[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]


                     OVERSIGHT OF BANKRUPTCY LAW AND 
                           LEGISLATIVE PROPOSALS

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON ANTITRUST, COMMERCIAL
                         AND ADMINISTRATIVE LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY

                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                               __________

                         TUESDAY, JUNE 25, 2019

                               __________

                           Serial No. 116-30

                               __________

         Printed for the use of the Committee on the Judiciary
         
         
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               Available via: http://judiciary.house.gov
               
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                    U.S. GOVERNMENT PUBLISHING OFFICE                    
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                       COMMITTEE ON THE JUDICIARY

                    JERROLD NADLER, New York, Chair
               MARY GAY SCANLON, Pennsylvania, Vice-Chair

ZOE LOFGREN, California              DOUG COLLINS, Georgia, Ranking 
SHEILA JACKSON LEE, Texas                Member
STEVE COHEN, Tennessee               F. JAMES SENSENBRENNER, Jr., 
HENRY C. ``HANK'' JOHNSON, Jr.,          Wisconsin
    Georgia                          STEVE CHABOT, Ohio
THEODORE E. DEUTCH, Florida          LOUIE GOHMERT, Texas
KAREN BASS, California               JIM JORDAN, Ohio
CEDRIC L. RICHMOND, Louisiana        KEN BUCK, Colorado
HAKEEM S. JEFFRIES, New York         JOHN RATCLIFFE, Texas
DAVID N. CICILLINE, Rhode Island     MARTHA ROBY, Alabama
ERIC SWALWELL, California            MATT GAETZ, Florida
TED LIEU, California                 MIKE JOHNSON, Louisiana
JAMIE RASKIN, Maryland               ANDY BIGGS, Arizona
PRAMILA JAYAPAL, Washington          TOM McCLINTOCK, California
VAL BUTLER DEMINGS, Florida          DEBBIE LESKO, Arizona
J. LUIS CORREA, California           GUY RESCHENTHALER, Pennsylvania
SYLVIA R. GARCIA, Texas              BEN CLINE, Virginia
JOE NEGUSE, Colorado                 KELLY ARMSTRONG, North Dakota
LUCY McBATH, Georgia                 W. GREGORY STEUBE, Florida
GREG STANTON, Arizona
MADELEINE DEAN, Pennsylvania
DEBBIE MUCARSEL-POWELL, Florida
VERONICA ESCOBAR, Texas

        PERRY APELBAUM, Majority Staff Director & Chief Counsel
                BRENDAN BELAIR, Minority Staff Director
                                 ------                                

      SUBCOMMITTEE ON ANTITRUST, COMMERCIAL AND ADMINISTRATIVE LAW

                DAVID N. CICILLINE, Rhode Island, Chair
                    JOE NEGUSE, Colorado, Vice-Chair

HENRY C. ``HANK'' JOHNSON, Jr.,      F. JAMES SENSENBRENNER, Jr., 
    Georgia,                             Wisconsin, Ranking Member
JAMIE RASKIN, Maryland               KEN BUCK, Colorado
PRAMILA JAYAPAL, Washington          MATT GAETZ, Florida
VAL BUTLER DEMINGS, Florida          KELLY ARMSTRONG, North Dakota
MARY GAY SCANLON, Pennsylvania       W. GREGORY STEUBE, Florida
LUCY McBATH, Georgia

                       SLADE BOND, Chief Counsel
                    DANIEL FLORES, Minority Counsel
                           
                           
                           C O N T E N T S

                              ----------                              

                         Tuesday, June 25, 2019

                                                                   Page

                           OPENING STATEMENTS

The Honorable David Cicilline, Chair of the Subcommittee on 
  Antitrust, Commercial and Administrative Law from the State of 
  Rhode Island...................................................     1
The Honorable James Sensenbrenner, Ranking Member of the 
  Subcommittee on Antitrust, Commercial and Administrative Law 
  from the State of Wisconsin....................................     2
The Honorable Jerrold Nadler, Chair of the Committee on the 
  Judiciary from the State of New York...........................     3
The Honorable Doug Collins, Ranking Member of the Committee on 
  the Judiciary from the State of Georgia........................     5

                               WITNESSES
                                Panel 1

The Honorable Richard Durbin, Member of Congress
  Oral Testimony.................................................     7
  Prepared Testimony.............................................     9
The Honorable Nydia Velazquez, Member of Congress
  Oral Testimony.................................................    12
  Prepared Testimony.............................................    14
The Honorable Ben Cline, Member of Congress
  Oral Testimony.................................................    19
  Prepared Testimony.............................................    20
The Honorable Antonio Delgado, Member of Congress
  Oral Testimony.................................................    23
  Prepared Testimony.............................................    25

