[Senate Hearing 109-1014]
[From the U.S. Government Publishing Office]

                                                       S. Hrg. 109-1014
                           BANKRUPTCY REFORM



                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION


                           FEBRUARY 10, 2005


                           Serial No. J-109-3


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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                    HERB 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
                       David Brog, Staff Director
                     Michael O'Neill, Chief Counsel
      Bruce A. Cohen, Democratic Chief Counsel and Staff Director

                            C O N T E N T S




Biden, Hon. Joseph R., Jr., a U.S. Senator from the State of 
  Delaware, prepared statement...................................    75
Cornyn, Hon. John, a U.S. Senator from the State of Texas, 
  prepared statements............................................    83
Durbin, Hon. Richard J., a U.S. Senator from the State of 
  Illinois, prepared statement...................................    93
Feingold, Hon. Russell D., a U.S. Senator from the State of 
  Wisconsin, prepared statement..................................    96
Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa, 
  prepared statement.............................................    98
Kennedy, Hon. Edward M., a U.S. Senator from the State of 
  Massachusetts..................................................     3
    prepared statement...........................................   107
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.     3
    prepared statement...........................................   110
Schumer, Hon. Charles E., a U.S. Senator from the State of New 
  York, prepared statement.......................................     2
Specter, Hon. Arlen, a U.S. Senator from the State of 
  Pennsylvania...................................................     1


Beine, Kenneth H., President, Shoreline Credit Union, Two Rivers, 
  Wisconsin......................................................     5
Bennett, Malcolm, President, International Realty Investments, 
  Inc., Los Angeles, California..................................    14
McCall, David, Director, District 1, United Steel Workers of 
  America, AFL-CIO, Columbus, Ohio...............................    18
Menzies, R. Michael, President and Chief Executive Officer, 
  Easton Bank and Trust Company, Easton, Maryland, on behalf of 
  the the Independent Bankers Association........................    20
Strauss, Philip L., Retired Attorney, Family Support Bureau, 
  Office of the District Attorney, San Francisco County, 
  California, on behalf of the National Child Support Enforcement 
  Association....................................................    16
Vullo, Maria T., Paul, Weiss, Rifkind, Wharton and Garrison LLP, 
  New York, New York.............................................     7
Warren, Elizabeth, Leo Gottlieb Professor of Law, Harvard Law 
  School, Cambridge, Massachusetts...............................    10
Zywicki, Todd J., Visiting Professor of Law, Georgetown 
  University Law Center, Washington, D.C.........................    12

                         QUESTIONS AND ANSWERS

Responses of Maria T. Vullo to questions submitted by Senator 
  Specter........................................................    43
Responses of Todd J. Zywicki to questions submitted by Senators 
  Sessions and Coburn............................................    48

                       SUBMISSIONS FOR THE RECORD

Abbott, Greg, Attorney General of Texas, Austin, Texas, letter...    52
American Bar Association, Robert D. Evans, Director, Government 
  Affairs Office, Washington, D.C., letter.......................    53
American Land Title Association, Ann vom Eigen, Legislative and 
  Regulatory Counsel, Washington, D.C., letter...................    59
Beine, Kenneth H., President, Shoreline Credit Union, Two Rivers, 
  Wisconsin, prepared statement..................................    61
Bennett, Malcolm, President, International Realty Investments, 
  Inc., Los Angeles, California..................................    69
Clements, Richard R., Law Offices of Richard R. Clements, Long 
  Beach, California, letter......................................    79
Commercial Law League of America, Mary K. Whitmer, President, Jay 
  L. Welford, Co-Chair, National Governmental Affairs Committee, 
  Peter C. Califano, Chair, Legislative Committee Bankruptcy 
  Section, Alan I. Nahamias, Chair, Bankruptcy Section, Judith 
  Greenstone Miller, Co-Chair, National Governmental Affairs 
  Committee, Chicago, Illinois, letter...........................    81
Cooper, Corinne, Tucson, Arizona, letter.........................    88
Creel, L.E., III, Creel & Moore, L.L.P., Dallas, Texas, letter...    90
Danner, Dan, Senior Vice President, Public Policy, National 
  Federation of Independent Business, Washington, D.C............    92
Greendyke, William, Partner, Fulbright & Jaworski L.L.P., 
  Houston, Texas, letter.........................................   104
Harshbarger, Scott, Murphy, Hesse, Toomey & Lehane, LLP, Boston, 
  Massachusetts, letter..........................................   105
LoPucki, Lynn M., Security Pacific Bank Professor of Law, 
  University of California, Los Angeles, School of Law, Los 
  Angeles, California, letter....................................   113
McCall, David, Director, District 1, United Steel Workers of 
  America, AFL-CIO, Columbus, Ohio, statement....................   114
Manney, Mark, McClain, Leppert & Maney, Houston, Texas, letter...   116
Menzies, R. Michael, President and Chief Executive Officer, 
  Easton Bank and Trust Company, Easton, Maryland, statement and 
  attachment.....................................................   117
Moschella, William E., Assistant Attorney General, Office of 
  Legislative Affairs, Department of Justice, Washington, D.C., 
  letter and attachment..........................................   139
Munsch, Russell L., Munsch Hardt Kopf & Harr PC, Dallas, Texas, 
  letter.........................................................   142
National Association of Credit Management, Robin Schausell, CAE, 
  President, Columbia, Maryland, letter..........................   143
National Association of Federal Credit Unions, Arlington, 
  Virginia, statement............................................   145
National Association of Realtors and the Institute of Real Estate 
  Management, Washington, D.C., joint statement..................   153
Pelofsky, Joel, Spencer Fane Britt & Browne LLP, Kansas City, 
  Missouri, letter...............................................   155
Small, A. Thomas, Bankruptcy Judge, Eastern District of the North 
  Carolina, and Eugene R. Wedoff, Chief Bankruptcy Judge, 
  Northern District of Illinois, proposal........................   157
Spears, Berry D., Winstead Sechrest & Minick, Austin, Texas, 
  letter.........................................................   193
Strauss, Philip L., retired Attorney, Family Support Bureau, 
  Office of the District Attorney, San Francisco County, 
  California, statement and attachment...........................   195
Tucker, J. Maxwell, Winstead Sechrest & Minick, Austin, Texas, 
  letter.........................................................   218
Vullo, Maria T., Partner, Paul, Weiss, Rifkind, Wharton and 
  Garrison LLP, New York, New York, statement....................   220
Warren, Elizabeth, Leo Gottlieb Professor of Law, Harvard Law 
  School, Cambridge, Massachusetts, prepared statement, 
  attachments and letter.........................................   227
Westbrook, Jay L., Benno C. Schmidt Chair of Business Law, 
  University of Texas at Austin, Austin, Texas, letter...........   238
Williamson, Brady C., LaFollette Godfrey & Kahn, Attorneys at 
  Law, Madison, Wisconsin, letter................................   240
Woodward, William J., Jr., Professor of Law, Temple University, 
  James Beasley School of Law, Philadelphia, Pennsylvania, letter   242
Zywicki, Todd J., Visiting Professor of Law, Georgetown 
  University Law Center, Washington, D.C., statement.............   243

                           BANKRUPTCY REFORM


                      THURSDAY, FEBRUARY 10, 2005

                              United States Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:15 a.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Arlen 
Specter, Chairman of the Committee, presiding.
    Present: Senators Specter, Grassley, Sessions, Cornyn, 
Brownback, Coburn, Leahy, Kennedy, Biden, Feinstein, Feingold, 
Schumer and Durbin.

                   THE STATE OF PENNSYLVANIA

    Chairman Specter. The hour of 10:15 having arrived, we will 
commence this hearing of the Judiciary Committee.
    The bill we will be discussing today, S. 256, seeks to 
address existing bankruptcy abuses, while implementing 
appropriate consumer protection. It enjoys strong bipartisan 
support in the Congress and has come close to enactment into 
law on more than one occasion.
    Bankruptcy reform initiatives have been considered by the 
Congress since 1998, and today's hearing will mark the 11th 
hearing convened by the Judiciary Committee on this or similar 
bills. Our counterparts in the House of Representatives have 
also held numerous hearings on this legislation. The Committee 
is holding hearings today to give an opportunity for renewed 
consideration to the pending legislation, even though there 
have been very many hearings in the past. This legislation has 
been one of the priority items of the Majority Leader and it is 
our hope to bring it up on the Judiciary Committee executive 
session a week from today.
    We are starting this hearing just a little later than we 
customarily do because we have had a meeting among Republicans 
on asbestos litigation. This has been a very busy time for our 
Committee, after having the hearings on Attorney General 
Gonzales and then moving last week to the class action bill, 
which we were able to report out of an executive session in a 
morning, which was prompt action for the Committee.
    The class action bill is on the floor today. We will renew 
the discussion at 11:30 and I will absent myself for a sort 
time to go over to open the hearings. We will open the floor 
action, but the bankruptcy hearings will continue during my 
absence and I will return, because we want to hear everybody 
and have an adequate opportunity for questioning by the panel.
    We have a very distinguished array of witnesses, and I 
believe that we have two of our colleagues here today to make 
introductions. Senator Schumer wishes to make an introduction. 
Senator Schumer is entering right on cue.
    I just mentioned you, Senator Schumer, and your interest in 
making an introduction.

                       STATE OF NEW YORK

    Senator Schumer. Well, thank you, Mr. Chairman, and I want 
to thank you for this opportunity. Ms. Vullo has come down. 
There are all sorts of things going on. I don't know; you may 
not want this public, but she is doing a lot of nice things in 
family and she came down because she cares so much about this. 
I want to welcome her back. She is an accomplished attorney 
from my State. She has spent years fighting pro bono for the 
victims of violence, vandalism and harassment in providing safe 
and legal health services.
    For those who don't remember or were not here then, were 
not members of this Committee, Ms. Vullo is here to remind us 
that the Bankruptcy Code should not be used as a safe haven for 
those who practice and are convicted of violence, no matter 
what their views on choice.
    I know it was not easy for Ms. Vullo to get here. I know 
she has to leave early, but she knew how important it was to be 
here to make the case. I remember Senator Biden was very 
impressed with her testimony when she came a few years back.
    Now, Mr. Chairman, since we were here last, the make-up of 
the Senate has changed and the make-up of the Committee has 
changed, but what hasn't changed is the need for real, honest 
and fair bankruptcy reform. And what hasn't changed is the need 
for an amendment to the current bill that prevents those who 
engage in violence and intimidation at clinics from hiding 
behind the Bankruptcy Code to escape court-imposed fees.
    The FACE amendment, which passed in the Senate 80 to 17, 
makes clear to those who would terrorize, use violence or 
threaten violence against women and doctors that bankruptcy is 
no escape from accountability. At the same time--and I 
underline this--it will do no harm, no harm, to legitimate 
protesters who are peaceful and who do not engage in violence 
or threats.
    So I hope now, as we reconsider this bill, that my 
colleagues will not do an about-face and oppose this critical 
measure. As I have said before, it is not pro-choice or pro-
life; it is pro-rule of law and anti-violence. We are going 
after abuses of bankruptcy in this law and there is no reason 
why this abuse of bankruptcy shouldn't be included as well.
    I want to thank Ms. Vullo for making this case, and I ask 
unanimous consent that my entire statement be placed in the 
    Chairman Specter. Without objection, your full statement 
will be made a part of the record.
    Senator Schumer. Thank you for your courtesy, Mr. Chairman.
    Chairman Specter. Thank you, Senator Schumer.
    [The prepared statement of Senator Schumer appears as a 
submission for the record.]
    Chairman Specter. Senator Kennedy, I yield to you for an 

                     STATE OF MASSACHUSETTS

    Senator Kennedy. Thank you very much, Mr. Chairman. It 
really is a great pleasure for me to introduce Elizabeth 
Warren, who serves as the Leo Gottlieb Professor of Law on the 
faculty of Harvard Law School and really is one of our Nation's 
leading experts on bankruptcy law.
    She is often cited for her studies on the economic squeeze 
on middle-class families, as well as the economics of debt, 
health care finance and other economic stresses. She also works 
on policy issues relevant to corporate reorganization and 
sovereign insolvency. The National Law Journal has named 
Professor Warren one of the 50 most influential women lawyers 
in America, and her students at Harvard have awarded her the 
Sachs and Freund Award for teaching excellence.
    So we look forward to Professor Warren sharing her 
expertise with us. We thank her very much for being with us 
    [The prepared statement of Senator Kennedy appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Senator Kennedy.
    I now yield to my distinguished ranking member, Senator 

