are going to be revisiting them. We are looking at comments we 
got on those rules and are looking at a fuller rulemaking 
process later in the year. And one of the areas that has been 
raised to us as perhaps we can have more complete regulation is 
in looking--
    Chairman Sessions. You do not need statutory authority to 
change that regulation, do you?
    Mr. White. No. But I would say one of the things we do need 
to look at, Mr. Chairman, is what are the limits, though, for 
certain areas that people suggest we ought to regulate is 
whether the statute lets us regulate, without reaching a legal 
conclusion going to the issue of receipt of payment of the 
debtor's lawyer paying the credit counseling fee. Section 110 
of the code regulating bankruptcy petition preparers, not 
credit counseling, for example, says that it is prohibited for 
a petition preparer to pay a court filing fee. Section 111 does 
not have exactly the same language. So we obviously need to 
parse the statute. We have regulatory authority. We are going 
to look at it. But we are obviously going to be very careful 
that we stay within the bounds of what we are authorized to do.
    Chairman Sessions. In the letter that Senator Grassley and 
I wrote to you, we noted that, for example, the Hummingbird 
Agency website advertises they directly contract with 
attorneys, not debtors, that they accept fees from attorneys, 
and promise that attorneys will not ``lose customers.'' So that 
really goes to the very heart of what I think the provisions 
intended, and I hope that you will keep an eye on that.
    Mr. White. Yes, sir.
    Chairman Sessions. On the next panel, we will hear from 
David Jones, President of the Independent Consumer Credit 
Counseling Agencies. He wants the U.S. Trustees Office--that is 
you--to issue guidance for credit counseling agencies in three 
areas: ability to pay, definition of ``legal advice,'' and 
obligation to negotiate a repayment plan with the debtor's 
creditors.
    Is the Trustees Office planning on issuing guidance to 
credit counseling agencies in these areas?
    Mr. White. Well, we are looking at that. We have seen the 
comments from Mr. Jones and others that came in with respect to 
our interim rule. We are looking at those as we fashion a new 
Notice of Proposed Rulemaking.
    Chairman Sessions. I think those are legitimate requests, 
and I hope that you can work toward that.
    Anything else you would like to offer to the Committee as 
we evaluate this first year of the bankruptcy law?
    Mr. White. No, Mr. Chairman, except that we do think that 
the new law has given us new tools to enhance the integrity and 
the efficiency of the system. We have a lot still to learn, and 
we will continue to try to make more progress in the next year. 
But we do think there are some promising signs from the first 
year of enforcement and implementation.
    Chairman Sessions. Well, I share Senator Grassley's view 
that bankruptcy is a great American tradition, that people who 
are in debt that they cannot repay are entitled to seek the 
protections of bankruptcy, but it is not a guaranteed right to 
abuse the system. There has been widespread concern throughout 
the country that bankruptcy had been completely out of control, 
that people were filing bankruptcy when they had other 
alternatives, that nobody was watching the store or monitoring 
the fraud and abuse. And I do believe this system, the new 
system, can help restore confidence in the system without in 
any way denying people who legitimately have bankruptcy rights 
those rights. I really feel strongly about that, and I 
appreciate your work on it.
    I also would like to express my appreciation to Mr. McNulty 
and his prosecutions of criminal activities. You mentioned 70, 
I believe--50-some-odd defendants were charged recently. I 
would note as a lawyer with some sadness, nine of those were 
attorneys. And so that indicates to me that officers of the 
court in a number larger than we would like to admit may not be 
adhering to the high standards of professionalism. I hope that 
these better forms, the clarity of that, the increased ability 
for the trustee to have oversight over the problems can help 
end that.
    I thank you for your leadership.
    Mr. White. Thank you, Mr. Chairman.
    Chairman Sessions. Thank you.
    [The prepared statement of Mr. White follows:]
    Chairman Sessions. Our second panel, if you would step 
forward. I think you perhaps know our first witness is Todd 
Zywicki, law professor and senior fellow of the James Buchanan 
Center, Program on Politics, Philosophy, and Economics at 
George Mason University. He teaches in the area of bankruptcy, 
contracts, commercial law, business associations, law and 
economics, and public choice and the law. That is quite a lot. 
He has testified several times before Congress on the issues of 
consumer bankruptcy law and consumer credit, including 
testifying before this Committee last year before the passage 
of the bankruptcy bill. Prior to this, he served as a Director 
of the Office of Policy Planning at the Federal Trade 
Commission, was recently named a member of the United States 
Department of Justice Study Group on Identifying Fraud, Abuse 
and Errors in the U.S. Bankruptcy System, and I am proud DOJ is 
working on that. He received his J.D. from the University of 
Virginia, his M.A. in Economics from Clemson University, and an 
A.B. cum laude from Dartmouth College.
    Our second witness is Mr. Steve Bartlett, President and CEO 
of Financial Services Roundtable. He previously served as mayor 
of Dallas, Texas. That was a headache, I suspect.
    Mr. Bartlett. It was one of the more enjoyable and 
exhilarating experiences in my life.
    Chairman Sessions. Big D. That would be a great challenge, 
I am sure. A Member of the United States Congress--that would 
be easy compared to being mayor, I suppose--and while in 
Congress, he served on the House Banking Committee and was a 
leader in financial modernization. You served as Deputy Whip 
and was a sponsor or principal cosponsor of 18 major pieces of 
legislation, including the Enhanced Secondary Mortgage Market 
Pact, FHA regulation, Fair Labor Standard Act reform, and the 
Disabilities Act. You have your B.A. from the University of 
Texas, Austin, and adjunct professor and lecturer at the LBJ 
School of Public Affairs. And Dr. Gates, who is on the floor 
now, is still celebrating the Texas A&M game. My condolences.
    Our third witness is David Jones, President of the 
Association of Independent Consumer Credit Counseling Agencies, 
from Florida. He served as President for the last 6 years. In 
2003, he retired after 6 years as President of a major national 
credit counseling and consumer education agency. You presently 
concentrate efforts in support of the credit counseling 
industry.
    Our fourth witness is Hon. Randall Newsome, Chief Judge of 
the Bankruptcy Court for the Northern District of California. 
He has been a bankruptcy judge since 1982, beginning in 
Cincinnati, before appointment in California. Judge Newsome has 
served as President of the National Conference of Bankruptcy 
Judges from 1998 to 1999 and is a fellow of the American 
College of Bankruptcy and a member of the American Law 
Institute. He currently serves as a faculty member for the 
Federal Judicial Center, ALI, ABA, and other organizations. He 
has testified before committees of Congress on bankruptcy 
reform legislation and is a contributor to ``Collier on 
Bankruptcy'' and other writings.
    Our fifth witness is Robert Lawless, a professor at the 
University of Illinois College of Law, where he teaches 
bankruptcy, consumer law, and corporate reorganizations. He has 
been a law professor at the University of Nevada, University of 
Missouri, Columbia, Washington University, and Ohio State. 
Professor Lawless has served as a panelists and presenter at 
five different bankruptcy and consumer credit symposia and 
conferences in the last 6 years. He graduated with his J.D. and 
a bachelor of science in accountancy with highest honors from 
the University of Illinois.