                                Panel 2

Hollister Petraeus, Former Assistant Director, Consumer Financial 
  Protection Bureau's Office of Servicemember Affairs
  Oral Testimony.................................................    29
  Prepared Testimony.............................................    32
Robert Keach, American Bankruptcy Institute
  Oral Testimony.................................................    36
  Prepared Testimony.............................................    49
Ed Boltz, National Association of Consumer Bankruptcy Attorneys
  Oral Testimony.................................................    58
  Prepared Testimony.............................................    60
John Rao, National Consumer Law Center
  Oral Testimony.................................................    69
  Prepared Testimony.............................................    71
Dalie Jimenez, Professor of Law, University of California Irvine 
  School of Law
  Oral Testimony.................................................    94
  Prepared Testimony.............................................    96
The Honorable Thomas Small, National Bankruptcy Conference
  Oral Testimony.................................................   114
  Prepared Testimony.............................................   116

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Items submitted by Robert Keach, American Bankruptcy Institute 
  for the record
  A statement from the American College of Bankruptcy, dated June 
    14, 2019, endorsing the Family Farmer Relief Act and the 
    Small Business Reorganization Act............................    38
  A letter from the The American College of Bankruptcy, dated 
    June 14, 2019, endorsing the Family Farmer Relief Act and the 
    Small Business Reorganization Act............................    42
  A letter from the The National Conference of Bankruptcy Judges 
    (NCBJ), dated June 21, 2019..................................    44
  A statement from the American College of Bankruptcy, dated June 
    11, 2019, supporting the HAVEN Act...........................    48
Attachment entitled ``Subchapter V--Reorganization of a Small 
  Business Enterprise Debtor,'' submitted by the Honorable Thomas 
  Small, National Bankruptcy Conference for the record...........   123
Items submitted by the Honorable David N. Cicilline, Chair of the 
  Subcommittee on Antitrust, Commercial and Administrative Law 
  from the State of Rhode Island for the record
  A statement from the American College of Bankruptcy, dated June 
    14, 2019, endorsing the Family Farmer Relief Act and the 
    Small Business Reorganization Act............................   152
  A statement from the American College of Bankruptcy, dated June 
    11, 2019, supporting the HAVEN Act...........................   154
  A statement from the Association of Young Americans endorsing 
    the Student Borrower Bankruptcy Relief Act...................   155

                                APPENDIX

Items submitted by the Honorable David Cicilline, Chair of the 
  Subcommittee on Antitrust, Commercial and Administrative Law 
  from the State of Rhode Island for the record
  A report entitled ``Effectuating the Fresh Star,'' American 
    Bankruptcy Institute.........................................   160
  An article entitled ``The Bankruptcy Code's Disservice to Those 
    Who Served,'' American Bank Institute Journal................   175
  An article entitled ``Defending Our Veterans,'' American Bank 
    Institute Journal............................................   179
  A letter from the Consumer Bankers Association (CBA) supporting 
    reforming student loans......................................   182
  A letter from the The National Conference of Bankruptcy Judges 
    (NCBJ), dated May 31, 2019, submitted by Robert Keach, 
    American Bankruptcy Institute for the record.................   185