                        STATE OF VERMONT

    Senator Leahy. Thank you, Mr. Chairman. Thank you for 
having this hearing. This is the first hearing on bankruptcy 
reform we have had in 4 years. It is long overdue. I am 
delighted you are doing it.
    I also would note that the Nation faces a lot different 
things than it did 4 years ago. We endured the terrorist 
attacks of September 11th that only deepened the financial woes 
of this country. We have been witness to a parade of financial 
misdeeds by major U.S. corporations. The names of Enron, 
WorldCom, among others, left a bitter taste in the mouths of 
average Americans. They have damaged investor confidence. They 
have shaken our capital markets. Financially-troubled companies 
have short-changed their pension promises by nearly $100 
billion, putting workers, responsible companies and taxpayers 
at risk.
    Since we last held a hearing on bankruptcy reform, 782,000 
private sector jobs have been lost. Far too many Americans are 
working and barely making ends meet even when they are holding 
down two and three jobs. And we are immersed in wars in 
Afghanistan and Iraq with no end in sight.
    So I think when we discuss bankruptcy reform, we should do 
it in the context of real-life developments since 2001. To be 
appropriate and fair, the key provisions have to be carefully 
examined. This week, the Majority Leader, Senator Frist, said 
the following about bankruptcy reform legislation, quote, ``It 
has been several Congresses since people have really looked at 
the bill very carefully. So we thought it was important to have 
hearings and have the opportunity to mark it up and modernize 
it before taking it to the floor.''
    I agree with Senator Frist. We should modernize the 
legislation, but we should take into account what has happened 
since 2001. For example, we should strengthen the financial 
safety nets for middle-class American families confronting 
illness or injury. Medical problems, I am told, contribute to 
about half of all bankruptcies, even though most of those who 
filed had health insurance when they first became sick.
    Many lose their jobs and their insurance because their 
conditions worsen, while others face thousands of dollars in 
copayments and deductibles not covered by their insurance. I am 
pleased Professor Warren is here and she could join us in 
discussing her recent research and analysis of illness and 
injury as they relate to bankruptcy.
    We should provide for more disclosure of information so 
that consumers may better manage their debts and avoid 
bankruptcy altogether. U.S. consumer debts have reached 
staggering levels, after more than doubling over the past 10 
years. Consumer debt hit $1.98 trillion in October 2003, up 
from $1.5 trillion three years ago. Credit card debt is at $735 
billion. The average household has a balance of a little over 
    I know that Senators Grassley, Durbin, Schumer and others 
share a commitment to include credit industry reforms in a fair 
and balanced bankruptcy bill. The millions of credit card 
solicitations made to American consumers over the past years 
have contributed to the rise of consumer debt.
    It doesn't give me a huge amount of confidence as a Senator 
when I have a neighbor whose dog gets a credit card with a line 
of credit already on it. It makes me wonder sometimes when I 
hear the crocodile tears of some, if this may have something to 
do with it. Or when you try, as I did the other day, just as an 
experiment to get my frequent-flyers numbers back and they put 
you on hold for 34 or 38 minutes, hoping that you will hang up 
and they don't have to actually come through with something, I 
lose a little bit of confidence.
    Additional disclosure is needed to ensure that consumers 
completely understand what is in there. When you get the credit 
card, you want to know just what you are getting. We have to be 
careful that our efforts to ensure accountability don't 
inadvertently create problems for privacy and security. We are 
in an age where personal information can be easily digitized 
and shared. If it falls into the wrong hands, it is abused. 
Identity theft is one danger, as is tracking and harassing a 
battered spouse. We ought to look at how we can cut down on 
    And then look at the economic hardships faced by service 
members' families. That warrants our attention. Calls to serve 
their country in Iraq, Afghanistan or elsewhere can cause loss 
of family income, the closing of a family business, or 
additional expenses. Senators Durbin, Graham and others have 
taken an interest in this issue, and I will look forward to 
working with them.
    Now, there is one thing that has not changed. The campaign 
of violence, vandalism and intimidation continues to curtail 
the availability of family services and endangers providers and 
patients. The perpetrators of such violence continue to escape 
judgment through bankruptcy abuse. I want to applaud the senior 
Senator from New York for his work in this area.
    The 501-page bankruptcy reform bill introduced a few days 
ago has been stripped of the consensus clinic violence 
language. It fails to address the discharge of penalties for 
violence against family planning clinics. Such people can 
commit violence and escape. We should look at that, and I am 
looking forward to hearing from Ms. Vullo, who, as Senator 
Schumer has mentioned, has done a huge amount of pro bono work 
in this area.
    The rest of my statement, Mr. Chairman, I will put in the 
record. We have a lot of work ahead of us. I think this is an 
important hearing and I compliment you again for holding it.
    Chairman Specter. Thank you very much, Senator Leahy, and 
without objection, your full statement will be made a part of 
the record.
    [The prepared statement of Senator Leahy appears as a 
submission for the record.]
    Chairman Specter. Our practice at the Judiciary Committee 
is to have 5 minutes for the witnesses to testify, and I would 
appreciate it if you would observe the large timing lights in 
front of you: green, continue; amber, one minute left; and the 
red, stop.
    Senator Biden. Mr. Chairman, can you yield to me for five 
seconds? I have a hearing in the Foreign Relations Committee on 
the tsunami and the President's request for about $1 billion, 
which I think is appropriate.
    I want to make clear to the witnesses that my coming in and 
out of this hearing is not a lack of respect. Senator Grassley 
and I have been working on this for 8 years. I am anxious to 
get it resolved. So my failure to be here is not a lack of 
interest, but I will be in and out.
    Chairman Specter. Well, thank you, Senator Biden, for those 
comments. That applies to other Senators, as well. There are 
hearings going on all the time and there is floor action, so it 
is no disrespect or lack of interest if Senators move in and 
out of the hearing.
    Our first witness is Mr. Kenneth Beine, who appears today 
on behalf of the Credit Union National Association. He is 
president of Shoreline Credit Union, a Wisconsin native, a 
graduate of the University of Wisconsin in 1974, with a 
master's in finance from the University of Wisconsin in 1984.
    Thank you for joining us, Mr. Beine, and we look forward to 
your testimony.

                      NATIONAL ASSOCIATION

    Mr. Beine. Thank you. Good morning, Chairman Specter and 
other members of the Committee. I am Kenneth Beine, President 
of Shoreline Credit Union, in Two Rivers, Wisconsin. We are a 
$64 million State-chartered, federally-insured credit union. I 
appreciate the opportunity to be here to tell you about our 
concerns with bankruptcies and how they are impacting credit 
unions, and my credit union in particular.
    I am speaking on behalf of the Credit Union National 
Association, which represents about 90 percent of the 9,100 
State and Federal credit unions nationwide. We are very pleased 
that the Committee is holding today's hearing on S. 256, the 
Bankruptcy Abuse Prevention and Consumer Protection Act of 
    I sat in front of this Committee nearly 4 years ago today 
with a message from America's credit unions. That message is 
the same today as it was then. Credit unions recognize that 
many people legitimately need the option to declare bankruptcy. 
What concerns us, however, are the cases of abuse by those who 
file Chapter 7 and totally walk away from their debt even 
though they clearly have the ability to pay part or all of that 
    Credit unions have consistently had three top priorities 
for bankruptcy reform legislation: a needs-based formula, 
mandatory financial education, and maintenance of the ability 
of credit union members to voluntarily reaffirm their debts. 
The bill before you today, while a product of compromise, does 
a good job of balancing these issues. We strongly urge the 
Senate to pass this compromise bill as soon as possible.
    CUNA strongly supports the provision in S. 256 that 
requires a person contemplating bankruptcy to receive a 
briefing about available credit counseling and assistance in 
performing a budget analysis. We also strongly support the 
provision in this legislation that would prohibit the Chapter 7 
or 13 debtor from receiving a discharge if the debtor does not 
complete a course in personal financial management.
    Any sensible bankruptcy reform should include education 
requirements to give debtors the tools they need to make wise 
decisions about filing for bankruptcy and, more importantly, to 
succeed financially after bankruptcy. In anticipation of this, 
CUNA plans to develop face-to-face and/or online courses to 
fulfill this aspect of the legislation.
    I am confident that early financial education would have 
helped some young adult members of Shoreline Credit Union to 
make different decisions than they did. In one case, a couple 
in their mid-20's decided they wanted a clean slate prior to 
getting married. They ran up credit card purchases. One prepaid 
on auto loan with us to have the cosigner, their parent, 
removed. Both were employed full-time. They both then filed 
Chapter 7. My credit union's share of their version of 
financial planning was a write-off of almost $3,000 in credit 
card balances, plus several hundred dollars on disposal of the 
    Credit unions strongly believe that reaffirmations are of 
benefit both to the credit union which would avoid a loss and 
to the member debtor who, by reaffirming with their credit 
union, continues to have access to financial services and to 
reasonably-priced credit.
    Let me digress for a moment. We do not remove members who 
have a loss. We encourage them to continue to have a 
relationship with us and continue to have savings accounts. We 
also offer checking to those people so they can continue to 
conduct business. We do not want to contribute anybody to the 
unbanked. As not-for-profit financial cooperatives, losses to 
the credit unions have a direct impact on the entire membership 
due to a potential increase in loan rates or a decrease in 
interest on savings accounts.
    Perhaps the best demonstration of the credit union 
movement's position that reaffirmation benefits both the member 
and the credit union comes from another real-life example. We 
had a middle-aged couple file for Chapter 7 due to several 
medical problems and loss of employment. They reaffirmed their 
automobile loans with Shoreline. Although not required to repay 
their credit card loans, they were adamant about doing so and 
did so quite voluntarily after discharge. Needless to say, they 
are members today in good standing and they only ask to be 
granted a loan.
    Credit unions are very anxious to see Congress enact 
meaningful bankruptcy reform and believe that needs-based 
bankruptcy presents the best opportunity to achieve these 
important public policy goals. Credit unions believe that 
consumers who have the ability to repay all or part of their 
debt should be required to file a Chapter 13 rather than have 
all their debt erased in Chapter 7. Therefore, CUNA supports 
the needs-based provision that is contained in S. 256.
    We hope that today's hearing shows that the Senate is 
moving toward passage of bankruptcy abuse reform legislation, 
and we hope that bankruptcy reform will become law in the 
coming weeks. As I said earlier, I was here 4 years ago. It is 
an honor to be called back.
    Thank you. I will be happy to answer any questions.
    [The prepared statement of Mr. Beine appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Mr. Beine.
    We now turn to Ms. Maria Vullo, partner in the law firm of 
Paul, Weiss, Rifkind, Wharton & Garrison LLP. She received her 
law degree from the New York University School of Law in 1987 
and holds a bachelor of arts degree in political science from 
the College of Mt. Saint Vincent. She clerked for Judge 
MacKenzie in the district court in the Eastern District of 
    Thank you for joining us today, Ms. Vullo, and the floor is 


    Ms. Vullo. Thank you, and good morning, Mr. Chairman and 
Senator Leahy and the rest of the Committee. Thank you, Senator 
Schumer, for your kind words.
    As the Chairman mentioned, my name is Maria Vullo and I am 
a partner at the law firm of Paul, Weiss, Rifkind, Wharton and 
Garrison, based in New York. And I appear again before this 
Committee. I was here, I think it was, in February of 2001, and 
I am testifying from my personal experience regarding a present 
loophole in the United States Bankruptcy Code that I very 
strongly believe needs to be fixed to prevent further abuse of 
the bankruptcy process by persons who are seeking to evade 
judgments that have been obtained through extensive litigation 
under the Freedom of Access to Clinic Entrances Act, also known 
as the FACE statute.
    I have been for almost ten years now--time goes by quite 
quickly--lead counsel for the plaintiffs in a case that was 
pending in Portland, Oregon, called Planned Parenthood of the 
Columbia Williamette v. The American Coalition of Life 
Activists. It is known as the Nuremberg Files case in many 
other forums.
    In February of 1999, after more than 4 years of litigation, 
and after a one-month trial, we obtained on behalf of our 
clients a $109 million judgment under the FACE statute to 
compensate the plaintiffs for out-of-pocket security costs that 
they were required to incur because of threats of violence by 
certain extreme members of the anti-choice movement. The jury 
also awarded punitive damages in large sums against each of the 
14 defendants.
    Since I appeared before this Committee, the Ninth Circuit, 
sitting en banc, affirmed the judgment and the injunction that 
had been issued by the district court. And the United States 
Supreme Court has denied the defendant's petition for a writ of 
certiorari, and in the course of those proceedings the 
Solicitor General, Ted Olson's office, filed a brief in support 
of my clients' legal positions and the Ninth Circuit's 
judgment. So there is no question here that the case has been 
fully litigated. The judgment is valid and the defendants are 
required to pay it.
    That being said, we have experienced, my law firm has 
experienced, over the past five years since the judgment was 
first rendered, some very significant obstacles in collecting 
on the judgment. This experience has led to the proposed 
amendment to the Bankruptcy Code that I urgently ask this 
Committee to pass.
    Just as a little bit of background, my clients are 
physicians and family planning clinics who were subjected to 
threats of violence, including the Nuremberg Files website 
which had dripping blood and cross-outs of names of physicians 
who had been murdered, grayed-out names of physicians who had 
been shot at and wounded, and those who were still working and 
living were not grayed yet or not crossed out yet. That was a 
threat of violence that all the courts have said is 
sanctionable under our country's laws, as it should be.
    My clients live and work in relatively safe communities 
across the country, but have been forced, because of the 
defendants' actions, to live under a constant threat of 
imminent attack. They have purchased and regularly have worn, 
and still wear, bullet-proof vests. They have installed 
extensive security systems, including bullet-proof glass and 
reinforced steel in their homes and offices. They have warned 
their children's teachers of the dangers that they face.
    They have developed emergency plans, should they come under 
attack, including instructing young children to hide in the 
bathtub when shots are fired. They vary their routes to and 
from work to protect themselves from assailants. They have 
installed window coverings to thwart snipers. They have 
purchased and wear disguises to avoid being recognized by 
extremists. And, of course, they are ever-vigilant in public. 
They are not secure in their homes or in their offices. They 
don't live their lives like we do, and that is un-American and 
the defendants' conduct is un-American.
    The passage of the FACE statute, however, has had a 
significant impact on the lives and safety of family planning 
clinic workers. We need the statute and its continued 
enforcement to save lives, but the statute cannot be fully 
enforceable if those who are found liable under the statute 
after years of litigation can simply go into a bankruptcy court 
or multiple bankruptcy courts, file a Chapter 7 petition, 
trigger the automatic stay and cause relitigation and 
relitigation of the same issue.
    I experienced this personally in six different bankruptcy 
courts across the country after the verdict. I was in Jackson, 
Mississippi; Chattanooga, Tennessee; Norfolk, Virginia; 
Roanoke, Virginia; Baltimore, Maryland; and Greenbelt, 
Maryland--quite a list for a girl from Brooklyn.
    Following the jury's verdict, the defendants announced that 
they intended to pay not a cent of the amount awarded by the 
jury. These are not honest but disfortunate debtors who find 
themselves unable to pay their credit card debts or mortgage. 
These are people who do not follow the laws of our country and 
believe that they can just abuse the bankruptcy process in 
order to avoid judgments that have been lawfully obtained 
against them.
    My firm has committed enormous research--
    Chairman Specter. Ms. Vullo, your red light is on. Could 
you summarize, please?
    Ms. Vullo. Sure, sure.
    The critics of the amendment that is being proposed may ask 
why it is needed, given that I won the issue ultimately after 
three or 4 years of litigation in the bankruptcy courts. And to 
this, I have two quick responses.
    First, an amendment that will make clear what the law 
already provides should not be controversial. Secondly, the 
amendment is needed most importantly because with it debtors 
will not be able to abuse the Bankruptcy Code by invoking the 
automatic stay, causing relitigation. It is very simple to make 
it unambiguous in the Bankruptcy Code that you cannot abuse the 
bankruptcy process and the automatic stay provision by filing 
for bankruptcy and causing relitigation. Just state in the 
statute that FACE judgments are non-dischargeable.
    Chairman Specter. Thank you.
    Ms. Vullo. Let me just--
    Senator Schumer. Mr. Chairman, this is important. It is the 
only witness on this controversial amendment. The witness came 
at great trouble to herself. Could she just be given another 
two minutes to make the end of her statement? I know that is 
asking a good deal with the amount of witnesses.
    Chairman Specter. There will be time for--
    Senator Schumer. She has to leave, Mr. Chairman. She flew 
down this morning and has to leave right after she speaks.
    Chairman Specter. When do you have to leave, Ms. Vullo?
    Ms. Vullo. I have to be in court this afternoon in the 
Southern District of New York. I am caught between United 
States Senators and a United States Federal judge.
    Chairman Specter. When do you have to leave, Ms. Vullo?
    Ms. Vullo. I have to leave no later than getting on the one 
o'clock shuttle, so I have to leave by noon.
    Chairman Specter. How much more time would you like, Ms. 
    Ms. Vullo. I just need a couple of minutes.
    Chairman Specter. Go ahead.
    Senator Schumer. Thank you, Mr. Chairman.
    Ms. Vullo. After extensive litigation and considerable 
expense over a period of four-plus years, as I mentioned, we 
won the issue in the bankruptcy courts under the current Code 
which deals with willful and malicious injury. But that does 
not mean that the Bankruptcy Code worked, because the 
relitigation demonstrates that it did not work.
    Enactment of an amendment is necessary because we had to 
relitigate the question of willful and malicious injury over 
and over again. While we won that issue, what we need here is a 
very unambiguous provision that says judgments under FACE or 
similar statutes are non-dischargeable in bankruptcy, so you 
don't have lawyers engaging in sanctionable conduct, as I would 
submit, going into the bankruptcy courts, triggering the 
automatic stay and arguing about interpretation, as we lawyers 
like to do, of language in legislation. This is a loophole that 
needs to be fixed based upon documented abuse.
    I think I have said what I need to say. I strongly urge 
this Committee to consider an amendment to the Code. It is 
something that, as a private lawyer litigating this issue for 
many years, I have personal experience with and feel very 
strongly about because it is a problem in the Code that needs 
to be remedied.
    Again, I apologize that I have to leave to go to court. If 
there are any questions--and I recognize other members of this 
panel and I certainly don't want to impose on them, but I 
apologize that I have to leave early.
    [The prepared statement of Ms. Vullo appears as a 
submission for the record.]
    Chairman Specter. Well, thank you, Ms. Vullo.
    If any of the other witnesses have any extraordinary time 
constraints, just let us know and we will try to accommodate 
you. We have limited the witnesses' testimony to give minutes 
because our experience has been that when you get to the 
question-and-answer session, you are responding to matters of 
greater concern to the members which really is of assistance in 
the legislative process.
    Our next witness is Professor Elizabeth Warren, Leo 
Gottlieb Professor of Law at Harvard; an extraordinary 
background on writing, 50 book chapters; principal investigator 
on a number of empirical studies on commercial law. Her works 
have appeared in major national publications--Time and 
Newsweek. She was the reporter for the National Bankruptcy 
Review Commission and Vice President of the American Law 
Institute. She has a bachelor's degree from the University of 
Houston and a law degree from Rutgers.
    Thank you for joining us, Professor Warren, and we look 
forward to your testimony.