    Our final witness is Henry Hildebrand, Chapter 13 Standing 
Trustee from the Middle District of Tennessee. He administered 
nearly 14,000 active Chapter 13 cases and distributes more than 
$150 million per year to creditors. He is a counsel to the 
national law firm of Lassiter, Tidwell & Hildebrand. He is a 
fellow of the American College of Bankruptcy and on its 
Education Committee, a board-certified consumer bankruptcy 
lawyer by the American Board of Certification, and serves on 
its board of directors. Mr. Hildebrand served as notes editor 
for the Quarterly, a newsletter dealing with consumer 
bankruptcy issues and Chapter 13 practice, and is a regular 
contributor to the American Bankruptcy Institute Journal, a 
graduate of Vanderbilt University, received his J.D. from the 
National Law Center of George Washington University.
    That is a distinguished panel indeed, and without further 
ado, perhaps, Mr. Zywicki, if you have any thoughts, we would 
hear from you at this time. We will have a 5-minute limit, and 
if you feel like you need to exceed that, remember you can 
place those remarks in the record.

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

    Mr. Zywicki. Thank you, Mr. Chairman. It is a pleasure to 
be here today. As you noted, the Bankruptcy Abuse Prevention 
and Consumer Protection Act was enacted last year after 8 years 
of study, deliberation, and hearings by this body and Congress 
and passed with bipartisan support. I understand the purpose of 
today's hearing is to understand and evaluate how the Act is 
operating in practice.
    As has been previously emphasized, everything that we say 
today is going to be tentative, but based on my observations so 
far, the Act seems to be working largely as Congress intended. 
And so, as a result, so far it appears to be successful.
    As I understand, the purpose of BAPCPA was to preserve 
bankruptcy relief for those who need it and reduce fraud and 
abuse by those who do not. The Act seems to be operating well 
on both of those accounts.
    First, the first question is whether or not it preserved 
bankruptcy relief for those who need it. Critics argued before 
the Act was passed that it would result in widespread hardship 
and distress among those who needed to file bankruptcy because 
of job loss, illness, or the like and would be unable to do so; 
that it might harm those who were victims of natural disasters, 
such as hurricanes; and, third, that it would somehow harm 
women's efforts to collect alimony and child support in some 
poorly specified manner from deadbeat parents.
    So far, each of these concerns seems to have been 
unfounded. First, there seems to be no evidence of serious lack 
of access to the bankruptcy courts. I have heard no reports of 
those who needed bankruptcy relief and have been unable to get 
it. The best evidence that we may have on whether this is 
happening is if we expected that people were unable to get 
bankruptcy relief, you would expect to see non-bankruptcy 
delinquencies and charge-offs to be rising, and that does not 
seem to be the case. The numbers seem to be basically 
equivalent to 2004, which suggests that there are not people 
out there who are struggling to pay their bills who need to 
file bankruptcy and are unable to do so.
    Second, with respect to victims of natural disasters, most 
notably Hurricane Katrina, as Cliff White noted on the last 
panel, it appears that the system certainly has enough 
flexibility and discretion to deal with those sorts of 
situations, and we have not noticed any problems with that.
    Third was the question about the notion that somehow this 
would make it more difficult for women to collect alimony and 
child support. That was never a very plausible argument in the 
first place. The legislation quite plainly enacts a number of 
new protections and powers for women. It was repeatedly 
testified at the time by experts in this area that the biggest 
obstacle to collecting alimony and child support was often 
bankruptcy filings, efforts by parents, deadbeat fathers to 
manipulate the system in order to discharge some obligations, 
to use the automatic stay to prevent collection, that sort of 
thing. There seems to be no evidence of this purported harm to 
women, and on this it seems to have unequivocally increased the 
ability of women to collect in bankruptcy, just as had been 
predicted.
    The second goal then was to reduce fraud and abuse in the 
system. As has been noted, filings have dropped dramatically. 
There seems to be no question based on the experience of last 
fall of what many thought, which is that to some extent 
people's willingness to file bankruptcy is related to the 
incentives provided by the bankruptcy laws. The fact that 
500,000 people managed to find their way to the bankruptcy 
court in the 2 weeks prior to the bankruptcy law going into 
effect shows that people do have some discretion over when and 
whether they file bankruptcy.
    There has been a number of protections in the legislation 
that were designed to weed out fraud and abuse in the system. 
There are myriad forms of fraud and abuse, and as a result, a 
number of different provisions were necessary to address them. 
It appears that most of these have been fairly well targeted 
and have accomplished their goals.
    First, with respect to fraud, a number of new protections 
were enacted, including tax returns, pay advices, debt audits 
are coming online now. That seems to have weeded out a lot of 
fraud.
    We have already heard reports on abuse and the role of the 
means test. Repeat filings seem to be down substantially. In 
particular, repeat filings were designed solely to take 
advantage of the automatic stay and prevent legitimate efforts 
of creditors to foreclose rather than efforts for real 
bankruptcy relief.
    As noted, domestic support creditors have substantially had 
their position increased, and it seems to have eliminated some 
of those strategic filings.
    Finally, if I may have 20 seconds to conclude my thoughts.
    Chairman Sessions. Please take your time.
    Mr. Zywicki. There have been some complaints that there are 
drafting problems in the legislation. Certainly with a piece of 
legislation this complicated, you would expect some hiccups and 
drafting problems. But by any reasonable estimation, it seems 
that those drafting glitches are less than one would expect 
from such a provision.
    Second, Congress' intent was made sufficiently clear, I 
think, at the time that a lot of those drafting glitches have 
been solved.
    Finally, I think that--or judges have been able to construe 
the statute. Finally, I think comparing this to the 1978 
legislation, which many veterans will recall was struck down as 
unconstitutional by the U.S. Supreme Court, I have not seen 
anything to suggest the major constitutional problems that were 
raised by the 1978 code, for instance. We may have some issues 
that are being worked out with this, but nothing like the 
serious and substantial long-lasting problem that arose in 
efforts to implement the 1978 code.
    Thank you.
    [The prepared statement of Mr. Zywicki appears as a 
submission for the record.]
    Chairman Sessions. Thank you.
    Congressman Bartlett?

  STATEMENT OF STEVE BARTLETT, PRESIDENT AND CHIEF EXECUTIVE 
    OFFICER, FINANCIAL SERVICES ROUNDTABLE, WASHINGTON, D.C.

    Mr. Bartlett. Thank you, Mr. Chairman. I am Steve Bartlett, 
President of the Financial Services Roundtable and proud 
University of Texas alum, as well as mayor of Dallas, Texas. I 
have submitted my entire statement for the record.
    The Financial Services Roundtable, as you know, consists of 
a membership of 100 of the largest integrated financial 
services companies in the United States and, thus, the American 
consumer and the health of the American consumer is the 
lifeblood of our companies, and it is in our best interest to 
have well-educated consumers who manage debt prudently. That is 
just what Public Law 109-8 helps to do. The law is just over 1 
year old.
    So far, from the perspective of the American consumer and 
the economy, the new bankruptcy reform law is working quite 
well. Bankruptcy filings are down. More Americans than ever are 
getting credit counseling, and as a result, consumers are 
better educated about prudent financial management than they 
have ever been. Let me cite some statistics.
    Consumer bankruptcy filing rates have dropped dramatically 
from an annualized rate of about 1.5 million to 600,000 in 1 
year. More consumers are choosing repayment plans under Chapter 
13, about 40 percent of filings as opposed to 27 percent prior. 