 
         OVERSIGHT OF BANKRUPTCY LAW AND LEGISLATIVE PROPOSALS

                              ----------                              


                         Tuesday, June 25, 2019

                        House of Representatives

                 Subcommittee on Antitrust, Commercial

                         and Administrative Law

                       Committee on the Judiciary

                             Washington, DC

    The Subcommittee met, pursuant to call, at 10:01 a.m., in 
Room 2141, Rayburn Office Building, Hon. David Cicilline [Chair 
of the Subcommittee] presiding.
    Present: Representatives Cicilline, Nadler, Neguse, Johnson 
of Georgia, Jayapal, Scanlon, McBath, Sensenbrenner, Collins, 
Buck, Armstrong, and Steube.
    Staff present: David Greengrass, Senior Counsel; John Doty, 
Senior Advisor; Lisette Morton, Director of Policy, Planning, 
and Member Services; Madeline Strasser, Chief Clerk; Moh 
Sharma, Member Services and Outreach Advisor; Susan Jensen, 
Parliamentarian/Senior Counsel; Julian Gerson, Staff Assistant; 
Joseph Van Wye, Professional Staff Member, ACAL Subcommittee; 
Slade Bond, Chief Counsel, ACAL Subcommittee; Daniel Flores, 
Minority Chief Counsel; and Andrea Woodard, Minority 
Professional Staff Member.
    Mr. Cicilline. The Subcommittee will come to order. Without 
objection, the Chair is authorized to declare recess of the 
Committee at any time.
    We welcome everyone to our hearing on Oversight of 
Bankruptcy Law and Legislative Proposals. I now recognize 
myself for an opening statement.
    The overriding principle of the bankruptcy system is to 
give people who are overwhelmed with unimaginable debt a fresh 
start through meaningful relief from their debt. The system is 
supposed to work for everyone, from consumer debtors and small 
business owners to family farmers, serviceMembers, and 
veterans, and give them a new pathway to economic prosperity. 
But as the witnesses at today's hearing will document, the 
bankruptcy system is not working.
    For example, as my colleague and friend, Senator Durbin, 
will attest, far too many student loan borrowers have been 
unable to succeed financially due to overwhelming student loan 
debt. The amount of outstanding student loan debt has 
skyrocketed to $1.5 billion. According to the Federal Reserve, 
this amount has tripled since 2006 and is expected to grow to 
$2 billion by 2022.
    In addition to undermining the quality of life and the 
earning of borrowers, the crisis has also severely affected the 
economy overall. The American Bankruptcy Institute reports that 
student loan debt has undermined homeownership, automobile 
ownership, and has also resulted in a decline in students 
choosing public service careers over the private sector. As 
this report notes, and I quote, ``student loan debt thus 
affects not only those who owe the loans, but also has 
consequences that ripple through our communities and our 
nation.''
    Worse still, 20 states have passed laws to suspend or 
revoke occupational and driver's licenses for people in default 
for student loan debt. According to a 2017 report by the New 
York Times there have been at least 8,700 cases of at-risk or 
revoked professional licenses for student loan default. In one 
example, the 10nessee Board of Nursing, a State with nursing 
shortages, suspended the license of a nurse who defaulted on 
her student loan because she was unable to work for a period 
due to severe epileptic seizures. To reinstate her license, the 
state required her to pay more than $1,500, which she could not 
afford without a job, effectively ending her career as a nurse. 
This grotesque outcome is due to amendments to the bankruptcy 
code that have made educational debt virtually non-
dischargeable.
    Under current law, student borrowers cannot discharge this 
debt unless they demonstrate that they would face an undue 
hardship if the debt were not discharged. While Congress 
intended that provision to provide relief for hard-hit 
borrowers, in practice it is an extremely high bar to relief 
for those with crushing debt. As an original co-sponsor of H.R. 
2648, the Student Borrow Bankruptcy Relief Act of 2019, 
legislation introduced by Chair Nadler and Senator Durbin to 
repeal the undue hardship requirement, I look forward to 
hearing testimony from our witnesses on ending this crisis.
    Today's hearing is also an opportunity to examine other 
potential improvements to the bankruptcy system. These include 
several commonsense bills that would ease burdens, streamline 
the bankruptcy process, or expand eligibility for service 
Members, veterans, small businesses, and family farmers. 
Additionally, this hearing is an opportunity to consider 
heightened disclosure requirements for bankruptcy professionals 
retained by the board established by Congress to oversee the 
budget and fiscal plans of Puerto Rico's instrumentalities.
    I welcome each of our esteemed colleagues to offer 
testimony in support of these thoughtful measures. At this 
time, I now recognize the gentleman from Wisconsin, the Ranking 
Member of this subcommittee, Mr. Sensenbrenner, for his opening 
statement.
    Mr. Sensenbrenner. I thank the Chair. The bankruptcy system 
is an essential element of the U.S. economy. Rooted in the 
bankruptcy clause of the Constitution, it has, since the 
founding of our republic, provided the United States with the 
most stable lending environment in the world. I am pleased that 
with today's hearing, we can begin our examination of ways that 
we can make our bankruptcy system even better.
    The Subcommittee is considering a wide range of legislative 
proposals today. I am an original co-sponsor of one of them, 
the Family Farmer Relief Act of 2019. This bill would raise the 