    Ms. Warren. Thank you, Senator. Thank you for having me.
    This bill is 8 years old, and in 8 years bankruptcy has 
certainly been in the news: Enron, WorldCom, Adelphia, United 
Airlines, USAir, TWA, LTV Steel, K-Mart, Polaroid, Global 
Crossing, just to name a few. And many of the companies that 
have gone into bankruptcy are those associated with scandal. 
But I notice there is no response in this bill. There is no 
response because this bill was written before a lot of new 
problems were on the horizon: companies that file for Chapter 
11 that cancel pensions plans and health benefits, leaving 
thousands of families economically devastated; companies that 
continue to pay executives and insiders tens of millions of 
dollars, while they demand concessions from their creditors; 
military families targeted for payday loans, insurance scams, 
and other forms of financial chicanery; scandals that have 
rocked the so-called nonprofit credit counseling industry; sub-
prime mortgage companies that have unlawfully taken millions of 
dollars from homeowners, then fled to the bankruptcy courts to 
protect their insiders and bank lenders.
    In the 8 years since this bill was introduced, there has 
been a revolution in the data available to us. Unlike 8 years 
ago, we need not have a theoretical debate about who uses the 
bankruptcy system. We now know that 1 million men and women are 
turning to bankruptcy each year in the aftermath of a serous 
medical problem, and three-quarters of them had health 
insurance at the onset of the illness that ultimately 
bankrupted them. We know that a family with children is nearly 
3 times more likely to file for bankruptcy than their 
counterparts who have no children. And we know that now more 
children every year live through their parents' bankruptcy than 
live through their parents' divorce.
    The effects on small business also need not be speculated 
upon. This Congress has the opportunity with this bill to make 
history. This would be the first law in the history of the 
United States that would discriminate against small businesses. 
It would say that the Enrons and WorldComs of the world can go 
forward with no new disclosures, no supervision by the United 
States--additional supervision by the United States trustee, no 
fixed deadline. But if you are a little business, all of those 
new restrictions will apply. And if you cannot meet them, you 
are automatically thrown out of bankruptcy under this bill.
    Now, we hear a lot about the means test. I remind the 
Senators with respect, it is one section of 217. But the key 
part of the means test to think about and all the other 
provisions that apply to families is they treat all families 
alike. It treats every family--it assumes that they are all in 
bankruptcy for the same reason: that they have overspent. This 
means that a family driven into bankruptcy by the increased 
costs of caring for an elderly parent with Alzheimer's is 
treated the same as someone who maxed out his credit cards at a 
casino. A person who had a heart attack is treated the same as 
someone who had a spending spree at the mall.
    If Congress is determined to sort the good debtors from the 
bad, then it is both morally and economically imperative that 
they distinguish those who have worked hard and played by the 
rules from those who have shirked their responsibilities.
    I understand that bankruptcy losses hurt good people. My 
brother is a small landlord. My sister-in-law works for the 
Apartment Association. I have another brother who has run a 
small business. I am a member of a credit union. Those losses 
are real. No one denies that, and they can make a difference in 
the bottom line--a 1-percent difference, a 2-percent difference 
in some cases.
    Those creditors are fully entitled to a system that is as 
free of abuse as we can humanly make it. But I want you to 
think about the people who are not here today. Think first 
about the fact that there are no representatives from the 
credit card industry here today, and yet they are the ones who 
will scoop up most of the benefit from this bill. As 
bankruptcies have risen in the 8 years that this bill has been 
pending by 17 percent, credit card profits, despite not 
adopting this bill, have gone up by 167 percent. They now top 
$30 billion annually.
    But think of the others who are not here. These are the 
people for whom bankruptcy law matters 100 percent: the Mom 
working two jobs trying to pay her bills; the family with a 
child battling cancer; the reservist who has been called up and 
lost his small business. These are good people who desperately 
did not want to file for bankruptcy. A difference in the 
bankruptcy laws is a 100-percent difference to them--
    Chairman Specter. Professor Warren, your red light is on.
    Ms. Warren. I will. Thank you. For these people it will be 
the difference between whether they can save their homes, 
whether or not they can stop the collection calls that come 
principally in the afternoons when the children are home from 
school, whether they can make peace in their lives after a 
catastrophe has hit them. Please don't change the law without 
hearing from these people.
    [The prepared statement of Ms. Warren appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Professor Warren.
    I might add that all of the statements which have been 
submitted will be made a part of the record in full.
    We turn now to Professor Todd Zywicki, Visiting Professor 
of Law at Georgetown, Professor of Law at the James Buchanan 
Center, an author of some 40 articles in the fields of 
bankruptcy, commerce, commercial law, a law degree from the 
University of Virginia where he was executive editor of the Law 
Review, and a bachelor's degree cum laude from Clemson.
    Thank you for coming today, Professor Zywicki, and we look 
forward to your testimony.


    Mr. Zywicki. Thank you. Distinguished Senators, it is a 
distinct honor to testify before you today on the subject of 
this bankruptcy reform legislation.
    Last year, over 1.5 million people filed bankruptcy in this 
country. During the past decade, annual bankruptcy filings 
doubled. In the past two decades, bankruptcy rates have 
quintupled--this during an era of almost uninterrupted 
prosperity, high economic growth, low interest rates, low 
unemployment rates, and rising stock in household real estate 
markets. More people will file bankruptcy this year alone than 
during the entire decade of the Great Depression.
    Let's make one thing very clear at the outset, then. Record 
numbers of Americans are not filing bankruptcy because they 
have to. Many Americans are filing bankruptcy because we have a 
bankruptcy system that is out of control. We have a system 
riddled with fraud and abuse. We have a system where rich 
debtors use bankruptcy to walk away from debts they could repay 
but choose not to. We have a system where unscrupulous deadbeat 
fathers hide behind the machinery of the Bankruptcy Code to 
avoid paying alimony and child support, and divorced women 
actually have to stand in line behind bankruptcy lawyers to 
collect money that they are owed in bankruptcy.
    We have a system where debtors can abuse the unlimited 
homestead exemption by relocating on the eve of bankruptcy, 
leaving creditors in the lurch. We have a system where debtors 
conceal assets, like about their incomes, and manipulate the 
system, safe in the knowledge that their malfeasance rarely 
will be caught. We have a system where lawyers stampede their 
clients into bankruptcy while never asking whether a debtor 
should try to avoid bankruptcy through credit counseling.
    Senators, we have a bankruptcy system that is broken and 
must be repaired. It will not fix itself, and in 8 years the 
problems have not disappeared, and in 8 years the critics of 
this much needed reform still have offered no plan for fixing 
    Those who turn a blind eye to bankruptcy fraud and abuse 
ignore its victims. Those victims include the unsuspecting 
divorcee who is sandbagged by the bankruptcy system when she 
learns that her property settlement has been discharged; the 
small businesses that are forced to raise prices, curtail 
services, or lay off workers to compensate for losses resulting 
from bankruptcy filings. They include hospitals that are unable 
to buy new equipment or hire another nurse because of unpaid 
bills discharged in bankruptcy. They include young and low-
income workers who are unable to buy a car because they cannot 
get a car loan because of out-of-control bankruptcy system. And 
they include you and me, every American who is forced to pay 
more for credit, goods, and services because others file 
bankruptcy and walk away from debts they could pay but choose 
not to. This is unfair and unnecessary.
    This bill rebalances the consumer bankruptcy system in two 
ways: first, it increases protection against abuse, primarily 
by institutionalizing a systems of means testing, eligibility 
for filing Chapter 7; second, it installs important new 
safeguards against bankruptcy fraud.
    The central debate over this legislation boils down to one 
simple question: Should high-income debtors who can repay a 
substantial portion of their debts without significant 
financial or other hardship be required to do so? I believe the 
answer must be yes.
    Bankruptcy is intended as a last resort for those who are 
poor or unemployed, suffering from health problems, or 
otherwise down on their luck. Bankruptcy should not be a first 
resort for those who consciously choose to live beyond their 
means. Nor should bankruptcy be a mechanism for people to 
strategically take advantage of the system for financial gain. 
Means testing will improve the administration of the bankruptcy 
system, increase the recovery from high-income debtors, protect 
low-income debtors, and increase public confidence in the 
fairness and efficiency of the bankruptcy system.
    At the same time, means testing will protect the poor and 
unfortunate debtors for whom bankruptcy is intended. By 
definition, means testing does not apply at all to the great 
bulk of bankruptcy filers, the roughly 80 percent of Chapter 7 
filers whose incomes are below the median. Nor will it apply to 
debtors who can demonstrate special circumstances to rebut the 
means-testing presumption. No honest unfortunate debtor will be 
denied the right to file bankruptcy under this or any other 
provision of the legislation.
    Does bankruptcy abuse occur? Every day. In one case, a 
Miami physician who earned over $245,000 per year tried to 
discharge $265,000 in unsecured debt. In addition to his 
homestead, he had property in Washington, D.C., with over half 
a million dollars of equity and three vacant lots in Colorado. 
I could give additional examples, but I think you get the 
    This bill would also create numerous new safeguards against 
the rampant fraud in the system today. The FBI estimates that 
10 percent of bankruptcy cases contain some degree of fraud, 
especially a failure to fully disclose all assets. This 
legislation includes numerous, simple cost-effective measures 
to reduce bankruptcy fraud.
    Are fraud and abuse of bankruptcy filers the majority of 
individuals in the bankruptcy system? Senator, may I have 30 
seconds to conclude?
    Chairman Specter. You may.
    Mr. Zywicki. No. But they are representative of a certain 
class of bankruptcy filers, those who file bankruptcy not as a 
result of financial hardship, as conventionally understood, but 
merely as a convenience to maintain an extravagant lifestyle. 
This legislation rebalances the bankruptcy system by targeting 
the worst forms of fraud and abuse in the system while leaving 
honest bankruptcy filers unaffected. It rewards old-fashioned 
virtues of thrift and personal responsibility and ends the 
shameful subsidization of upper-class profligacy by those who 
are forced to pick up the bill. I urge you to pass it.
    Thank you.
    [The prepared statement of Mr. Zywicki appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Professor Zywicki.
    We now turn to Mr. Malcolm Bennett, who appears here on 
behalf of the National Multi Housing Council and the National 
Apartment Association. He is president and founder of the 
Minority Apartment Owners Association and founder of 
International Realty and Investments, Incorporated.
    Thank you very much for coming from California, Mr. 
Bennett, and the floor is yours.