And here is the deal on the credit counseling. There were 
157,000 total credit counseling sessions at Justice Department-
certified agencies in October of 2006, and that compares to 
57,000 a year ago on an annualized rate in 2005. Now, that is 
157,000 to 57,000. Indeed, there were 73,000 in October for 
traditional credit counseling. So not only has the new law 
introduced the new concept of pre-discharge counseling and pre-
bankruptcy counseling, which are good in and of themselves, but 
it has also introduced the concept to a lot more consumers and 
made it safer to seek traditional credit counseling, about a 
30-percent increase.
    These numbers indicate, Mr. Chairman, that the means 
testing and the pre-bankruptcy credit counseling mandate are 
working. Recall that the principal policy objective of 
bankruptcy reform was to say that people who can repay some or 
all of their debts ought to do so, and that seems to be 
happening under the new law.
    Now, one major result of bankruptcy reform is this 
increased credit counseling. We think that is a positive. Is it 
perfect? Of course not. But credit counseling can and does help 
consumers to keep out--helps keep them from getting into 
financial trouble, and for those consumers for whom bankruptcy 
is the appropriate and the last available option, credit 
counseling helps keep those consumers out of financial trouble 
into the future.
    The Justice Department has estimated that some 10 percent 
of consumers who get pre-bankruptcy counseling do not file for 
bankruptcy. And recall there is that much larger number that 
come in for traditional credit counseling and find ways out of 
their difficulty. Counseling is now widely available from 
numerous sources through multiple channels, and that was the 
intent of the law: in-person counseling, telephone counseling, 
and Internet counseling.
    I must say, Mr. Chairman, that the nonprofit agencies that 
are members of both AICCA that Mr. Jones represents and NFCC 
have really stepped up to the plate to make this law work. They 
have applied in large numbers to become certified agencies. 
They have sacrificed. They have stepped up to live by ethical 
requirements as established by the Justice Department, as, in 
fact, they always had. We are better off today for the efforts 
of those agencies and their dedicated professionals who work 
day in and day out to help these consumers. It is clear that 
these agencies are acting as Congress had intended.
    It is also important to note that the Justice Department 
certification itself is a significant enhancement to the law 
which had not existed. I don't know whether this was an 
unintended consequence, but it is a consequence of great note. 
For the first time, consumers can know who are the good-guy 
agencies as distinguished from the bad-guy agencies and have 
some reliance on being able to go to certified agencies, 
agencies certified by the U.S. Justice Department that these 
are agencies that they can rely on. That in and of itself 
improves the system rather dramatically.
    Now, Mr. Chairman, we believe that the counseling system 
can be improved. We have, in fact, submitted some specific 
suggestions to the Justice Department which have been made a 
part of this record. The most important suggestion, it seems to 
me, is that pre-bankruptcy certificates could be extended for a 
year--could be good for a year prior to pre-bankruptcy filing 
as opposed to just the 6 months. We think that gives consumers 
a much larger window of time to consider their options and try 
to work themselves out of trouble. We think that each of the 
issues that we have raised and others have raised can be 
corrected in regulatory action.
    So, Mr. Chairman, so far, so good. Bankruptcy reform is 
working. Prior to the enactment of this law, Congress had not 
reformed bankruptcy laws significantly since 1978. We need to 
let the law mature before considering any legislative changes. 
Congress did the right thing for the consumer and the economy 
in passing this bankruptcy reform. It is now time to make sure 
the legislative success is correctly implemented.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Bartlett appears as a 
submission for the record.]
    Chairman Sessions. Thank you.
    Mr. Jones?

    STATEMENT OF DAVID C. JONES, PRESIDENT, ASSOCIATION OF 
  INDEPENDENT CONSUMER CREDIT COUNSELING AGENCIES, POINCIANA, 
                            FLORIDA

    Mr. Jones. Thank you, Mr. Chairman. I am very happy to 
address the future viability and progress of the BAPCPA over 
the last year.
    Chairman Sessions. Is your microphone on?
    Mr. Jones. Maybe I turned it off.
    Chairman Sessions. That is a little better.
    Mr. Jones. I probably did. Well, thank you anyway, and let 
me restate here. I am very happy to address on behalf of our 
members the future viability and the progress that has been 
made over the last year since passage of BAPCPA. We provide 
counseling and education to millions of U.S. consumers and 
annually return over $3.2 billion in consumer payments to the 
Nation's creditors. We deal with a lot of consumers. In 
addition, we have counseled over 200,000 consumers entering the 
bankruptcy system to date, and I want to talk about five major 
areas of concern that we have with the administration of the 
bankruptcy law.
    The first concern I have is the future adequacy of the 
credit counseling resources. The present number of approved 
agencies is more than adequate to satisfy the need for pre- 
bankruptcy counseling currently. However, we have serious 
concerns about the adequacy of counseling capacity when those 
filings significantly increase, which they probably will. A 
surge of capacity in such circumstances could trigger 
provisions that provide for suspension of the counseling 
requirement in some judicial districts unnecessarily, and we 
believe strong efforts should be made to avoid such an outcome.
    The second point involves the need to clarify filers' 
ability to pay. Every approved agency provides mandated 
counseling at a reasonable fee or provides services without 
regard to ability to pay that fee. We applaud that criteria, 
and it is consistent with our own member accreditation 
standards. However, approved agencies have consistently been 
offering bankruptcy counseling at a significant financial loss. 
All the information we have seen indicates the cost of 
providing a bankruptcy session, in accord with the EOUST 
criteria, is about 50 bucks while the average payment for such 
a session turns out to be around $32. Currently approved 
agencies simply will not be able to continue participation over 
the long term if the provision of BAPCPA counseling does not 
become at least a break-even proposition. Now, that could 
change if the population changes, the bankruptcy population 
changes and more people select debt repayment plans, or it 
could change if we got some kind of relief from the EOUST on 
whether somebody who clearly can pay a fee could be required to 
pay that fee.
    The third point involves the question of what constitutes 
legal advice. It would seem obvious that a counselor assisting 
a financially troubled debtor needs to be able to advise that 
individual that bankruptcy is one available option; that 
bankruptcy may offer either liquidation or partial repayment of 
debts, depending on circumstances; and that a bankruptcy will 
remain on the credit report for a decade. These factual matters 
can be readily distinguished from the giving of legal advice.
    BAPCPA's legislative history supports the view that 
Congress intended to ensure that debtors receive informed and 
objective advice from two separate sources: an approved CCA and 
an attorney. Assuming that the EOUST addresses the proper pre-
bankruptcy roles of attorneys and CCAs in the more 
comprehensive regulations it plans to propose, we would urge it 
to clarify the legal and ethical boundaries for interaction 
between these two professions.
    Fourth, approved agency removal issues. The EOUST has 
proposed that, in certain circumstances, its decision to revoke 
an agency's approved status need not wait upon exhaustion of 
its opportunity for administrative review but may be effected 
immediately by an interim directive. We hope that this short-
circuiting of the administrative appeals process will be rare 
and take strong exception to the EOUST's proposal.
    It is clear that, while nonprofit status is required to 
become an approved CCA, tax-exempt status is not. Because tax-
exempt status is not a statutory requirement, the EOUST should 
not deprive an approved CCA of its appeals right simply because 
it might lose or has lost that status.