level of debt that may be taken into a family farm bankruptcy 
under Chapter 12. It is important that we consider this bill as 
it modernizes Chapter 12 to account for the higher levels of 
investment needed to farm in today's family farming setting.
    We will also examine the Small Business Reorganization Act. 
This bill offers a way to make Chapter 11 bankruptcy more 
accessible to small businesses. That will make it easier for 
small businesses to reorganize their debts rather than 
liquidate when they fall on hard times. Modeled on the Chapter 
12 small farm bankruptcy provisions that have proven 
successful, the Small Business Reorganization Act is a genuine 
promise to help the bankruptcy code better serve American 
business in the 21st century. Two other bills we will consider 
offer more flexibility in bankruptcy for serviceMembers and 
their families, and the third would require more transparency 
from firms helping to resolve Puerto Rico's insolvency under 
the 2016 PROMESA legislation. I am glad we are considering 
these bills as well.
    Finally, we will look at Chair Nadler's proposed 
legislation to make all student loans dischargeable in 
bankruptcy. The amount of student debt has reached crisis-level 
proportions for large numbers of young Americans who are the 
future our country. I am willing to consider that bankruptcy 
reform should allow them an easier chance to deal with 
substantial debt, but I must emphasize that since the great 
majority of new student loans are Federal loans, we must do 
everything we can to make sure that innocent taxpayers are not 
forced to pick up the tab for unpaid student loans. Further, 
Congress would be remiss in steering college students to 
bankruptcy court as the only help that we are willing to give. 
Regardless of this bill, we must address the skyrocketing costs 
of higher education.
    It is my hope my colleagues are willing to work across the 
aisle to achieve this goal, and I yield back the balance of my 
time.
    Mr. Cicilline. Thank you, Ranking Member Sensenbrenner. The 
Chair now recognizes Chair of the Full Committee, the gentleman 
from New York, Mr. Nadler, for his opening statement.
    Mr. Nadler. Thank you, Mr. Chair. I thank the Chair for 
holding today's hearing, the first hearing in the 116th 
Congress on the very important subject of bankruptcy reform.
    The Bankruptcy Code either directly or indirectly affects 
millions of Americans and all types of businesses, from the 
largest to the smallest. When it works properly, it offers a 
second chance to individuals and businesses in financial 
distress. Various reforms are necessary to ensure that it 
reaches its full potential.
    We are fortunate today to be joined by four Members who 
have introduced legislation to address certain deficiencies and 
unfairness in the Code. I am pleased that this undertaking is 
largely bipartisan, which I hope will help facilitate enactment 
of these needed reforms. I am especially appreciative that 
Senator Durbin is here today to share his thoughts on 
legislation that both he and I introduced earlier this year, 
the Student Borrower Bankruptcy Relief Act.
    Our legislation would address head on the manifest 
unfairness that student loans, unlike every other unsecured 
debt, such as credit cards or auto loans, are effectively non-
dischargeable in bankruptcy. This Subcommittee last considered 
such relief more than 10 years ago, and unfortunately the 
problem of crushing student loans has only worsened. Currently 
45 million Americans owe student loan debt estimated at a total 
of $1\1/2\ trillion, an amount that exceeds outstanding credit 
card and auto loan debt combined.
    Some of this debt is attributable to for-profit education 
mills that promise much but deliver little. Some of this debt 
is also the result of predatory lending practices that target 
young Americans desperate to improve their lives and contribute 
to society, but who do not fully understand the terms of the 
loans they take on. Some of this debt is disparately borne by 
minorities who, on average, own more than their White 
counterparts, and who are more often the targets of such 
predatory lending practices.
    There is no reason that this one category of debt should be 
singled out for special treatment that makes relief under the 
Bankruptcy Code virtually impossible. I thank Senator Durbin 
for joining me in attempting to put an end to this injustice. 
The problem of student loan debt is just one of the many issues 
we must address. As today's witnesses will explain, we also 
need to address two important provisions affecting those who 
serve our country in the military. According to a 2018 
Lifestyle Survey of Service Members and Veterans, financial 
issues were the top lifestyle stressor, and unfortunately 
bankruptcy is sometimes the best answer for those in financial 
distress.
    Under current law, National Guard Members and reservists 
who serve on active duty are, like other active service 
Members, exempt from the Bankruptcy Code means test, which 
determines whether a debtor's income is too high to have all 
his or her debts erased in bankruptcy. This critical protection 
for National Guard Members and reservists must be extended 
before it expires at the end of the year.
    In addition, although Social Security benefits are not 
treated as income for purposes of the means test, veterans' 
disability benefits do constitute income under this test. 
Fortunately, bipartisan legislation addressing this inequity 
has been introduced in both the House and the Senate. We must 
also ensure that family farmers in financial distress are 
eligible for Chapter 12 of the Bankruptcy Code, the specialized 
form of bankruptcy relief specifically intended for family 