    Mr. Bennett. Thank you, Chairman Specter and other members 
of the Committee. Thank you for the invitation to be with you 
here today as you consider S. 256, the Bankruptcy Abuse 
Prevention and Consumer Protection Act. As said, my name is 
Malcolm Bennett. I am from Los Angeles, California, where I am 
the founder and president of International Realty and 
Investments, one of the largest minority-owned and -operated 
firms in the area. And, in addition, I formed the Minority 
Apartment Owners Association, which represents owners 
throughout Southern California. And today I am here 
representing the National Multi Housing Council and the 
National Apartment Association, and I would like to share with 
you my views as well as the industry views on the current 
Bankruptcy Code.
    While we are certainly in support of comprehensive and 
meaningful reform of the Bankruptcy Code, I will limit my 
comments to those that are of most interest to us, and that is 
the provisions of the automatic stay.
    As you are well aware, Section 362 of the Code essentially 
denies creditors the ability of collection effort when a person 
files for bankruptcy protection. For those of us in the rental 
housing community, this means that we are prohibited from 
continuing with the eviction process. While we certainly 
realize that the automatic stay provision to give debtors 
breathing room is a worthy one, however the rental housing 
industry and renters in general are disproportionately 
disadvantaged by this provision, especially when it is 
manipulated by people for personal gain. And I may explain, I 
have made my work putting people into housing, especially a lot 
of those that would almost be out of that safety net. And in 
the majority of cases, it has been tremendously rewarding. 
Unfortunately, there does come a time when a resident must be 
removed from his or her rental unit by eviction. Now, 
understand that as property owners we need tenants, and we 
would not evict a tenant without cause. And when we do use the 
eviction process, it is actually the last action that we take. 
And we do so following strict State laws and procedures which 
we believe to be fair and protective of the residents.
    We really cannot go in and change the locks and take 
possession of a unit. There are numerous legal matters that 
arise in the eviction process. On the whole, the average 
eviction takes about 3 months, and during this time several 
things happen. Number one, there is no rent being paid by the 
tenant, and there is obviously the potential for extensive 
damage because the tenant knows that they are going to 
eventually be evicted, and there is no way to re-rent the 
apartment. In the meantime, we continue to incur legal bills, 
ongoing utilities, and other miscellaneous costs associated 
with a unit that is basically out of service.
    Once we have been granted a judgment in a State eviction 
court, then he or she subsequently files a bankruptcy petition. 
And as you know, that automatic stay provision stops our 
eviction right in its tracks. And as a result, residents are 
allowed to stay in these places rent-free, which could be 
several additional months. And it is really most absurd when 
the situations arise out of illegal drug activities when we are 
mandated to get rid of these people, yet they are allowed to 
remain in because of the automatic stay. And, in addition, we 
run the possibility of losing good tenants.
    What is even more distressful is there are a lot of 
unscrupulous opportunities which exploit the automatic stay by 
going out and passing out to our tenants flyers saying that 
they can get them extra time by filing all sorts of frivolous 
motions in the eviction proceedings. Then after all of that 
fails, then they file for bankruptcy, stalling, which could 
take another several months. These abuses play out all across 
the United States, from large multi-family communities to 
single units.
    I would also like to point out that a recent study shows 
that 47 percent of all rental housing is owned by individuals 
like me, and 35 percent of all of those are properties with ten 
units or less. In short, when apartment owners, especially 
small firms, lose our ability, it is a great significant 
burden, and the added cost really impacts the low and moderate 
    Section 311 is a much-needed reform to the automatic stay. 
While it does not exempt rental housing from the automatic 
stay, it goes a long way to help the abuse. And what it really 
does, it denies an automatic stay if the property owner or 
manager already had a judgment prior to the bankruptcy being 
filed, and when the property is endangered with illegal drugs 
or controlled substances. Both of these will allow the owner to 
gain possession much faster. Also, it provides that needed 
protection for a tenant that wants to reinstate their entire 
monetary default and remain in the unit.
    At all cost, we try to avoid evictions, and as I move to 
close, this is an important step to reduce the abuse, and this 
amendment will go a long way. And I would like to thank you on 
behalf of the National Multi Housing Council and the National 
Apartment Association for the opportunity to present these 
points to you today, and I certainly will entertain any 
    [The prepared statement of Mr. Bennett appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Mr. Bennett, for 
your testimony.
    Our next witness is Mr. Philip Strauss, here on behalf of 
the National Child Support Enforcement Association, principal 
attorney for the Legal Division of the Department of Child 
Support Services in San Francisco; a bachelor's degree in 
history from the University of California at Berkeley and law 
degree from the University of California at Hastings.
    Thank you very much for joining us, Mr. Strauss, and you 
are up.


    Mr. Strauss. Mr. Chairman, members of the Committee, good 
morning. As you said, I appear on behalf of the National Child 
Support Enforcement Association, whose membership consists of 
professionals at the local, State, and Federal Government 
levels who have the responsibility for administering and 
implementing the Federal child support enforcement program. I 
welcome the opportunity to discuss the effect that the 
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 
will have on the collection of child support and alimony when 
the debtor has filed a petition for relief under the Bankruptcy 
    For the last 31 years I was employed as an attorney for the 
City and County of San Francisco, and the last 28 I spent 
enforcing child support obligations. For the last 16 years, I 
specialized in the collection of support during bankruptcy and 
have taught this subject to attorneys both in California and 
nationally. I have litigated bankruptcy support cases before 
numerous bankruptcy courts, the District Court for the Northern 
District of California, Bankruptcy Appellate Panel of the Ninth 
Circuit, and the Ninth Circuit Court of Appeals. I retired from 
service in San Francisco in 2004.
    Seven years ago, I proposed amendments to the Bankruptcy 
Code which now appear in S. 256. It is my opinion and the 
opinion of every professional support collector with whom I 
have discussed the issue that the child support amendments 
contained in Sections 211 through 219 of S. 256 will 
revolutionize the enforcement of support obligations against 
debtors in bankruptcy. These enhancements will also result in a 
more efficient and economical use of attorney and court 
    During the past 17 years in which I have taught the subject 
of support enforcement during bankruptcy, I have reviewed 
virtually every court opinion written on the subject since the 
enactment of the Bankruptcy Code in 1978. Based on this 
experience, I developed, in association with my colleagues, 
what essentially became a wish list of amendments to the 
Bankruptcy Code aimed at facilitating the collection of support 
from bankruptcy debtors. This wish list is reflected in 
Sections 211 through 214 and 216 through 217 of S. 256.
    The most important amendment is found in Section 214 which 
removes several impediments to the collection of support. Of 
these, the most valuable by far is a provision allowing the 
continued operation of an earnings withholding order for 
support. Since State courts or administrative agencies have 
already determined the appropriate level of support and 
arrearage payment, the removal of withholding orders from the 
reach of the automatic stay will require a support debtor to 
design his or her bankruptcy plan to accommodate support 
debts--which are, of course, the most serious and primary of 
all financial obligations. Under current bankruptcy law the 
reverse is true. The support creditor is often forced to take a 
back seat to ordinary commercial creditors when a support 
arrearage payment is sought in a bankruptcy case.
    Under current bankruptcy law, when a debtor files for 
protection under Chapter 12 or 13, the collection of even 
ongoing support is stayed. The economic detriment to the family 
which is not receiving public assistance can be devastating.
    This amendment, therefore, not only ensures that the 
payment of support by wage earners will not be interrupted, but 
it will also avoid the need to entangle the debtor's family in 
the bankruptcy process.
    In addition to the removal of the earnings withholding 
process from the automatic stay, other federally mandated 
collection processes would be exempt under Section 214 of the 
bill. These include the interception of the debtor's tax 
refunds to pay the support obligation; the revocation of 
debtors' professional, driver's, or recreational licenses for 
those debtors who are not paying their support; the continued 
enforcement of medical obligations; and the continued reporting 
of support delinquencies to credit reporting agencies.
    Perhaps the second most important and useful section of the 
bill is contained in Section 213 which prevents a debtor from 
obtaining confirmation of a bankruptcy plan and a subsequent 
discharge if that debtor has not made full payment of all 
support first becoming due after the petition date. This 
section is significant for two reasons. It will prevent a 
support debtor from paying other debts at the expense of 
familial obligations. And, second, the provision is self-
executing. Neither the support creditor, an attorney for the 
creditor, nor a public attorney will have to seek enforcement 
of this provision in bankruptcy court.
    I know that there has been some criticism that the bill 
will put child support creditors in competition with banks or 
financial institutions who have debts that have not been 
discharged because of this bill. However, there is no 
professional child support collector who believes that is a 
serious issue. We have never had a problem collecting support 
simply because a credit card or a financial institution was 
collecting support. Therefore, on behalf of the National Child 
Support Enforcement Association, we urge you to enact this bill 
so that these amendments can finally be implemented. We have 
waited a decade for them, and every year that goes by means 
support that is not collected for children.
    [The prepared statement of Mr. Strauss appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Mr. Strauss.
    Our next witness is Mr. David McCall, here on behalf of the 
United Steel Workers of America, where he is director of 
District 1. He has had numerous key positions in the labor 
movement and leads the union's negotiating committees for 
Republic Engineered Products, attended the labor studies 
program at Indiana University, Northwest, and graduated from 
the Harvard University trade union program.
    Thank you very much for joining us today, Mr. McCall, and 
we look forward to your testimony.


    Mr. McCall. Good morning, Mr. Chairman and members of the 
Committee. I am a member of our union's International Executive 
Board and the USWA district director for the State of Ohio, a 
State that has lost over 200,000 jobs in the last 5 years, a 
State where our union and the workers and the retirees we 
represent have experienced bankruptcies at such companies as 
LTV Steel, Ormet Aluminum, Warren Consolidated Industries, 
Republic Engineered Steels, and Wheeling-Pittsburgh Steel, 
which are among the largest. Beyond Ohio, our union of over 1 
million active and retired steelworkers has experienced 
bankruptcies at other locations such as Bethlehem Steel, 
National Steel, Kaiser Aluminum, and many other companies. 
Given the importance of bankruptcy law to the lives of our 
workers and our retirees, you can be sure that our 
International President, Leo Gerard, would be here today if he 
were not out of the country. But on his behalf, my own, and our 
union, we certainly thank you for holding these hearings and 
considering the perspectives that we offer.
    By itself, bankruptcy law cannot solve the many problems 
facing the American worker and pensioners today. It cannot roll 
back a flood of illegal imports that may undermine a plant or 
an industry, and it cannot directly challenge the transferring 
of manufacturing jobs to other countries. Nor can it 
necessarily close the widening gap between rich and not-so-rich 
in our country or solve the problems of our health care and 
pension systems. When these forces do drive companies under, 
our bankruptcy law should treat workers and retirees and their 
families as fairly and as humanely as possible.
    Most of the bill now before this Committee addresses 
consumer bankruptcies, but over the life of this bill and its 
predecessors, our union and the rest of the AFL-CIO have viewed 
S. 256 generally as rendering wholesale changes in the consumer 
bankruptcy system that would shift the rules decidedly in favor 
of creditors and to the detriment of individuals.
    Let me offer four points based on the experience of our 
union with manufacturing companies in bankruptcy. And much of 
this experience comes after and before the waves of bankruptcy 
in manufacturing.
    First, it is hard to say what is the worst thing about 
bankruptcies in manufacturing, whether it is the loss of tens 
of thousands of jobs and the impact on workers and their 
families; whether it is the extreme economic shock to the 
affected communities; whether it is the loss of hard-earned and 
promised benefits. But surely one of the most tragic injuries 
is when retirees, their spouses, and surviving spouses lose 
through bankruptcy their health insurance, just at a time when 
it is most needed in their life. These are citizens who spent a 
lifetime working in hard and dangerous jobs to earn what was 
supposed to be a lifetime employer-paid retiree insurance, only 
to lose it all as a result of the bankruptcy. If bankruptcy law 
is to be seen as legitimate and credible, it must be as humane 
and fair as possible on this particular subject. Therefore, 
when bankrupt companies sell its assets to a buyer, the buyer 
should fund or support at least a portion of the previous 
health care promises. I know Senators Leahy and Durbin and 
Rockefeller have each developed ideas that would dedicate a 
greater share of the bankruptcy estate to the needs of retirees 
who lost their health care in bankruptcy.
    Second is the subject of pensions. Even with a 
comprehensive Federal pension law such as the PBGC, 
bankruptcies leave behind too many victims. The shock and 
nightmare of workers and retirees losing a substantial amount 
of a pension benefit because of the termination of the plans in 
bankruptcy is a tragedy I have witnessed all too often.
    Third, the bill before you proposes to raise the priority 
for wages from 90 days before filing up to a maximum of $4,925. 
A new rule would give priority to those items earned in the 180 
days prior to filing up to a maximum of $10,000. This is 
progress, but it is not a complete solution. For example, 
courts in most areas of the country view severance pay as being 
earned over a long period of time, often over somebody's entire 
career. So even a rule prioritizing 180 days' worth of accrual 
brings very little severance pay to the priority category. In 
short, there are really two problems with the wage priority 
provision, both the amount and accrual period.
    Fourth, a section of this bill which does not appear until 
page 495 of a 501-page document is entitled ``Preventing 
Corporate Bankruptcy Abuse.'' I believe a more comprehensive 
approach to the problem of corporate abuses could be addressed 
by eliminating or restricting key employee retention plans. 
These golden parachutes are payable to executives of a 
reorganizing company and rewarding them handsomely often after 
they have cut workers' pay, reduced or eliminated retiree 
benefits, shuttered plants, and sold them off. A second area of 
concern is the problem of enormous sums of money going to 
bankruptcy professionals. Congress should look at restricting 
    Finally, let me conclude by saying our union is committed 
to work with anybody in this Committee in particular on any 
issues over bankruptcy, and we thank you for your time today.
    [The prepared statement of Mr. McCall appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Mr. McCall.
    Our final witness on the panel is Mr. Michael Menzies, who 
appears here today on behalf of the Independent Community 
Bankers of America. He is President and CEO of the Easton Bank 
of Easton, Maryland, has his bachelor's degree from Randolph 
Macon College, master's degree from Baltimore Loyola College, 
and moved to the Darden School of Banking at UVA.
    Thank you for joining us, Mr. Menzies, and the floor is 