    My final point involves debt settlement plans, something 
that really has not been broached and is part of the code. 
Section 502(k) allows the court, on a debtor's motion and after 
a hearing, to reduce a claim by up to 20 percent if the 
creditor unreasonably refused to negotiate a reasonable 
alternative repayment schedule proposed in a timely manner. 
This provision potentially provides approved agencies with the 
ability, and possibly the obligation, to negotiate a debt 
settlement plan on behalf of the debtor who lacks the financial 
resources to complete a 100-percent repayment plan.
    Given the potential of debt settlement plans to provide 
benefits to both debtors and creditors, as well as the new 
responsibility thrust upon agencies by Section 502(k), we 
believe that the EOUST should address this topic in its more 
comprehensive proposed regulations.
    Overall, we believe that the mandated credit counseling has 
been successful. It is, in my view, a boon to consumers. It is 
having a very beneficial effect on bankruptcy petitioners. They 
get possible alternatives, and their understanding of specific 
personal financial issues is improved.
    Thank you for letting us share these views, and I would be 
happy to answer any questions.
    [The prepared statement of Mr. Jones appears as a 
submission for the record.]
    Chairman Sessions. Thank you.
    Judge Newsome?

 STATEMENT OF RANDALL J. NEWSOME, CHIEF JUDGE, U.S. BANKRUPTCY 
    COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA, OAKLAND, 
                           CALIFORNIA

    Judge Newsome. Good afternoon, Mr. Chairman. The Bankruptcy 
Abuse Prevention and Consumer Protection Act has now been in 
effect for about a year, and as I understand it, the purpose of 
this hearing is to give the Act its first annual check-up.
    As I said in my written testimony, we really do not have 
enough data from which to draw conclusions about the effects of 
the bill, but I have to say, listening to Professor Zywicki, it 
sounds like he has data that I have not seen and that I would 
be very interested in seeing as to the effect on women and the 
access to the system and so forth.
    Putting all that aside--and, by the way, I should note that 
in our district, in the Northern District of California, we 
have had probably 7,000 cases filed this calendar year. We have 
had one motion to dismiss under the means test. Just one. And 
that was withdrawn by the U.S. Trustee.
    Putting all that aside, I still believe very strongly, as I 
always have in this debate, that while Congress can change the 
law, it cannot change the math. And the numbers appear to be 
dripping with red ink for millions of consumers in this 
country. Maybe I just scare easily, but I find those numbers 
shocking. The median household income in the United States has 
essentially been flat since 1989, but outstanding consumer debt 
has tripled in those 17 years. Revolving consumer debt has 
quadrupled during that same period, and those numbers don't 
include mortgage debt, the median amount of which rose some 27 
percent between 2001 and 2004.
    Now, it does not matter how fast your house is 
appreciating, and right now they do not appear to be 
appreciating much at all, if at all. If you continue to lean up 
to the hilt to spend more or to simply make ends meet or, worse 
yet, to pay off the debt you have already got so you can spend 
even more, that is a losing proposition.
    Eventually, after consumers have burned all the furniture, 
to use a bit of bankruptcy jargon--in other words, squeezed 
every dollar out of their houses and out of their other assets 
and out of their credit cards and their home equity lines--the 
debt bubble will burst. And once it does, it will be critical 
to the health of the economy that those consumers not be 
trapped underneath all of that debt. If the country is to 
weather what may be a perfect financial storm, it will need the 
most efficient and accessible bankruptcy system we can devise 
so that consumers can reorganize their finances and get back on 
their feet. The present law should be fine-tuned to prepare us 
for this eventuality, or any other.
    I think I can safely say that all of the bankruptcy 
judges--for whom I am not speaking here today--in this country 
would be glad to assist the Subcommittee in this endeavor in 
any way you see fit. Thank you for this opportunity to be 
heard.
    [The prepared statement of Judge Newsome appears as a 
submission for the record.]
    Chairman Sessions. Thank you very much. Professor Lawless?

STATEMENT OF ROBERT LAWLESS, PROFESSOR, UNIVERSITY OF ILLINOIS 
              COLLEGE OF LAW, CHAMPAIGN, ILLINOIS

    Mr. Lawless. Thank you, Mr. Chairman, and thank you for 
inviting me to be here today. As you mentioned, I teach and 
write about bankruptcy law at the University of Illinois, and 
in my scholarly work, I base that on Government data but also 
on publicly available court files, as well as talking to 
debtors and interviews with the debtors and the people who file 
for bankruptcy. That research had led me to conclude that the 
abuse that many saw in the bankruptcy system before the passage 
of the law was not there. I still think it is not there. 
Nevertheless, we have got the law, and we have got the law to 
deal with. In the law, there are many new provisions that would 
benefit banks, credit card companies, car lenders, landlords--
just about anyone that loans consumers money.
    Congress passed the law and the President signed it despite 
the expert advice of those who work in the bankruptcy field--
bankruptcy lawyers, bankruptcy professors, and bankruptcy 
judges. Interest rates have not gone down. According to the 
Federal Reserve, interest rates on personal loans and credit 
cards are the same today as they were just before BAPCPA, to 
use the term that we have been calling it, went into effect.
    What about credit card fees? Credit card fees continue to 
rise. For the 3 months ended September 30th of this year, 
Citigroup reported it made $1.3 billion in fees on credit and 
bank cards, an 8-percent increase over the same time period 1 
year previous. In October, Wells Fargo announced it was 
increasing late fees on its largest credit card accounts, the 
majority of its accounts, by 11 percent.
    On the 1-year anniversary of the new bankruptcy law--and we 
have heard a lot of talk about that here today--there has been 
a dramatic decline in bankruptcy filings. And it is certainly 
true that bankruptcy filings have declined. The numbers are 
still coming in. It depends upon what you compare it to, but 
maybe about one-half I think is a rough guess as to where they 
are from before the law passed.
    Some critics of the new law predicted that this dip is 
going to be short-lived and we are going to see bankruptcy 
filings return to their previous levels. Frankly, my expert 
opinion is that it is just too early to tell whether the law 
has led to a permanent readjustment of the bankruptcy filing 
rate.
    There is some reason to believe, however, that bankruptcy 
filings may return to their previous levels. Bankruptcy filings 
are trending upwards. But, in any event, I think that we are 
confusing a treatment here--bankruptcy--for a problem--
financial distress. It is somewhat like confusing the hospital 
with the underlying disease. What the new law did is it made it 
more difficult for people to get into bankruptcy court and get 
less effective relief once they get there. By shutting off the 
hospital, nothing has been done, as Judge Newsome just referred 
to, to deal with the pressing needs of the American middle 
class. And what we know from previous scholarly research is 
that bankruptcy is a middle-class phenomenon.
    Of course, bankruptcy filing rates have gone down. The 
onerous new requirements on attorneys who represent consumers 
have increased their costs. It is not a matter of trying to 
increase or maintain profits. Attorneys have more to do under 
the new law. They have more investigation to do. They have more 
responsibilities. It is not surprising that costs have gone up. 
I think based upon some preliminary research and looking at 
court files, attorneys' fees may have risen--and I want to 
emphasize ``may''--50 to 100 percent in some areas.
    Just as Americans drive less when the cost of gasoline 
rises, they are going to file bankruptcy less when the cost of 
filing bankruptcy rises. And just like rises in the cost of 
gasoline fall hardest on middle-class working Americans, rises 
in the cost of bankruptcy fall hardest on them as well.
    There is reason to believe consumer financial distress is 
on the rise. Judge Newsome referred to a figure in 2004. 
According to the Federal Reserve, the most recent figures show 
that home mortgage debt today, in 2006, is 75 percent higher 
than it was 5 years ago; 300,000 properties entered some stage 
of foreclosure in the third quarter of 2006, an increase of 43 
percent compared to the same time 1 year ago.
    The Boston Globe and New York Times have run multi-part 
stories about increasingly harsh debt collection tactics by 
consumer debt collectors. And with consumers owing more and 
with a less accessible bankruptcy system, it is not surprising 
that debt collectors have turned the screws.
    From bankruptcy courts and petitioners, we are hearing 
stories about the law's harsh application. A disabled debtor 
who had not worked in years and had not had enough income to 
file a tax return since the 1970s was faced with a trustee's 
demand that he produce those 30-year-old tax returns because 
the law requires the debtor to produce the most recently filed 
return.
    Two judges have interpreted the new law to prohibit filing 
bankruptcy on the day credit counseling is received. Another 
judge was faced with the situation of a debtor who had received 
credit counseling within 190 days rather than 180 days before 
filing bankruptcy. And I would support the extension of the 
credit counseling eligibility to 1 year. In dismissing that 
case where the credit counseling was received 190 days, just 10 
days too long before, the debtors had tried to use that extra 
time to negotiate with their creditor. Nevertheless, the judge 
felt he had no choice but to dismiss. As the judge wrote, ``The 
Court is obliged to dismiss regardless of the fact that debtors 
`almost' met the requirements of the statute, regardless of the 
fact that debtors seemed to have satisfied Congressional 
objectives that were enacted as part of the statute, regardless 
of the fact that no one contends that debtors were not in good 
faith, and regardless of the fact that no one contends they did 
not make a zealous effort to accomplish the Congressional 
objective, and regardless of the fact that no useful purpose 
will apparently be served by dismissal.'' So there is one 
example of debtors who needed bankruptcy court and were cutoff 
from access to it because of the new law.
    I thank you again for allowing me to speak to you today.
    [The prepared statement of Mr. Lawless appears as a 
submission for the record.]
    Chairman Sessions. I can give them a useful purpose for 
following the standard rule, which has a utility all of its 
own. But I guess judges can express their opinions and I can 
express mine.
    Mr. Hildebrand?

   STATEMENT OF HENRY E. HILDEBRAND III, CHAPTER 13 STANDING 
  TRUSTEE, MIDDLE DISTRICT OF TENNESSEE, NASHVILLE, TENNESSEE

    Mr. Hildebrand. Thank you, Mr. Chairman. I am a Chapter 13 
trustee in Nashville, Tennessee, and as a Chapter 13 trustee, 
what the trustees essentially are is the drive shaft of the 
engine that moves bankruptcy. We are the boots on the ground in 
the bankruptcy battles. We take positions, we advocate, but we 
also preserve the integrity of the system. We believe that is 
our task.
    As Chapter 13 trustees--and you mentioned this in your 
opening remarks--Chapter 13 does pay debt back. It is the 
mechanism that I heard people from Congress state. We wanted 
people to be able to recognize that Chapter 13 can be a useful 
tool to repay debt.
    Chairman Sessions. Mr. Hildebrand, would you just explain 
for people who may be listening here the difference in Chapter 
7 and Chapter 13, as simply and as briefly as you can?
    Mr. Hildebrand. Simply, Chapter 7 is the liquidation of 
available non-exempt assets to satisfy debts. It is what you 
think of in bankruptcy, take all of the non-exempt assets, sell 
them at auction, and divide the proceeds. And, of course--
    Chairman Sessions. And wipe out all your debts.
    Mr. Hildebrand. Wipe out most of the debts. There are less 
than there used to be. That is what people think of, and 98 
percent of the bankruptcies that are filed fall into that 
category. Chapter 13 is the alternative. It is proposing a plan 
to repay the debts as best you can over a period of 3 to 5 
years under the supervision of a court and a trustee. That in 
essence says what it is.
    Chairman Sessions. If the judge finds he can only pay part 
of the debts, then he would pay only part of the debts.
    Mr. Hildebrand. That is correct, Mr. Chairman. It is 
designed to be a manageable and adjustable tool to fit what 
debtors need and what families need in order to survive.
    Chairman Sessions. And collectors cannot call, they cannot 
file lawsuits, you cannot be harassed about paying debts.
    Mr. Hildebrand. We think they are still protected by the 
automatic stay, although there are some cases that lead that 
into question because of the new law. But while they are in 
that, then that is correct; they are protected. And we do pay 
substantial amounts back. I mentioned--as you mentioned, I am 
disbursing--just one trustee now out of 210, I am disbursing 
$150 million a year back to the community, back to the 
hospitals and the doctors and the shopkeepers that extended 
credit, as well as the auto lenders and everyone else.
    But we see what is going on. We have been charged with the 
responsibility of divining what was intended by the law, but 
all we have really to go on is the text--the text that was put 
into the statute. And we are somewhat mystified by some of the 
text, and as a consequence, we are seeing inconsistent 
positions and inconsistent decisions coming down from the 
court. And if there is a message I could deliver to this body, 
it is: Help us. Help us figure out what the intent was, and if 
the words are wrong, then we need to fix the words. And I 
encourage you, if there is an iteration, to change the words, 
that you consult with those of us who are in the trenches, 
those of us who are meeting with debtors. Yesterday I met with 
50 families. Tomorrow I will meet with 50 more. That is my job. 
If you meet with us, then we should be able to assist you in 
doing that and reaching that goal.
    It is a little bit like--the crafting of this law, we 
think, is a little bit like crafting a health care system and 
not talking to any doctors. So we encourage you, if you do 
that, to do that.
    I would like to take just a moment to mention one thing 
that you mentioned and it was the focus of your questions to 
the Director, and that is the means test. Now, the means test 
in Chapter 7, as you pointed out, Senator, is to decide who has 
the capacity to pay and who doesn't and who ought to be 
directed into 13. But what happened in Chapter 13 was that the 
means test was grafted in to figure out how much a debtor has 
to pay, not whether they can pay but how much. And we are 
struggling with what that means. And courts are 180 degrees 
diametrically opposed on what that means.
    For example, you defined the debtor's income as the average 
over the 6 months prior to filing. So the debtor that is 
unemployed for the 6 months before filing but now has a great 
job, maybe a neurosurgeon, would pay nothing because Congress 
has defined his income as nothing. And then the sadder side is 
where the debtor has a great job and now has been laid off. But 
Congress has said because of the definition of this current 
monthly income that he can afford to pay a lot, when in reality 
he cannot.
    We are stymied with this. The ability to deduct from what 
you can pay to figure this number the payments you make on 
secured debt would allow an above-median-income debtor to pay 
for the expensive automobile, the vacation home--all of those 
things that under prior law trustees would challenge, would 
fight, and would bring it to the court.
    If there is one thing that we can ask you to look at, it 
would be to look at the all-disposable-income test; also to 
encourage you to look at providing to us the tools to be able 
to do that, so to make certain that trustees have the resources 
for staff, for training, and to make sure the system does work.