    Mr. Menzies. Mr. Chairman, thank you. It is an honor to be 
in front of you today and to testify on behalf of the ICBA, the 
Independent Community Bankers of America, and I am especially 
honored that you waited for my testimony.
    Mr. Chairman, ICBA strongly supports S. 256 and appreciates 
the very hard work of this Committee over the past 8 years. We 
know you have truly been into this subject.
    Before sharing thoughts about the environment of personal 
bankruptcy and its impact on our communities, allow me to offer 
a brief illustration of the loan risk-taking process. Community 
banks are in the risk-taking business, and the reward for that 
risk, if properly underwritten, is earnings for all concerned. 
The customer benefits through financial health. The healthier 
the customer, the healthier the community, the healthier the 
bank, the healthier our overall economy, the healthier our tax 
base. The underwriting of consumer loan risk is a fundamental 
driver to all local economies.
    Successful consumer lending depends on numbers. Banks must 
make many loans to as many people as possible to diversify 
exposure and to spread the risk. In some respects, it is almost 
like health insurance without the impediments of health 
insurance. Consumer lending involves spreading risk over an 
entire portfolio. Many small loans are made, so profits from 
any one loan are small and profits come through volume. At the 
same time losses can be significant relative to unit 
profitability. This is especially true when the entire 
principal of a loan is lost all at once. Let me review the 
simplified consumer loan portfolio example that is attached to 
my testimony.
    The example consists of two revolving loan portfolios, each 
containing 100 loans of $1,000 apiece and each paid off within 
a year. One portfolio has an interest rate of 5 percent, the 
other portfolio an interest rate of 18 percent.
    If one loan in the 5-percent portfolio were to immediately 
default, regardless of reason, it would take the interest 
payments of 41 performing loans to compensate for that default. 
To put it another way, if you are earning 5 percent on a loan 
and you lose 100 percent of the principal balance of that loan, 
it takes 20 years of the same loan of interest earnings to 
offset the loss of that one loan.
    If one loan in the 18-percent portfolio defaults, it takes 
the interest from 12 performing loans to compensate for that 
default. Obviously, if a lender is experiencing greater losses 
than anticipated, they either have to charge more or be more 
selective in their underwriting process.
    There is not much more to underwriting than that, but it is 
difficult and lenders expend a tremendous amount of effort and 
energy to try to get it right. A lender that provides the 
greatest number of borrowers with the best rate while keeping 
defaults to a minimum is going to have the most reward and the 
most customers. Anything that enhances this process has obvious 
consumer benefits. Anything that detracts has obvious 
downsides. Again, we either have to raise rates or tighten loan 
    ICBA believes that bankruptcy is an appropriate solution 
for individuals who have legitimate reasons to walk away from 
their obligations. ICBA recognizes that all other borrowers pay 
for these losses created by those who are discharged from their 
debts. Sometimes these other borrowers are our children who 
inherit the impact of the cost of our credit system. This tax 
on the majority of individual borrowers should be mitigated 
wherever possible. Healthy consumer borrowers benefit 
communities, their economies, and our overall tax base. 
Economic disincentives such as unnecessary bankruptcies or the 
unnecessary discharge of debt hinders the wealth formation 
process that is necessary for social progress.
    Unbalanced bankruptcy policies have significant social 
implications, whether manifested in the casual avoidance of 
domestic support obligations, State taxes, or debts owed to 
lenders. A balanced policy will recognize that there are 
situations where it is appropriate to relieve individuals of 
all or part of their financial responsibilities, but at the 
same time will encourage Americans to take ownership of their 
personal financial health.
    ICBA would like again to express our strong support for S. 
256 and appreciate the efforts of this Committee to provide a 
modern legal framework for bankruptcy. We hope that after 8 
years of extensive consideration the Committee will move 
expeditiously to enact this much needed legislation. On behalf 
of community bankers, we stand ready to do everything possible 
to help you with this effort
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Menzies appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Mr. Menzies.
    On behalf of Senator Grassley, we will introduce his 
statement into the record in full, and Senator Grassley would 
also like to submit the testimony of the National Association 
of Federal Credit Unions and a letter from the Department of 
Justice, all of which will be made a part of the record, 
without objection.
    As I had commented earlier, I am going to be due on the 
floor on the class action bill at 11:30, so I am going to defer 
my round of questioning and absent myself for just a few 
minutes. I think we have time for 7-minute rounds. There is a 
vote scheduled at 12:30, so we will have at least time for one 
round, and if there are other questions, we will give the 
members full opportunity to question as they see fit on into 
the afternoon.
    At this time I will yield to my colleague, Senator 
    Senator Sessions. Thank you, Mr. Chairman. I appreciate 
your leadership on this issue. I know I have inherited Senator 
Grassley's Court Subcommittee, and he is the leader on this 
bill and has worked on it I guess for 8 years. It has been a 
big part of what I have done since I have been in the Senate. 
Former Chairman Hatch has worked on it very, very hard, and we 
have got a lot of bipartisan support, really.
    I think there is a real consensus that we can do better, 
that we as a Congress ought to evaluate this Federal court 
system. This is not like a State court system. It is a Federal 
system, and we have the responsibility to examine what is 
happening with it, see if it is working, and where it is not 
working to fix it.
    We have run into a lot of examples of abuses. Mr. Bennett, 
I think we had a little fuss over the housing matter last time, 
and rentals, but I think we really came up with compromise 
language that made a big step forward, because that bankruptcy 
law is clearly being abused when it comes to tenants whose 
leases expire, they have no right to be in there, and it just 
creates a nightmare.
    Mr. Bennett. Thank you so much.
    Senator Sessions. Mr. Strauss, there is no doubt--I am so 
glad you made that passionately clear--that this legislation 
clearly benefits child support and those who are receiving 
alimony from the courts. That is something that has been 
handicapped by the bankruptcy laws, and we know we can do 
better about it. I personally believe and I think most 
Americans believe that if someone is making more than median 
income and can pay back a part of the debts that they owe, why 
don't they do so?
    And I believe, Mr. Zywicki, you indicate that 80 percent of 
the filers in bankruptcy court are below median income. Is that 
    Mr. Zywicki. That is correct, Senator.
    Senator Sessions. And so the only people that would be 
impacted by the means test would be those who make median 
income or above, and many of those have substantial incomes. Is 
that correct?
    Mr. Zywicki. That is correct, Senator, and they have 
substantial expenses that they can deduct, such as medical 
expenses, for instance.
    Senator Sessions. Well, explain that. I know there has been 
some concern that somehow the medical expenses invalidate the 
bankruptcy reform bill. I will just put it that way. I see Dr. 
Tom Coburn here. Earlier he had to leave. But maybe someday if 
you can afford to pay the doctor or your hospital, maybe you 
should pay them. It is not as if they are evil entities, your 
physician or your hospital. If a person has a high income, they 
have got a low medical bill, maybe they can pay all or part of 
that. If they are below median income, they would not be 
required to pay it in any case, I assume.
    But would you comment on the discussion about health care.
    Mr. Zywicki. Thank you, Senator. With respect to your 
specific observations, those are exactly right. First, the way 
the means test works, you first have to determine whether a 
debtor is above the median income adjusted for family size. If 
not, then the means test completely does not apply.
    If they are above the median income, you then move to the 
second step, which is to determine--to establish a budget for 
the debtor to live on and several categories of expenses that 
are permissible and are subtracted right off the top before you 
determine these sorts of things, one of which is specifically 
medical expenses. There is a specific provision in the 
legislation on the means test that specifically makes a special 
allowance for health insurance and health care expenses and for 
caring for other health care expenses that arise in the family.
    Senator Sessions. In other words, if you moved into Chapter 
13 and the court evaluates how much money you should pay toward 
the debts you lawfully incurred before you filed bankruptcy, 
they would consider what your required health care payments 
would be before they would order you to pay anything.
    Mr. Zywicki. That is absolutely correct, Senator.
    Senator Sessions. If they are really high, you may not be 
required to pay anything because the court would give you 
credit, so to speak, for those extraordinary health care 
    Mr. Zywicki. That is exactly right, Senator, yes.
    Senator Sessions. Well, I think that is important.
    Mr. Beine, you represent credit unions. You have members. 
You are a non-profit. But you heard Mr. Menzies suggest that 
the problem of raising costs for people who balance their 
checkbook and pay their debts every month when people 
manipulate the bankruptcy system. And you cited a young couple 
that clearly abused the system. Your credit union took the hit 
for that, as I understand it. Does that, in effect, cause you 
to raise rates on people who do not abuse the system?
    Mr. Beine. In the end, yes. We have implemented risk-based 
lending, and we apply rates based on people's credit history. 
And individuals who are in that category end up paying more 
because their fellow consumers have walked away from something. 
We all pay for that.
    Senator Sessions. There is no free lunch on it.
    Mr. Beine. There is no free lunch.
    Senator Sessions. [Presiding.] I will just conclude by 
noting that this bill has really had a lot of intensive 
interest. It has been passed four times by both Houses of 
Congress. That is stunning, really, four times by both Houses. 
It had broad bipartisan support. In 1998, we passed a bill in 
the Senate 97-1. March 15th it was 83-15. I think the need has 
continued to grow. The problems with abuses continue to grow. I 
believe the means test is a legitimate factor that will involve 
only a small percentage of people who file bankruptcy, and 
those would have the chance to show that they cannot pay back 
anything if they have extraordinary expenses that the court 
could take into consideration.
    We have made some progress, I think, on cram-down. We have 
made some progress on rental difficulties. We have made 
progress on quite a number of issues that have been hotly 
contested and debated. And generally we have ended up with real 
strong support across the aisle for the final bill.
    So I would now recognize our next member, which would be 
Senator Kennedy. I will recognize you on behalf of the 
    Senator Kennedy. Thank you very much, Mr. Chairman.
    I would ask, Professor Warren, would you care to comment on 
what Professor Zywicki mentioned in terms of the bills in 
    Ms. Warren. Yes, Senator, I would be glad to. Indeed, I 
hope that what this colloquy means is that this Committee will 
consider adopting a safe harbor so that no family that has an 
income below the median will be required to go through all of 
the steps and all of the expenses in the means test that are 
currently imposed even when it is clear from the first minute 
of the petition's being filed that this person would not be 
someone who should be--who would ultimately be forced to pay 
under the means test.
    As I recall, people have asked for that over and over, and 
it is a reminder that it is costs that matter to families whose 
median income is $25,000. Being forced to file the papers, go 
through and run the risk of the traps and tricks are a real 
    I also hope that what this means is that there will be an 
amendment that will say that every family, when going through 
the means test, whether they currently have health insurance or 
not, will be permitted an allowance for health insurance. If 
that is the case, it would go a long way toward ameliorating 
some of these problems. As I understand it, it does not 
currently do that.
    But I would also point out, Senator, as I said before, this 
is one of 217 sections in the bill, the means test. Every other 
section in this bill applies regardless of income and 
regardless of the reason that you file for bankruptcy. I cannot 
fathom why a family that has high medical bills would not be 
permitted to file a Chapter 13 repayment plan in a last chance 
to try to save their homes because they could not come up with 
more money for car lenders, which is what is currently required 
under the bill, or more money for appliance lenders.
    This bill is grinding everyone through, and everyone has 
gotten their nose in for a piece here and a piece there. The 
only ones who are not represented in this conversation are the 
3.9 million Americans every year who are affected by this bill, 
the ones who file, the ones who are the children and other 
dependents of those who file.
    Senator Kennedy. Yesterday you appeared at a press 
conference where they had three individuals who were all 
workers and who had been devastated by the health bills. And in 
that conference, you referenced a rather detailed study that 
you had done about what these people had actually gone through 
in order to avoid bankruptcy. Could you summarize that for us, 
    Ms. Warren. Yes, Senator Kennedy. If we could have the 
    We asked families, we did both surveys when they first 
filed for bankruptcy, written surveys. We examined their court 
records, and then we did extended telephone interviews with 
these families after bankruptcy.
    These families told us that before they filed for 
bankruptcy--these were the medical bankrupts, the people who 
filed in the aftermath of a serious medical problem, a million 
adults every year. Sixty-one percent did not receive needed 
medical care because they didn't have the money. They were 
spending their money trying to pay other bills.
    Fifty percent did not have prescriptions filled that their 
doctors had given to them because they did not have the money 
and they were trying to find a way to make ends meet.
    Thirty percent had worked so hard at not paying the 
electric bill, the gas bill, in order to try to meet their 
medical obligations that they suffered utility shut-offs; that 
is, they had the power turned off, they lost their telephones.
    And among a group of people who are middle class, people 
who went to college, got decent jobs, played by the rules, got 
health insurance, as they spun out of financial control, in 
trouble, 22 percent went without food because they had not 
enough money.
    And the last group that we identified here, 7 percent of 
the households who filed for bankruptcy moved an elderly parent 
to cheaper facilities in order to try to be able to meet their 
    Professor Zywicki is certain that these people have abused 
the system. All I know to do is to let them speak for 
themselves, to bring their stories here. We have done the 
research. These families have tried their best. Bankruptcy was 
not their first option. It was not their second option. It was 
not their tenth option.
    They told us stories about crying at the hearing, military 
people who had to be excused from the hearing because they 
cried so hard they could not talk any longer.
    There are people who abuse the system. There is no doubt 
about it. But that is not what is happening to most of the 
people who file for bankruptcy.
    Senator Kennedy. Why doesn't the means test protect those?
    Ms. Warren. Senator, the means test just forces every 
single family, regardless of income, regardless of the reason 
that they filed for bankruptcy, to file new papers, to run new 
trips, to run new traps, ways to get them forced out of the 
system. It increases the cost for the attorney. It forces every 
attorney to take on new liability responsibilities, and that 
drives up filing fees for these families. There are 100 ways to 
squeeze the people among us who have been most desperately hurt 
by a broken health care system.
    Senator Kennedy. My time is up.
    Senator Sessions. Professor Zywicki, I think I will give 
you a chance to briefly respond to her mention of your name. 
You did not suggest that everybody was abusing, did you? Or 
what percentage did you suggest may be abusing the system?
    Mr. Zywicki. Absolutely not, Senator. First, the FBI 
estimate is that roughly 10 percent of bankruptcy petitions 
contain some sort of fraud. Empirical evidence tends to suggest 
that 7 to 10 percent of bankruptcy filers would qualify for the 
means test. And if I could add one final footnote, I would 
    Senator Sessions. Repeat that now.
    Mr. Zywicki. Roughly 7 to 10 percent of the highest-income 
filers would be the ones who are affected by the means test.
    Senator Sessions. It would be less--
    Senator Biden. Could I ask for clarification? Only 7 to 10 
    Mr. Zywicki. Yes, Senator.
    Senator Biden. Would be affected by this, is that what you 
are saying?
    Mr. Zywicki. The estimates are that roughly 7 to 10 percent 
of bankruptcy filers today would qualify for the means test and 
file Chapter 13 rather than Chapter 7. However, because the 
means test captures and targets the highest-income debtors with 
the greatest repayment capacity in the system, the people who 
are making $80,000, $90,000, $100,000, $120,000 a year, it is 
estimated that recoveries from those debtors would be roughly--
that they could pay roughly 60 to 70 percent of their unsecured 
debt in bankruptcy. And I think there are two notes to be made 
about as it relates to this.
    First, with respect to the means test, the allowances, as I 
said, are subtracted. I would also refer the Committee to 
Section 102(i), which is labeled special allowance for health 
insurance, and I believe Professor Warren said that there 
should be a special carve-out for health insurance payments. 
Section 102(i) is exactly that.
    Finally, I think that it is worth considering and I think 
that it is worth--the idea of whether or not we truly believe 
that medical providers should be treated as second-class 
citizens in bankruptcy, that just because a doctor delivers a 
baby or your neighborhood drug store sells you prescription 
drugs, the idea that they should not be entitled to the benefit 
of the means test for people who could repay their debts I 
think is troubling.
    Senator Sessions. Well, thank you. We do not want to get 
too far off base. But I think Senator Biden and maybe others 
would like to ask discreetly, just briefly. I had been using 
the figure that only about 20 percent of the people would 
qualify for the means test. Where do you get the numbers that 
now say 7?
    Mr. Zywicki. Certainly, Senator. I apologize for the 
ambiguity. The means test has two steps. At the first step, 
which is do you make above the median income, 80 percent of 
debtors make below the median income. That means 20 percent of 
filers move on to the second step. The estimates are that at 
the second step, you would determine that a number of the 
people who make above the median income would not have 
substantial repayment capacity after you subtract all of the 
allowances that are allowed by the means test. So after you 
subtract medical expenses, that sort of thing--
    Senator Sessions. Well, we better get back to regular 
    Mr. Zywicki. And so roughly 10 percent are left over after 
you jump both of those hurdles.
    Senator Sessions. Senator Cornyn?
    Senator Cornyn. Thank you, Mr. Chairman.
    I want to express my appreciation to Chairman Specter, but 
also to Senator Biden and Senator Grassley for all the hard 
work they have done on this, long before people like me even 
came to the Senate. And I know this has been long in the 
    I support bankruptcy reform because I think we need to 
restore a greater sense of personal responsibility to our 
financial system and prevent the abuses of the bankruptcy law 
that we have witnessed in recent years. Bankruptcy relief 
should be available to those who are unable to pay, not to 
those who are simply unwilling to pay.
    I would like to focus my comments and questions, though, on 
some new legislation that I filed earlier this week called the 
Fairness in Bankruptcy Litigation Act of 2005. And just by way 
of background for my colleagues, this arose out of an 
experience that I had in a previous life as Attorney General of 
Texas during the Enron bankruptcy.
    Of course, Enron was headquartered in Houston, Texas, but 
lo and behold, its bankruptcy was handled by a bankruptcy court 
in New York, where apparently they had had a subsidiary with 57 
employees, notwithstanding the fact that 7,500 employees were 
located in Houston, Texas, along with many of the creditors and 
witnesses and others, certainly the workers and the pensioners 
whose lives were directly affected by that bankruptcy.
    The purpose of the bill that I filed was to try to prevent 
judge-shopping in bankruptcy. We know that sometimes the most 
important determination made as far as the outcome of a lawsuit 
can be the court in which that case is heard. It is just human 
nature, certainly, that the party who benefits, here the 
debtor, might try and find the most favorable forum. We 
understand that being part of human nature. But it is our job 
to try to make sure the playing field is as level as possible 
and that nobody gets an unfair advantage going in.
    But I was very concerned because I saw the abuse from my 
perspective of the venue laws in bankruptcy in the Enron case 
where people in my State, my constituents were denied the 
opportunity for a forum that was close to home where they could 
actually have their claims heard and the case decided.
    As I have gotten into this, I have learned that there are a 
lot of people concerned about the same problem. For example, 
there is a new book written by Professor Lopucki of UCLA, I 
believe, called ``Courting Failure: How Competition for Big 
Cases Is Corrupting Bankruptcy Court.'' And I know that 
Professor Warren, who we have talked to about this, shares some 
of those concerns. Professor J.L. Westbrook of the University 
of Texas Law School and a lot of other people ranging from--
well, really on both sides of the aisle; my successor, Greg 
Abbott, as Texas Attorney General, but also former 
Massachusetts Attorney General Scott Harshbarger, a Democrat, 
who I guess is still head of Common Cause, or maybe just 
immediate past.
    So this is a concern shared by an awful lot of people, and 
I just want to ask--first I want to ask Professor Warren, first 
to express my appreciation for your consulting with my staff on 
this issue, but also then maybe to ask Professor Zywicki what 
your comments might be on judge-shopping in bankruptcy and the 
concerns that you may have. First, Professor Warren, would you 
please respond?
    Ms. Warren. Yes, Senator. Thank you very much. It has been 
my honor to work with your office on this important issue. I do 
not think this is an issue of Republicans or Democrats, an 
issue of liberals or conservatives. It is a good government 
issue. And as I see it, the background system makes a promise, 
and that is that there will be full and fair access for 
everyone, every creditor, everyone who has been injured or 
affected by the process.
    In the case of large corporations that can leave their home 
venue--Enron, who can leave Houston, Texas, where its 
employees, where its pensioners, where its trade creditors 
reside--and escape the obligation to make the process open to 
the thousands of people who are directly affected by the 
bankruptcy, that affects the bankruptcy system overall. A fair 
bankruptcy system is one that retains access for the employees, 
for the pensioners, for the small creditors, and that means 
those cases need to stay home, not go to a distant location 
where they think they may get a better deal.
    Senator Cornyn. Well, I have been impressed by the range of 
people that are concerned about this, everyone from the Enron 
employees committee, which has endorsed this particular bill, 
the National Federation of Business, and it is really quite a 
broad range of people. But is it your impression, Professor 
Zywicki, that creditors and employees, pensioners and others 
who are forced to litigate a bankruptcy in a far-flung forum, 
that some of them just simply give up or perhaps the costs of 
litigating in that far-off forum simply exceed the value of 
their claim and so ultimately it benefits the debtor rather 
than the creditor, someone with a valid claim?
    Mr. Zywicki. Senator Cornyn, that is probably the case, but 
I have not studied this particular issue closely enough to 
render an opinion on your piece of legislation.
    Senator Cornyn. I appreciate that answer, and let me 
clarify. I am not asking you to endorse the legislation now, 
anyway. I would appreciate it if you would look at it and tell 
us what you think.
    Mr. Zywicki. Certainly.
    Senator Cornyn. But is it a widely recognized problem not 
just among legal scholars, academia, but also practicing 
bankruptcy lawyers, as well as debtors, creditors and others 
that forum-shopping, judge-shopping, if I may say, is a cancer 
on our bankruptcy system?
    Mr. Zywicki. Senator Cornyn, I think there is no doubt that 
it substantially increases the cost to creditors and that there 
are a number of people, including Professor LoPucki and others, 
who have expressed concern for quite some time about this 
problem. There are others who have not seen it as quite a 
problem, but certainly it is the case that it makes it more 
difficult for creditors, employees and others to vindicate 
their rights in a distant forum than it would be otherwise.
    Senator Cornyn. Mr. Chairman, before I relinquish the 
floor, let me just ask unanimous consent that letters of 
endorsement that we have received from a variety of scholars, 
practitioners and people who are vitally concerned with this 
issue be made part of the record.
    Senator Sessions. They will be made a part of the record.
    Senator Cornyn. Thank you very much.
    Senator Sessions. I believe Senator Biden is next. Without 
objection, we will go to Senator Biden.
    Senator Biden. Thank you very much. I will refrain from 
what I assure my friend from Texas will be an incredibly long 
fight over this amendment. I find the language that is used 
kind of fascinating--escape from the obligation to be open.
    Is the colleague suggesting that the Delaware chancery 
court is not open, is somehow an unfair court? I find it 
outrageous such a statement. Maybe you can tell me. Is it not a 
competent court? Is it not an open court?
    Ms. Warren. Are you asking me, Senator?
    Senator Biden. Well, yes. You are the one that said 
``escape the obligation of making the process open.''
    Ms. Warren. Actually, Senator, bankruptcy cases are not 
heard in Delaware chancery court.
    Senator Biden. Excuse me, in Delaware, in Delaware. 
Bankruptcy courts in Delaware are not open?
    Ms. Warren. They are not open to employees of companies 
like Enron who cannot afford--
    Senator Biden. In what sense do you mean open?
    Ms. Warren. Excuse me, Senator?
    Senator Biden. In what sense do you mean open? The record 
is not open or they can't conveniently get there?
    Ms. Warren. Employees of companies like Enron literally 
cannot go to Delaware and hire local counsel, which the 
Delaware bankruptcy court requires of them before they can make 
an appearance, and that effectively cuts thousands of small 
employees, pensioners and local trade creditors out of the 
bankruptcy process. If they can't afford it, they are not 
    Senator Biden. Can they afford it in the States in which 
they reside?
    Ms. Warren. In the States that they reside in, they have 
local counsel, and local counsel can go down the block and 
appear on their behalf.
    Senator Biden. No, but can they afford it in those States?
    Ms. Warren. Yes, and they do and they appear.
    Senator Biden. Well, I only have seven minutes and I should 
talk about the Bankruptcy Act that is before us because this is 
a proposed additional law and there will be plenty of time to 
debate it.
    Let me ask a couple of questions here. By the way, this did 
start 8 years ago, this legislation, but there have been 
numerous changes to it in 8 years. Eight years ago, the person 
who stopped its passage was me because it did not have a safe 
harbor in it, it did not put women and children at the front of 
the line, it did not do a whole range of things that 
subsequently have occurred. We relitigated this 2 years ago, 
not in this Committee, but on the floor of the Senate, in 
conference, and we did it in great detail.
    I would ask unanimous consent that a statement that I have, 
Mr. Chairman, be entered for the record, if I may, at this 
    Senator Sessions. Without objection.
    [The prepared statement of Senator Biden appears as a 
submission for the record.]
    Senator Biden. I think one of the very important amendments 
that should be added to this legislation is the Schumer 
amendment, which, in fact, was part of the legislation, was 
part of an agreement that was crafted between the House and the 
Senate, and was part of what passed out of here as part of the 
bill overwhelmingly. The numbers that the Chairman cited--87, 
88, 89 votes, whatever the numbers were the several times it 
was passed out--contain the Schumer amendment.
    I am confused about one thing here. There is no question, 
coming from a family that has been, unfortunately, an excessive 
consumer of medical health care expenses, how someone can be 
absolutely crippled by these medical expenses. There is no 
question about that, in my view.
    What I have difficulty trying to figure out is should the 
irresponsibility of the Federal Government and the State 
government be thrust upon the creditor. Let me move away from 
health care for just a moment. There are an awful lot of people 
in the National Guard right now who are being sent overseas. 
They have jobs where their combined income of the husband and 
wife may be $80, $90,000 a year, but the male or female who is 
sent overseas, called up by the National Guard or the Reserves, 
who maybe was making $60,000 a year is now, based on their 
rank, making $24,000 a year. They have the same car payments, 
they have the same house payments, they have the same tuition 
payments, they have the same bills.
    My question is if they cannot pay those bills because of an 
extended tour, which many are going through, and they have to 
declare bankruptcy, should the creditors who have lent money to 
them based upon their initial income--should they be the ones 
that pay the cost, in effect, of their inability to pay, or is 
that a larger responsibility of the public at large?
    That is what confuses me about your arguments, Professor 
Warren. They are very compelling, they are literally true, but 
in a sense they beg the question. It seems to me that the 
Federal Government should be seeing to it that every American 
is put in a position where their health care costs are such 
that if, in fact, they have these extraordinary expenses, it is 
the social responsibility of the community to help them, as 
opposed to the social responsibility of the particular doctor 
or the particular bank that lent the money or the particular 
creditor who has put forward money, assuming there was any 
ability to pay.
    Just a philosophic question: should anyone who has 
extraordinary medical expenses that unquestionably exist--
should they be able to say, when there is an inability to pay 
all other bills, whatever they are--I mean, if they were going 
to pay those medical expenses, they wouldn't be able to pay 
another bill, from the gas company to whoever. Is it a societal 
requirement we should write into the Bankruptcy Code that says 
that the gas company should subsidize the payment of those 
medical bills, that the local drugstore should subsidize the 
payment of those medical bills?
    Maybe we should. I am being deadly earnest here, because 
you make a very compelling and mildly demagogic argument that 
talks about what is true. All of these things are true, and so 
my question is, from a philosophic standpoint, is it the 
responsibility of the gas company and the drugstore and whoever 
else you named to make sure that these people do not have to 
make these hard choices, or is that a responsibility of the 
Government or the people at large? That is my only question I 
will ask, and I am asking you, Professor.
    Ms. Warren. Senator, I think you have put your finger on 
the heart of what the bankruptcy bill--or bankruptcy, in 
general, not this bill--
    Senator Biden. No. Forget bankruptcy. I am asking a larger 
question. Forget about bankruptcy.
    Ms. Warren. But that is what I mean. It is the question of 
what role bankruptcy plays--
    Senator Biden. That is not my question. I would like you to 
answer my question. What role is there under what you would 
consider to be an appropriate form of Government where we 
legislate? Do we say that people who, in good faith, provide a 
service for an individual that the individual is later unable 
to meet because of a legitimately horrific and extraordinary 
dilemma that was an act of God--who should be responsible for 
taking them out from under that crushing burden?
    Should it be the automobile company who lent the money to 
purchase a car, the drugstore that provided a service and, in 
effect, lent the money because there is a bill, the drug bill, 
the utility company, the guy who has the lawn service company? 
Whose responsibility is it? That is really the question, 
because if you buy into this argument, which is very 
compelling, in my view, you are saying the creditors should be 
the ones to buy into that philosophically, enshrined in a piece 
of legislation obligation. That is my question.
    Ms. Warren. Senator, I think you are exactly right, and 
that is that we need fewer families to need to turn to the 
bankruptcy system. We have a broken health care finance system 
in the United States, and all I can do is point out that it is 
bankrupting families.
    Senator Biden. Absolutely right.
    Ms. Warren. Until we fix the broken health care finance 
system, those families have to turn somewhere and that means 
now they turn as a last-ditch effort to the bankruptcy courts.