    Thank you for the opportunity to speak.
    [The prepared statement of Mr. Hildebrand appears as a 
submission for the record.]
    Chairman Sessions. Very good. I do absolutely feel that we 
have a responsibility to listen to people who practice it, and 
things that do not make sense resulting in injustices we should 
listen and fix, because this is our Federal court system and 
Congress is creating it and we need to make it work right.
    I would appreciate it if you would share in some detail 
those problems. I know there are some in your written 
statement, but more detail about that and maybe your 
suggestions for reform.
    Mr. Hildebrand. We would be delighted to do that, Senator.
    Chairman Sessions. Let's see. We have a lot of interesting 
issues, and I will not go into them all. But, Mr. Zywicki, I 
became convinced--you made reference to it in your statement--
that there was a generated system to create bankruptcy filings 
simply to get stays of eviction for people. We had the ads in 
the newspapers, ``Call us. Stop your eviction.'' And when they 
got there, it was basically file bankruptcy. We took some steps 
toward ending that abuse, which I thought was a real abuse.
    Do you think that is working? You indicated you thought it 
may be.
    Mr. Zywicki. Senator, from what I can tell, one of the 
contributions to decreasing bankruptcy filing rates is a 
decrease in repeat filings generally. That could be from a 
number of reasons. There was an extension of the waiting period 
for receiving a discharge again. There is now a provision for 
counseling within bankruptcy for financial education that will 
hopefully reduce bankruptcy filings in the long run. But I 
think a substantial reason from what I can tell has been a 
reduction in repeat filings of the kind that you describe, 
which is the provisions in particular that expedite the process 
for lifting the automatic stay for somebody who is filing 
bankruptcy repeatedly just to prevent foreclosure without any 
purpose to actually try to work a repayment plan or discharge 
their debts. That, based on what I understand, has had a 
substantial increase in reducing those sorts of filings.
    Chairman Sessions. And I will ask you, Mr. Bartlett, you 
were critics of the existing system and supportive of reform. 
One of the things these forms and some of the more intensive 
review of the procedures was designed to do is to help avoid 
fraud. The person would hide assets or maybe feel like they 
could file bankruptcy and beat the system in some fashion and 
not put all their assets back into the pot for creditors that 
were required to go there.
    Do you think in tightening up some of these provisions that 
that may have led people to choose not to file bankruptcy? 
Could that be a factor in the decline in filing?
    Mr. Bartlett. Well, Mr. Chairman, I think it was. I think 
that the fraud has clearly been reduced. I was never one to 
think that the excess bankruptcy filings were the result of 
fraud, but it was clearly there. And I think fraud in large 
part has been driven out of the system by the reforms that the 
law has made.
    But I think equally important has been the awareness by the 
consumer through a number of medium, including reading the 
newspapers, seeing reports of it, the mymoneymanagement.net 
that my organization has put up on the Web, and just simply 
talking with their bankruptcy attorneys and the counselors, an 
awareness that bankruptcy is a last resort, not a first resort, 
that many times there are a lot better options and that, in 
fact, if you can pay some or all of your debts, you ought to do 
so. Not only are you better off, but the overall economy is 
better off.
    So I think the idea of putting in the whole--the whole law 
is based upon the concept that if you can pay some or all of 
your debts, you ought to do so. And that has been the principal 
cause, I think, of the reduction of bankruptcy filings.
    Chairman Sessions. But, in truth, like you said, most 
people filed honestly in bankruptcy. Most people, I know Judge 
Newsome would know and Mr. Hildebrand would know, are 
justified. They have low incomes. They are below median income. 
And so for them, not much has changed, has it, Judge Newsome?
    Judge Newsome. A lot has changed.
    Chairman Sessions. What has changed?
    Judge Newsome. What has changed is they have to file at 
least eight new sets of documents to get any kind of bankruptcy 
relief at all, and that is expensive. When you are a lawyer and 
you have got to get your client to go out and find those 
documents--these people are not in bankruptcy by accident many 
times. It is not because they are great recordkeepers. They are 
in bankruptcy because they are very unsophisticated people, 
they do not keep their records very well, and the lawyer has to 
go out and spend a lot of time with these people trying to get 
them to gather up the documents they need. Regardless of 
whether they make nothing but Social Security every year, they 
have got to do it.
    Chairman Sessions. Well, they have to produce documents.
    Judge Newsome. Absolutely. They have always had to produce 
documents.
    Chairman Sessions. But if you want to come in and not pay 
somebody you owe a debt to, shouldn't you be required to at 
least show you do not have income sufficient to pay them or 
assets sufficient to pay them?
    Judge Newsome. Absolutely. And Schedule I of Form 6 has 
always done, and if we think now--
    Chairman Sessions. Well, that is--Congress did not agree. 
All I am saying is Congress thought the tax returns--tax 
returns and what other documents are required?
    Judge Newsome. And, Senator, I lost so I am not here to 
argue with you about the law. If we got it, we are going to 
enforce it. That is our job.
    Chairman Sessions. Thank you.
    Judge Newsome. But you need tax returns, you need pay 
stubs, you need, of course, the credit counseling certificate. 
You have to fill out the first 15 lines of a 58-line form, 
regardless of whether you make just Social Security income, 
regardless of whether you could establish perhaps by one simple 
document, or there is no reason to believe that you have any 
other income, you have to do the same thing everybody else has 
to do regardless of what your circumstance. That is the one-
size-fits-all problem.
    Chairman Sessions. Well, when I was a Federal prosecutor, 
sometimes that ``no false statement to the Government'' is the 
thing that becomes prosecutable. You ask these multiple 
questions. If the answer is no, you put no. If you do not have 
it, you put no. And then you find out that they lied and they 
got 40 acres out here--
    Judge Newsome. Put them in jail, Senator. I have always 
said that is the way to get the system cleaned up.
    Chairman Sessions. Well, you cannot prove it sometimes. I 
am just saying there is nothing wrong with asking some 
questions so that when the person goes through the process, 
they have had to adequately disclose their assets, I think.
    Mr. Hildebrand, you have been through that.
    Mr. Hildebrand. I agree with what you just said. I believe 
it is appropriate for debtors to disclose when asked, and I 
have always been able to do that. In fact, by providing to me 
the requirement, which I believe I have, to check four 
different numbers for income--I am looking at the B22 form that 
you mentioned, the current monthly income; I am looking at what 
the debtors said on Schedule I, which has always been there; I 
am looking at their pay advices that they have to file for the 
60 days before they file; and I am looking at their tax return. 
So I have four numbers that I have to try and reconcile and ask 
the debtor: Why is your taxable income, gross income of your 
tax return so much different than your last two pay stubs? And 
why is that different than your current monthly income? And I 
am not saying that is wrong.
    Chairman Sessions. What do you learn when you ask that?
    Mr. Hildebrand. Well, I tell you, there is one thing, and 
you probably knew this as a Federal prosecutor. Sometimes you 
can look at somebody and you know when they are lying. You know 
it. And after 25 years of being a trustee, I got pretty good at 
looking and seeing that that is a real Rolex on your wrist. And 
you instinctively can tell that. I have tools now that can help 
me, but I do not need them in every case. I know the debtor 
that is 68 years old that came before me yesterday, who has 
Social Security income, they cannot find their last tax return, 
and they have to pay now to get some way for somebody to help 
them dig that out.