    Senator Biden. And that means they turn to asking the 
people that they borrowed money from to pay for their health 
care costs, right?
    Ms. Warren. Senator, the costs--
    Senator Biden. Isn't that literally correct?
    Ms. Warren. It is literally correct that the costs of a 
broken health care system are borne throughout the economy.
    Senator Biden. We are asking--and I may be ready to do 
this. We are going to ask the gas company, the drugstore, the 
automobile dealer to pay for the broken system instead of 
having the nerve to come and say it is a moral obligation of a 
nation to pay for that broken system.
    Why should it not be someone who sits there, living in a $2 
million home, who lent no money to that person--why do they not 
have an obligation to pay for that instead of the guy who owns 
the drugstore at the corner pay for that? That is my only 
point. Let's just be honest about what we are doing here. It 
may make sense.
    I would like to put in the record a Forbes article, and I 
would like to ask you whether it is an accurate quote, 
Professor. They quote you in an article entitled ``Everybody 
Knows It's Credit'' in Forbes magazine saying, quote, ``The 
lobbyists are going to be the only ones who really profit, 
scoffs Elizabeth Warren, Harvard Law professor.'' I think you 
are dead right because as you point out in here, we have to 
find new bogeymen. The people who aren't going to benefit under 
this are the credit card companies, as you point out in here.
    I submit this for the record, if I may.
    Chairman Specter. Without objection.
    Senator Biden. I would invite any response in writing from 
anyone who would like to respond to the article. We will make 
it available to you.
    But I just think we should be honest about this thing. 
Making the gas company--and I don't like the gas company. I 
don't like many companies, but at any rate, we just ought to 
acknowledge what we are doing here when we make these kinds of 
    Chairman Specter. Thank you, Senator Biden.
    Senator Kennedy. Can Professor Warren just respond to the 
quote? Do you want to just respond to the quote?
    Ms. Warren. I think the Senator makes an entirely fair 
point about externalizing the costs and I would add only one 
caveat to it. Not only does this bill treat all debtors alike. 
In many ways, it treats all creditors alike. The gas company 
doesn't have the capacity to change its pricing to reflect 
these risks, or has very limited capacity. But I remind you of 
what the credit card companies have already--
    Senator Biden. Should it? That applies they should.
    Ms. Warren. No.
    Senator Biden. Should the gas company be required to change 
their prices to reflect these--
    Ms. Warren. No. Of course, they shouldn't, Senator.
    Senator Biden. The way you stated it, you said they don't 
have the capacity. The implication is maybe they should have 
that capacity.
    Ms. Warren. No. My point is the losses will go to some 
creditors who cannot reflect this in their prices. But look at 
the cases cited in my testimony where credit card companies--I 
have a specific case, In re McCarthy, but nothing unusual about 
it, a woman who borrowed $2,200. She paid back $2,100 over the 
2 years preceding bankruptcy, and at the end of that period of 
time she was told she still owed $2,600.
    With fees and interest, I submit, Senator, that there are 
many in the credit industry right now who are getting their 
bankruptcies prepaid; that is, they have squeezed enough out of 
these families in interest and fees and payments that never 
paid down principle.
    Senator Biden. Maybe we should talk about usury rates, 
then. Maybe that is what we should be talking about, not 
    Ms. Warren. Senator, I will be the first. Invite me.
    Senator Biden. I know you will, but let's call a spade a 
spade. Your problem with credit card companies is usury rates 
from your position. It is not about the bankruptcy bill.
    Ms. Warren. But, Senator, if you are not going to fix that 
problem, you can't take away the last shred or protection from 
these families.
    Senator Biden. I got it, okay. You are very good, 
    Chairman Specter. Thank you very much, Senator Biden.
    I am advised that Senator Kennedy has questioned, so we 
have four more Senators to question. The vote is scheduled at 
12:30, which is 30 minutes from now, so we have time for 7-
minute rounds if we observe the limits. I will take my seven 
minutes now.
    Senator Biden. May I be excused, Mr. Chairman? I am going 
to another tsunami hearing.
    Chairman Specter. We will miss you.
    Professor Warren, you testified in the opening comments 
about new problems such as the Enron executive problem. What 
would your suggestion be as to how the bill ought to be 
modified to deal with that issue?
    Ms. Warren. Senator, I think that Senator Durbin had a 
series of amendments proposed, I believe it has been 2 years 
ago now, that tried to address that directly, the notion that 
the bankruptcy courts need to be much more scrupulous about 
executive compensation and about insiders who take money out 
during the course of a Chapter 11, particularly when the 
consequence is to leave nothing for their employees, their 
pensioners, their health care plans. I think there is actually 
already drafted potential legislation here, sir.
    Chairman Specter. Mr. Strauss, you have emphasized the 
support orders as being a priority item. Would you have any 
suggestions as to how this bill might be made stronger to 
provide for support?
    I think there is a decided public policy in favor of seeing 
to it that those who owe support for children pay it and don't 
leave children in the hands of the mothers, absconding. What 
suggestions, if any, would you have to make the bill stronger 
on that important item?
    Mr. Strauss. I had actually in the last go-around suggested 
another exception to the automatic stay. The Federal Government 
requires that when a debtor is not paying support, his passport 
be taken. That was not included in this, so I would--it is a 
minor addition, but I think it would be helpful in enforcing 
child support obligations to remove from the effects of the 
automatic stay the right of the Government to withhold 
passports. Other ones are so technical it would just really 
take me too long to explain.
    Chairman Specter. Mr. Bennett, I note that you are the 
founder of the Minority Apartment Owners Association. Do you 
think that this bankruptcy bill fairly treats minorities, or 
would you have any suggestions on that line?
    Mr. Bennett. Well, as the study reports, the majority of 
small properties are owned by individuals, some 47 percent. So 
it really adversely affects not only the minorities, but the 
smaller property owners. Whereas most people have a belief that 
all apartments are owned by big conglomerates and REETs and 
things like that, the study shows that 47 percent are owned by 
individuals just like myself. So we certainly are adversely 
affected by bankruptcies.
    And not only that, but I pointed out in my testimony that 
we have cases where we have multiple bankruptcy filings where 
the husband will file and then the wife will file, and then we 
turn around and we have an 18-year-old son on their file. We 
have even had to request in some cases that the judge put on 
their order ``no additional bankruptcy filing.'' So it is a 
real concern.
    Chairman Specter. Mr. McCall, bankruptcies have certainly 
taken a very heavy toll on the economy and a very heavy toll on 
loss of jobs. The steel industry has been beset by quite a 
number of problems. The imports--we have done a little good on 
that. United States Steel Corporation has made profits in the 
last year and I think we are doing better, although more 
recently we have had a surge.
    I would be interested in your thinking on the asbestos 
problem which has caused some 74 bankruptcies and the 
tremendous loss of jobs in America. To what extent has that 
impacted on the interests of the labor movement?
    Mr. McCall. Certainly, it is a very similar situation and 
related to the health care issues that we were talking about 
earlier. There comes a point in time where companies by their 
creditors are loaned money, and whether or not they are doing 
responsible things with that money, whether or not they are 
investing that money responsibly, whether or not there are 
overpayments to executives, and even then once bankruptcy is 
initiated, whether there is a planned reorganization and the 
company reemerges paying part of that debt or whether they 
spend a vast majority of that money on professional 
professionals in bankruptcy, or whether they spend a great deal 
of money on, as I said before, KERPs and incentive plans for 
executives to downsize and downsize and downsize, leaving no 
jobs available, leaving no health care for the workers. So I 
think it is similar and related to the health care issue.
    There are probably other issues that enter into the 
Bankruptcy Code and issues of responsibility and fairness and 
justice and equity for all of the stakeholders in a company 
that is entering bankruptcy.
    Chairman Specter. Professor Zywicki, would you be able to 
expand on what Ms. Vullo testified? She had to leave before the 
question-and-answer session. She testified, as you heard, about 
going through a large series of efforts to enforce judgments. 
Does your expertise extend to that field to give some guidance 
to the Committee as to what we might do to avoid the kind of a 
problem she articulated?
    Mr. Zywicki. Senator, I have not in the context of 
preparing for today's hearing studied the specific language 
which has been proposed in the past because it is not part of 
this bill. What she reflects is, of course, similar to what all 
creditors go through in the current bankruptcy system, which is 
the difficulty of trying to collect debts. With respect to the 
particular amendment that she has proposed, I would have to 
study the language more specifically before I could render a 
full opinion on it.
    Chairman Specter. Well, I am sorry she wasn't able to stay 
longer. I intend to telephone her to get some more 
specification as to what she had to say. It sounded like a long 
chase. We have had the inability to complete this bill because 
of the provisions relating to collection of judgments and 
avoidance through bankruptcy by those who have judgments 
against them under the abortion laws. So we will be pursuing 
    Well, I have four seconds left and I will terminate on time 
and yield now to Senator Feinstein.
    Senator Feinstein. Thanks very much, Mr. Chairman. I 
neglected to introduce the two participants from California, 
and so I would like to acknowledge Mr. Bennett and Mr. Strauss' 
participation. It is a long way from California, as they say, 
so we are delighted to have your testimony today. Thank you so 
    I think Dr. Warren's op ed piece that says that almost 50 
percent of bankruptcy petitioners have health care problems is 
really something that we need to take into consideration. In 
the last Congress, the 107th Congress, I proposed an extreme 
hardship amendment, and essentially what it did was provide a 
rebuttable presumption.
    I would like to just read to the panel part of this because 
if you take one of Mr. McCall's, for example, union members, 
and because someone close to me is going through this right 
now, just to get a cancer diagnosis can run over $100,000 in 
tests. It is possible to have a health problem and you are 
never able to repay the debt. Therefore, the question comes 
whether this kind of debtor really should be pushed into 
Chapter 13 or remain in Chapter 7. So we proposed this last 
time. It went down, but I would like to work on it for the 
markup for this Committee, and let me read it to you.
    ``In addition to the other grounds by which presumption of 
abuse may be rebutted under this subparagraph, the debtor may 
rebut the presumption by showing that the debtor's financial 
problems are the result of extreme hardship and extraordinary 
circumstances beyond the control or reasonable expectation of 
the debtor for which the debtor should not be held justly 
accountable. If there is another ground by which the 
presumption may be rebutted, this clause shall not be construed 
to require a finding of abuse if the debtor's financial 
troubles arose from circumstances that were either within the 
debtor's control or for which the debtor should be held 
    I don't know whether this is perfect or not, but it seems 
to me that to push somebody into Chapter 13 and require that 
they repay a debt for which they bear no personal 
responsibility and have encountered an extraordinary and 
extreme hardship is not something that we should do, 
particularly as medical costs go up.
    I was told last week that the cost of one use of certain 
machines is $3 to $4,000 for diagnosis. Well, if you are on 
Social Security or if you are one of Mr. McCall's union members 
or if you are the average for my State, there are health care 
costs which you can never repay. It is just impossible.
    Now, Senator Biden's theory is, well, the Government should 
do that. That is not this bill. I don't really want to get into 
that, but it seems to me that there are some bona fide 
situations in which a debtor facing this kind of unavoidable 
and extreme hardship should not be pushed into Chapter 13.
    I would like the panel's response.
    Ms. Warren. Professor Zywicki, would you like to go first?
    Mr. Zywicki. Senator, I understand what you are saying. I 
would urge this Committee caution with respect to the premise, 
which is with respect to the conclusion that half of 
bankruptcies are substantially caused by health care. I have 
reviewed the study on which that is based. That number is 
substantially larger than any other study that has ever been 
done with respect to the relationship. The authors of the study 
consider a serious health care problem to be anything more than 
$1,000 in health care expenses over some period of time.
    Senator Feinstein. But that is not what I am saying. I 
mean, I am not talking about a study. I am saying we all know 
that health care costs can bankrupt you.
    Mr. Zywicki. Absolutely, yes.
    Senator Feinstein. The question is whether you have the 
possibility in your lifetime of repaying these costs.
    Mr. Zywicki. Senator, I believe that it is appropriate that 
the same rules should apply to everybody, which is if you can 
repay some or all of your debt, whatever it is, whether it is 
20 percent, I think that is appropriate. I think, secondly, the 
bill as it is written takes account of health care problems, 
health care expenses and that sort of thing. So I think that 
with respect to the problem we are trying to deal with, the 
bill is adequate as it currently stands to deal with the 
    Senator Feinstein. Anybody else? Dr. Warren.
    Ms. Warren. Thank you, Senator. I think, Senator, you have 
put your finger exactly on the key point, and I think, with 
respect, Professor Zywicki has given exactly the other side. He 
doesn't care what happened to these families or why it 
happened. The only question is you put them in, you turn the 
crank, and if it is possible to use public dollars to squeeze 
some more pennies out of them on behalf of their creditors, 
then do it.
    I think you ask exactly the right question. If we are to 
inject morality into this system, if we are to make the hard 
judgments, then it is incumbent on us collectively to ask what 
happened. Why did these families get into trouble?
    I think you are exactly right. Provide the escape, provide 
the safe harbor for the family who did everything right--good 
educations, decent jobs, paid for health insurance, got 
married, bought houses, aren't the abusers, the people who 
really wanted to play by the rules, the people who the last 
thing they ever wanted to do was end up in bankruptcy, but who 
discovered that in America today one medical diagnosis can take 
a solid, hard-working middle-class family and turn them upside 
down financially. You are offering them a chance to turn 
rightside up again.
    Senator Feinstein. Well, I would appreciate it if anyone on 
the panel would take a look at the language, at least. I am 
going to move something like this in the markup. It may well go 
down again, but I would appreciate any input that you could 
give to it.
    Could I make one other point, and that is on credit cards 
and sending these credit cards out to children. One of the 
things that I tried to do in another amendment was put a limit 
of $2,500 per card for a minor. I would like to have your 
comment on that.
    Mr. Beine. Number one, we do not send out unsolicited 
credit card mailings. And, number two, our limit is $500 for 
    Senator Feinstein. Would you repeat that?
    Mr. Beine. At our credit union, our limit for minors is 
$500. We require the parent's signature. We do not give out 
    Senator Feinstein. How about throughout the industry?
    Mr. Beine. I cannot speak for the industry overall.
    Senator Feinstein. Thank you. That is helpful.
    Ms. Warren. Senator, I would just point out that the 
industry now refers to minors, those under the age of 18--I was 
looking for the exact language, but as a growing market for 
them, the last group that isn't already carrying credit cards. 
They are a new profit center--children.
    Senator Feinstein. I think this is something that we need 
to take a look at, Mr. Chairman, and I need certainly to get 
updated. But I saw where 8- and 9-year-olds are getting 
solicitations with toys through the mail if they pick up a 
credit card.
    Now, it seems to me that with respect to a minor, there 
ought to be some limit on the amount of credit, without a 
signature of a parent and a guarantee by the parent to repay 
the debt.
    Chairman Specter. If they contract with an 8-year-old or a 
9-year-old or another minor, it is unenforceable.
    Senator Durbin, I believe under the early-bird rule, you 
were here early and you are next.
    Senator Durbin. Thank you very much, Mr. Chairman, and 
thank all the witnesses. Can I make a general observation, 
since we don't have any opening statements, about this session 
of Congress?
    It is curious to me that this is such a high priority, that 
this needs to be fast-tracked, that we need to move on this 
bill right now and get it out, a 500-page bill. We are going to 
have two hours-and-a-half, we are going to discuss it and we 
are going to mark it up next week. That is my understanding.
    As we look at the witnesses at the table, there are so many 
people not there. Where is the credit card industry? I will you 
in the back rows. Don't hold up your hands, but you are not at 
the table. Yet, you are the big player and the big push behind 
this bill for a decade. Ten years, you have been begging for 
this bill to preserve credit card debt through bankruptcy. Yet, 
you won't come up and testify.
    I don't understand that, Mr. Chairman, why the most 
important industry behind this bill will not have the courage 
to step forward and explain why they want this bill. It tells 
us a lot.
    I think as you listen to the testimony here from the 
witnesses, you come to understand that the face of bankruptcy 
is a lot different than the industry describes it. Professor 
Warren has told you what she has found. Professor Zywicki, a 
visiting professor at my Georgetown Law School, may see it 
otherwise. But I happen to believe Professor Warren is closer 
to the truth because, Mr. McCall, I know your steel workers and 
I know what has happened to them.
    I can tell you in the State of Illinois, in southern 
Illinois, that we have a coal miner with emphysema, worked his 
whole life in the coal mine, did everything right, retired 
early because of his illness, and then the Horizon Mining 
Company went into bankruptcy and canceled his health care. The 
man is hoping that he will get enough health care to live until 
he reaches Medicare. If he doesn't, he will be facing 
    I don't think he is morally flawed, Professor Zywicki. I 
think he is a man who, because of misfortune, has no other 
choice. And I hope that as you acknowledge 7 percent of the 
people guilty of fraud and abuse in bankruptcy, if it is that 
number, that you will acknowledge that a much greater number 
come into bankruptcy under the circumstances Professor Warren 
has described, not because they want to, in the hopes that they 
don't have to and want to get out of it.
    Professor Warren, on that earlier comment about 7 percent 
fraud and abuse, would you reflect on that?
    Ms. Warren. As I understand this, it does not come out of 
any study. It is the FBI's estimate, as I understand it, of how 
many people have mistakes in their forms. People make mistakes. 
These are people whose median income in the year before filing 
is $25,000. These are people for whom two out of three have 
lost their jobs. These are people half of whom have had serious 
health crises and they don't always get every number right. 
There is no doubt about that. Should they? Yes, sir, but to 
refer to this as a system that has 7 percent abuse in it--there 
is simply no evidence of that.
    Senator Durbin. I would just say I think it is nothing 
short of an outrage that we are not looking at the corporate 
bankruptcies that are stripping away health care retiree 
benefits, pension benefits and contract agreements that people 
have lived by for a lifetime. We are not even considering that. 
We are talking about the victims of that process and how to 
make life more difficult for them. That is what this hearing is 
about. That is what this bill is about.
    Why aren't we talking about that, and why won't we spend 5 
minutes talking about health care in America, for goodness 
sake, this looming crisis in America that no one will address? 
It is hitting businesses and families and individuals, and now 
the victims of that crisis that we won't even talk about are 
the ones who are going to be disadvantaged again.
    Professor Warren, will you try to bring this into a context 
that is very important for this conversation? The argument is 
that if you are below median income, why are you worried about 
this means test? It is not going to affect you. Why is it going 
to affect you if you are below median income?
    Ms. Warren. Senator, in two principal ways. The first is 
there is no safe harbor; that is, you are not exempt from the 
forms, the requirements of filing, the tricks, the traps, the 
deadlines, the increased attorneys' fees in order to have 
someone tell what they could tell on the very first day, and 
that is you are not part of the means test.
    If there were a safe harbor for the 80 percent of the 
families for whom one sheet of paper tells you they don't 
belong in the means test--if they were safe harbored and taken 
out, we would be having a very different conversation. That is 
part one.
    But I want to say about part two it is only one section in 
the bill. This bill changes Chapter 13. It changes the number 
of places where credit card companies will get the right to 
threaten to object to someone's discharge, which means more 
often that those people will agree to pay their debts, 
notwithstanding bankruptcy.
    There is one cut after another, provision after provision. 
And on whom does it fall the hardest? The families in the worst 
financial trouble. Be clear here, Senator. A multi-millionaire 
can still skate through bankruptcy, even if every provision in 
this bill were adopted.
    Senator Durbin. And hang on for the most embarrassing 
amendment on the floor when we talk about homestead exemption 
and tell the story of Bowie Kuhn, the former Commissioner of 
Baseball, who hung on to a multi-million-dollar mansion in 
Florida that he was able to keep through bankruptcy, and Burt 
Reynolds, the actor, who did the same thing. Yet, we are 
hammering away at people who can't pay for cancer surgery. Does 
this make sense?
    The second point I want to make: are there as a result of 
this bill going to be more debts that are non-dischargeable in 
bankruptcy that when it is all over, despite your best efforts, 
you are stuck with for life?
    Ms. Warren. Yes, Senator, that is what this bill is 
designed to do. That is why every women's group that has looked 
at this bill has opposed it, because their real concern is that 
this forces them into competition with Citibank and Bank One 
when they are trying to collect from an ex-husband who has been 
through bankruptcy. This is the central concern.
    Every single family who gets pushed out of the system 
because the fees are too much now, every single family who ends 
up with non-dischargeable debts literally will be responsible 
for those debts until they die. It is important to remember 
that for most of the families who file for bankruptcy, they 
don't have enough income to pay the interest. So what that 
means is it is like Ms. McCarthy. She can pay $2,000 a year for 
the rest of her life and she will die owing Providian as much 
as she owed them the day she filed for bankruptcy.
    Senator Durbin. And it is our highest priority to make sure 
we pass the bill that says that she will continue to make that 
    Thank you.
    Chairman Specter. Thank you, Senator Durbin.
    Senator Feingold.
    Senator Feingold. Thank you, Mr. Chairman. I want to 
welcome our witnesses, particularly Ken Beine from Wisconsin. I 
am always glad when I can hear the scholarship of Professor 
Warren, and I also want to commend Senator Durbin's very 
powerful remarks.
    Mr. Chairman, I appreciate your holding this hearing rather 
than taking this bill directly to markup this week, as was 
originally planned. Let me respectfully suggest that the 
testimony we are hearing makes it very clear that a markup of 
this bill in this Committee next week would be premature.
    This bankruptcy bill was essentially written in 1998, seven 
years ago. The last time the Judiciary Committee held hearings 
or took any action on the bill was in early 2001. It is now 
2005. It is simply inconceivable that this Committee will be 
ready next week to do the job that it needs to do on a bill 
this complex and a topic this important to our economy and the 
lives of many of our most vulnerable citizens.
    The last significant bankruptcy reform legislation in this 
country was passed in 1978. This is not a topic that Congress 
gets back to every few years. We need to get this job done 
right and we need to do it comprehensively. That means 
addressing the important issues raised by the effect of 
increasing corporate bankruptcies on the pensions and health 
care of employees, rather than saying that those issues can 
wait for another bankruptcy bill sometime in the future. These 
are pressing issues that this Committee must face up to now, 
and it certainly will not be an acceptable answer to those who 
point out real problems with how the current bill will operate 
that we can somehow fix this at a later date. That is not 
    So I hope, Mr. Chairman, that this Committee will serve its 
proper role in the Senate to examine legislation carefully and 
completely before sending it to the floor. I hope that every 
member of this Committee, even those who support this bill, 
will recognize that a real amendment process is appropriate 
here, in contrast to what we have seen on the class action bill 
over the past few weeks.
    My questions today, although they will be brief, will 
highlight some of the problems with S. 256 that practitioners 
and academics and trustees have identified. We need to listen 
to those non-partisan experts before we enact this bankruptcy 
bill or we will do grave harm to a system that is a crucial 
part of the safety net that the law offers to our most 
vulnerable citizens.
    Let me first turn to my friend and constituent, Mr. Beine. 
I wanted to especially thank you for being here. It is always 
good to see somebody from Wisconsin in Washington, and I wanted 
to say to you that I know how tough it is for everyone who has 
suffered from the devastation of our manufacturing sector. I 
know firsthand from my own visits that Two Rivers, or Trivers, 
as some say, and Manitowoc have been hit especially hard by 
    Wisconsin has lost tens of thousands of manufacturing jobs 
in the last few years, and the biggest sector of the economy by 
far in Two Rivers and Manitowoc is the manufacturing sector. So 
the whole area has been affected dramatically. In a recent 
study, 37 percent of businesses in Manitowoc and Two Rivers 
reported that they had to lay off employees in the past year. 
So it is not surprising for me to hear you say that there has 
been an increase in bankruptcy filings, although it is 
certainly terrible news.
    There are a number of important steps Congress could be 
taking to help people in Manitowoc and Two Rivers, including 
changing our tax code to help beleaguered domestic 
manufacturers and rethinking international trade agreements 
that have been devastating for American businesses.
    The problems you are facing are very real, but I want to 
make sure we don't pass a bill here that will actually compound 
the burden on Manitowoc citizens, Two Rivers citizens and 
Wisconsin citizens. I don't want to take any action that is 
going to further harm people who I know have borne the brunt of 
this administration's failed economic policies by undermining a 
law that stands between them and complete destitution.
    I am a big fan of, as you know, and a friend of the credit 
union industry. You are wonderful people and you serve your 
communities very well. I think this bill is a bad deal for my 
constituents and your customers, so I am afraid we have to part 
ways on this issue. This bill hasn't changed all that much 
since it was introduced 8 years ago, before the problems with 
the erosion of our manufacturing base became so severe. So it 
may not really be designed to address your problems. So I would 
like to give you a chance to respond to what I have said, and I 
would like to ask Professor Warren if she would like to comment 
as well.
    Mr. Beine.
    Mr. Beine. First of all, thank you for the kind words. I 
guess I respectfully disagree with some of the statements. We 
are convinced that the current law hurts financial institutions 
because there are a number of individuals who abuse it. Under 
no circumstances are we looking to hurt those individuals, the 
80 or 90 percent, or if it turns out to be 95, that still need 
the ability to be able to completely walk away and start over. 
The bankruptcy law is here to enable people to start over, and 
that is an important right in this country.
    Thank you.
    Senator Feingold. Professor Warren.
    Ms. Warren. I would only add that I too am a big fan of 
credit unions. I was explaining to Mr. Beine earlier I have 
family members who have really relied on their credit unions to 
help them get past tough times, and I have cosigned more than 
one loan to the credit unions which were paid off in full. I 
want to be clear, sir.
    But I really want to go back to a key point here. I think 
credit unions are responsible lenders who are very careful 
about the money they put out. I believe the thrust of this 
bill, by forcing more families out of bankruptcy, by driving up 
the costs, by making more debts non-dischargeable, is a reward 
to irresponsible lenders.
    I believe that what happens is that good people come in, 
like credit unions and like small landlords, who really are 
affected. There are changes we could make to make things better 
for them. But they are here, when it is credit card companies 
who have behaved irresponsibly and who have already raked 
billions of dollars of profits off these families before they 
file for bankruptcy that are the real problem. If we wanted to 
make this bill work, part of what we would ask is how to sort 
out the good lenders from the bad.
    Senator Feingold. Thank you, Professor.
    Professor Zywicki, as you know, I have mentioned that the 
Bankruptcy Act was first introduced 8 years ago, and you have 
long supported it. However, as Professor Warren has stated, the 
8 years since this bill was introduced have seen many 
developments with significant implications for bankruptcy law. 
Furthermore, we now have significantly more data about who 
files for bankruptcy and why they do than when the bill was 
first introduced.
    Given all the things that have changed since the original 
bill was drafted and given all the new information that has 
emerged since that time, is there anything about this bill that 
you think should be changed, or do you endorse S. 256 without 
any adjustments whatsoever?
    Mr. Zywicki. Senator, first, let me clarify that I believe 
that the majority of bankruptcy filers are legitimate, honest 
bankruptcy filers, and I would not endorse this bill if I 
believed that in trying to eliminate fraud and abuse we would 
be harming people, the honest, innocent people for whom 
bankruptcy is intended.
    Having said that, this bill has been around for 8 years. 
The problems that this bill attacks have not disappeared during 
8 years; they have worsened during that 8-year period. There 
may be additional new abuses that have come on the scene, 
additional new problems that have come on the scene. But that 
is not, I don't believe, a reason to ignore the fact that this 
bill targets real problems. It targets the homestead exemption 
abuses, it targets fraud and those sorts of things. So this 
bill responds to problems that are still endemic in the system.
    Senator Feingold. What about my question? Are there any 
changes to the bill that need to be made at all or is it 
exactly the way it should be? We are marking this thing up next 
week. The train is leaving the station, apparently, and there 
is probably not going to be another bankruptcy bill for a very 
long time. This is it. Should this bill be changed?
    Mr. Zywicki. I believe that this bill is fine as it is.
    Senator Feingold. Not one word?
    Mr. Zywicki. There is no word that I would change in this 
particular piece of legislation.
    Senator Feingold. Well, Mr. Chairman, I know my time is up, 
but the idea that after 8 years and all the economic changes in 
this country that there wouldn't--
    Chairman Specter. If you need some more time, Senator 
Feingold, go ahead.
    Senator Feingold. Let me just say that after 8 years, the 
notion that there wouldn't be anything different about the 
Bankruptcy Code--with all the economic changes and 
dislocations, that there wouldn't be a word to change is not 
credible to me and is a further reason why I am very concerned 
about the speed with which this bill is moving.
    Thank you for the extra time, Mr. Chairman.
    Chairman Specter. Thank you, Senator Feingold.
    The timing on the bill has been set. We are moving ahead. 
This hearing was designed to give us opinions of experts in the 
field on problems in the bill. We will have many communiques 
from interested citizens in all walks of life, and when the 
Judiciary Committee meets next Thursday to consider the bill, 
there will be time between that session and the full floor 
debate. So there is time for consideration of any changes that 
ought to be made.
    We thank you all for coming, ladies and gentlemen. We very 
much appreciate it. Many of you have come from long distances 
and it has been a very productive hearing. That concludes our 
hearing, and thank you.
    [Whereupon, at 12:34 p.m., the Committee was adjourned.]
    [Questions and answers and submissions for the record