    Now, I wish that there was a way that it could not be 
applied to them. But it also angers me--and I am glad to have 
the tools to do that--when I see that person in the Chapter 13 
trying to save their house, but then the next person comes up 
and they have got a third car they do not need and they have 
got a big screen TV and they have got a hot tub that they get 
to keep and they get to pay for because of the way that I 
mentioned that the disposable income test is written. And that 
makes me angry. I wish I had the tools to fix that.
    Chairman Sessions. You are right. there is a tension. We do 
not, Judge, want to have more burdens than we need. That is a 
valid concern. But we do need to make sure that the perception 
that bankruptcy is an invitation to fraud, we need to end that 
perception, and it was not as bad as some people thought 
before, but hopefully this will help.
    Briefly, Mr. Hildebrand, those that make above the median 
income are often required to go into Chapter 13. Explain to us 
why that is not so bad and why many, many people file Chapter 
13 anyway when they could file Chapter 7.
    Mr. Hildebrand. Where you come from, where I come from, and 
in Georgia and in North Carolina and in Texas, there are 
enormous numbers of people that are filing Chapter 13, not 
because they have to but because they want to. I believe this 
is a bar issue, the debtor's bar. The more that the debtor's 
bar becomes sophisticated and educated, the better tool that 
Chapter 13 can be.
    Now, you did take away in the law some of the incentives 
for people to file Chapter 13.
    Chairman Sessions. The cramdown was one of them.
    Mr. Hildebrand. The cramdown.
    Chairman Sessions. Some. We did not eliminate it.
    Mr. Hildebrand. The 910 days is--you used to have to pay 
for the car more. I look at that as a loss to the medical 
community and the other creditors who are getting less as a 
result of that benefit to the car. But in the long run, Chapter 
13 allows you to keep your house, restructure your debts, pay 
what you can afford to pay, and if it does not work, if for 
some reason you cannot do it, you can convert to Chapter 7, at 
which point you can demonstrate to the United States Trustee, 
``I really tried, and this is why I could not do the Chapter 
13.''
    Chairman Sessions. I could not agree more about that.
    Judge Newsome and Professor Lawless, you expressed concern 
that continually arose in the debate over bankruptcy that I 
would like for you to address, although I think you do not--I 
mean, my view is firm that you do not fix too much borrowing, 
you do not fix too much mortgage on your home by making it 
easier to defraud your creditors or not pay your creditors. But 
tell me, how could we--what concerns do you have and what are 
some steps Congress might consider to avoid people who are 
financially illiterate from being sucked into too much debt? 
And I would just say this: I do not know that--you know, if 
they were not being offered credit cards, we would be suing 
these banks and all for not offering credit to people who have 
a realistic chance to pay back. We would say you are not doing 
enough. But how could we improve that? We did some steps in 
this bill that required disclosure, but it is not--let me just 
say this to you: This is a Banking Committee issue. Credit, 
lending, is not to be solved in a court procedure bankruptcy 
bill, in my view.
    Judge Newsome. I do not think you are going to like what I 
am going to say, and I may have to have an escort out of the 
building, given who is in the room. But one of the things that 
aggravates me greatly is when I look at a set of bankruptcy 
schedules and I see five credit cards or four credit cards or 
even three credit cards with $5,000 or $10,000 limits issued by 
the same bank. I see 25 or 35 or--it is nothing anymore. It 
used to be in 1982 if you saw two or three bank cards on the 
schedule, that was about the max. Very rarely did you ever see 
more than two or three cards. Now, it is nothing to see 40 
cards on a set of schedules, $200,000 in credit card debt.
    If it were up to me, I would say, look, if you issue more 
than one card to anybody with more credit than they should 
have, it is your tough luck. Let's let the marketplace do its 
work. If you do not like the way the loan came out this time 
because they defaulted, then do not do it again. The same thing 
goes for when you have got three or four--you know, you have 
got 25--these people can all keep track of how much credit 
outstanding these people have or what is available to them.
    What if you said that if you issue a credit card into a 
totally insolvent situation, you cannot object to the 
dischargeability of that debt in the bankruptcy. Now, I know 
that is going to go over like a lead balloon around here, but 
really, I think that is one way of deterring lenders, putting a 
little more moral hazard into the lending practices of the 
credit card companies.
    Mr. Lawless. I agree with just about everything Judge 
Newsome said, and I would add that I think you have got to 
think about bankruptcy as part of the consumer credit system. 
We have been talking here today like--
    Chairman Sessions. I think bankruptcy is a court system 
that allows people to not pay their credit card debts.
    Mr. Lawless. Well, I agree--
    Chairman Sessions. Or any other debts, if they so qualify.
    Mr. Lawless. Well, I agree with that, and what I was going 
to say is that we are talking about bankruptcy like it is some 
end in and of itself as opposed to a means. And I think you 
asked a very good question about what else Congress can do, and 
I think Congress should look at restrictions on consumer credit 
lending, more regulation along the lines of limits on marketing 
to college students, limits on marketing to minors, limits on 
being able to send credit card solicitations to people who have 
just come out of bankruptcy.
    We might want to think about some national usury law. I am 
very reluctant to propose usury caps, but something at a very 
high level because we see things, and Congress just passed and 
I was very happy to see limits on payday lending around 
military bases, and something with very high caps that would--
usury caps that would address some of the grossest abuses in 
the consumer lending industry.
    There are some other things that I think would work, to 
look at regulating things like universal default clauses, 
regulating some of the ability of the credit card companies to 
change provisions in their contracts at will with consumers. It 
is a one-sided system where the credit card companies get to 
call all the shots and get to change the rules pretty much at 
will.
    Chairman Sessions. Thank you.
    Mr. Bartlett, I always felt that it really wasn't 
oppressing a person to give them credit cards and let them use 
them, but how do you respond to that? That to me has been one 
of the things that has made it difficult to pass bankruptcy 
reform, which, as I made clear, I think is sort of not part of 
our--shouldn't be much a part of our discussion. But how would 
you answer that?
    Mr. Bartlett. Well, Mr. Chairman, you are correct that 
bankruptcy is a judicial process that is available for people 
who are totally insolvent and cannot pay their debts. And 
bankruptcy should not be and under this new law is not 
available for people who can pay, who can repay some or all of 
their debts.
    Mr. Chairman, so far as the issuance of credit, I would say 
to the professor that proposals for usury limits and for 
Government-allocated credit and for some Government agency to 
decide who gets credit and who does not has been a system that 
has been tried in other countries. It has been tried from time 
to time with various laws around here. And always it has been 
an abysmal failure because when the Government starts 
allocating credit or allocating other things, well, then, there 
becomes a shortage and, in fact, you eliminate both fairness 
and you eliminate economic growth.
    The fact is the competitive marketplace is what issues 
credit today. By and large, the issuers of credit offer credit 
to people on terms that they can repay, and they repay it, and 
that is one of the things that has generated some of the 
economic prosperity that we have.
    The Federal Reserve just did a study on one of the points 
that Judge Newsome raised, and they concluded the opposite. 
They concluded that since 1970 the level of household debt 
service has stayed relatively flat, that it has risen only by a 
very small amount. Obviously, you can pick up statistics about 
what has gone up and what has gone down. But, by and large, the 
system works quite well.
    The idea of imposing price controls, which is oftentimes 
trotted out in Washington and elsewhere, or usury limits, that 
is a system that is doomed to failure, and it just simply--it 
is an allocation-of-credit system in which the Government will 
decide who gets to buy a new car or who gets to buy a new house 
or who gets to buy anything else. And it is a system that is 
doomed to failure.
    I think a system in which the companies compete, lenders 
compete against one another and they compete ferociously brings 
the lowest cost, the highest efficiency, and the best 
allocation of credit. And there is a bankruptcy system, but 
that should be limited to people who otherwise are insolvent 
and not able to pay their debts.
    Chairman Sessions. Mr. Zywicki, do you want to comment on 
that? Any thoughts?
    Mr. Zywicki. Sure, I think there are a couple of points.
    First, obviously just by way of background, one of the 
reasons why people end up--sometimes people are issued more 
than one credit card by a lender, typically what has happened 
over the past decade or so is that because of mergers between 
banks and accumulation of credit card portfolios. Basically 
what happens is a person may have a credit card from two 
different banks. The two banks merge. They have got two credit 
cards then from the same bank. And then the question becomes: 
Should the bank cancel one of them? Which is a very different 
question from the one that I think was posed earlier. That 
seems to be something that has become more common.
    With respect to overindebtedness, I think in usury 
regulations there is--two observations for here. First, as Mr. 
Bartlett notes and as I have noted in some of my scholarship 
which is cited in my testimony, the debt service ratio has 
remained basically constant over the past 25 years, the debt 
service ratio basically being what is your ability to pay your 
bills every month as they come due--your credit card payments, 
your car loan, that sort of thing.
    That number has remained basically constant for 25 years. 
Why? Because interest rates have been very low for the past 
decade or so. If interest rates go down, people borrow more. 
Their monthly payments remain the same. They can pay more for a 
house.
    It turns out also housing values have gone up much faster 
than mortgage debt has. It turns out that the biggest 
polarization in wealth in America today does not seem to be 
between rich and poor but, rather, between homeowners and non-
homeowners. Why is that? Basically we have seen this expansion 
of credit to lower-income borrowers. Homeownership in America 
is at an all-time high. About 69 percent of families own their 
homes now, an increase of 5 percent over the past decade. Most 
of those people paid their loans. Most of those people are 
sitting on an incredibly valuable asset that they could not 
have gotten access to in the past and will not get access to in 
the future if impose wrong-headed limits on credit.
    Finally, I think we have to keep in mind that one reason 
why people borrow and one reason why people may borrow too much 
is because of the bankruptcy laws. If the bankruptcy laws give 
you a free pass, people are more willing to borrow more. People 
may be more willing to live beyond their means if the 
bankruptcy laws give you a free pass. If the bankruptcy laws 
instead ask you to repay some of that if you can, people may 
have a very different attitude toward their borrowing. That is 
not saying that everybody does that. Most people are in 
bankruptcy because of job loss or something like that. But it 
is certainly the case that people's behavior will be affected 
by the bankruptcy laws themselves.
    Chairman Sessions. Well, I am glad we just had that 
discussion because it is a concern, it is a national concern 
that people are often getting in too much debt. And I think we 
have to adhere to the ideal that every American, when they take 
a credit card or sign up for a mortgage, is a responsible 
decisionmaker. And sad to say, people are irresponsible. Sad to 
say, if they can get their hands on two credit cards, they may 
run both to the limit and get so deep in debt they cannot get 
their way out of it. But when they are bankrupt, Mr. Bartlett, 
the bank does not get paid. Isn't that correct? So you have a 
self-interest in not allowing the debts to get too high, else 
you take the big hit. You are the one that takes the hit.
    Mr. Bartlett. Mr. Chairman, we are the other victims here, 
the victims of the financial loss. We spend a lot of--``we'' 
meaning our companies and the industry spends a lot, invests a 
lot of time and resources and money to try to educate 
consumers, to counsel with them, to provide resources so that 
they understand how to manage debt.
    We just opened up this new website, as I mentioned a minute 
ago. One of the things that does is to invite consumers to 
reach out to a certified credit counselor. We now have a list 
of certified, good-guy, Good Housekeeping Seal credit 
counselors that we can refer consumers to, and that helps a 
lot. That gives us a third party that we can send people to at 
the earliest signs of difficulties so that they can work their 
way out long before bankruptcy.
    I would also just note, Mr. Chairman, one piece of 
information. The other trade association, the companion with 
Mr. Jones, is NFCC. They just did a survey of their incoming 
customers or consumers that they counsel with in pre-bankruptcy 
counseling, and according to those consumers, 67 percent of 
them were there because of poor money management decisions. 
That is self-identified. And 29 percent were there as a result 
of a job loss, and about 2 percent were there because of a 
medical loss or a medical difficulty.
    So, Mr. Chairman, in most cases, about two-thirds, it 
always comes down to poor management, poor decisions of money 
management, about two-thirds, and that is why we offer a lot of 
counseling to try to help people make better decisions.
    Chairman Sessions. I think we ought to teach people to be 
frugal. There is nothing wrong with watching how you spend your 
money. And it is easy today to be tempted and get out of 
control and overspend.
    My own view is that one of the greatest things about 
America is an average working person can get to the end of the 
month, have no money, have a flat tire, has no money and has 
got a piece of plastic and can go get the tire fixed and try to 
pay it back later. That is one of the fabulous things about 
this country.
    Another fabulous thing about it is that when you go around 
the world, like I have had the opportunity to do in recent 
years, particularly in some of the underdeveloped countries, 
houses are half-built. They do not have windows in them. They 
will have the roof, and I asked one time about it, and he said, 
``Well, they don't have money to buy the windows yet. They are 
saving up to get the windows.''
    We buy the house and take out a mortgage, and the average 
guy in America can borrow $100,000 and pay it back at 7 percent 
or less interest over 30 years and live in the house. What a 
fabulous thing this is. And I don't think the banks deserve any 
moral credit for it. They are making money off the loan, or 
they would not be making it. But the system I think 
fundamentally works.
    And, Mr. Jones, credit counseling--the agency I visited in 
my hometown of Mobile, they bring the family in, they sit 
around the table, they decide what the income is. They help 
them see where they are misspending money, help them figure a 
way out of it. Sometimes the only way is bankruptcy. But I do 
think credit counseling plays a good role in this country, and 
I hope that we can come through some of the difficulties some 
of your companies have had and reach its fullest potential of 
helping people void unwise debt expense and work their way out 
of debt.
    Mr. Jones. I could not agree with you more. The problem in 
this country is not the availability of credit. It is financial 
illiteracy. And the more we can help people understand how to 
be good stewards of their family money, the better off we will 
be.
    Chairman Sessions. I think that is the purpose behind the 
Act.
    Thank you very, very much. This has been a very good panel. 
We will have your full statements in the record, and I will 
just pledge to you that we will continue to look at this. If 
you have any specific matters that you think should be adjusted 
in the Act, I would be glad to receive them. And as time goes 
by, I feel it is our responsibility to evaluate where we are 
going and fix the problem.
    If there is nothing else, we will stand adjourned.
    [Whereupon, at 4:37 p.m., the Subcommittee was adjourned.]
    [Submissions for the record follow.]
    [Additional material is being retained in the Subcommittee 
files.]
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