farmers. I am pleased that the gentleman from New York, Mr. 
Delgado, is here today to discuss his bipartisan legislation 
that will accomplish this vital goal.
    In addition to these concerns, further reforms are 
necessary to better effectuate the financial reorganization of 
small businesses debtors. Experiences since the enactment of 
the 2005 amendments to the Bankruptcy Code show that provisions 
intended to streamline the bankruptcy process for these debtors 
fail to address certain fundamental concerns, such as the 
ability to cram down dissenting creditors who object to a 
debtor's reorganization plan. I thank the gentleman from 
Virginia, Mr. Cline, for his leadership on this issue.
    Finally, Congress should consider the need to promote 
greater transparency and integrity with respect to the ongoing 
financial reorganization of Puerto Rico. In response to dire 
fiscal issues facing Puerto Rico at the time, Congress passed 
the Puerto Rico Oversight Management and Economic Stability 
Act, or PROMESA, in 2016. That legislation established the 
Financial Oversight and Management Board with control over 
Puerto Rico's budget, laws, financial plans, and regulations, 
and the authority to retain professionals to assist the Board 
in executing its responsibilities.
    Although largely patterned on Chapter 11 of the Bankruptcy 
Code, PROMESA did not incorporate all facets of Chapter 11 into 
other relevant provisions of the Code, including, for example, 
the Code's mandatory disclosure requirements regarding actual 
or potential conflicts of interest that professional persons 
seeking to be retained in a bankruptcy case must make to the 
court prior to their retention. Fortunately, our colleague from 
New York, Ms. Velazquez, is with us today to discuss her 
legislation that addresses this shortcoming in PROMESA.
    In addition to our colleagues who will be testifying, we 
have a distinguished panel of other witnesses who will share 
their perspectives on the important issues under consideration 
today. Accordingly, I look forward to hearing from all of 
today's witnesses, and I yield back the balance of my time.
    Mr. Cicilline. I thank the gentleman. I am now pleased to 
recognize the Ranking Member of the full committee, the 
gentleman from Georgia, Mr. Collins, for his opening statement.
    Mr. Collins. Thank you, Chair Cicilline and Ranking Member 
Sensenbrenner. I am glad that we are having this hearing today, 
and it is good to be on something that we can all discuss and 
hopefully move forward on. It is good to see the senator and 
the rest of our Members here as well.
    The bankruptcy system is a critical component of the 
economy. It provides for an important safety net for 
entrepreneurs and households when they need a fresh start. It 
also stabilizes and encourages lending because it is a tried-
and-true way for creditors to recover as much as feasible when 
things go wrong for borrowers. I particularly applaud this 
Subcommittee for considering today the Small Business 
Reorganization Act. This important bill, recently introduced by 
Representative Cline and Subcommittee Chair Cicilline, offers 
long-term and long-needed reform to Chapter 11 of the 
Bankruptcy Code to help small businesses.
    Chapter 11 has for many years been the key to survival for 
firms that need to reorganize their debt so they can continue 
in business. Reorganization preserves jobs, investments, and 
valuable contributions to our economy. For just as many years, 
Chapter 11's terms have been poorly suited to allow small 
businesses and their creditors to take full advantage of the 
relief it promises. To solve this problem, this bill takes up 
as a model for small business the provisions of Chapter 12 that 
help small family farmers to reorganize their farming 
enterprises when needed. Chapter 12 has long worked well for 
family farmers. Weaving models based on it into Chapter 11 for 
general use in small business cases is a terrific idea.
    I was proud to have introduced the Small Business 
Reorganization Act last term with the Subcommittee Chair 
Cicilline, and I am proud to be an original co-sponsor this 
term. This bill promises to finally make Chapter 11 work for 
the entrepreneurs whose small businesses form the backbone of 
job creation in communities across our Nation.
    We also consider today several other bills. Respectively, 
they offer more flexibility in bankruptcy for service Members 
and their families, an increase in the amount of debt that can 
be reorganized in Chapter 12 bankruptcies, and increased 
transparency concerning firms helping to resolve Puerto Rico's 
insolvency under the 114th Congress' PROMESA legislation. I am 
glad that we have the chance to examine these bills today.
    We are also, though, here to consider Chair Nadler's 
proposed legislation to expand the amount of student loan debts 
that can be discharged in bankruptcy, and I also recognize the 
senator's work on that as well. However, like many Members, I 
am deeply touched by the skyrocketing cost of higher education 
and the massive amounts of debt students are taking on to 
shoulder these costs. To be the best help, Congress must find 
ways to stop the explosion of costs. Congress' answer to 
students should not be, sorry, we are unwilling to drive down 
costs, but we want to make it easier for you to end up in 
bankruptcy court. The answer needs to be about the costs 
themselves and the institutions with a firm look at the total 
picture. As someone who just came from, you know, a few years 
ago on the state level, this is one of the biggest issues we 
have, and I am glad we are discussing it. We need to find an 
answer to this, but I think we cannot also discharge the cost 
aspect of university and college systems as we go forward.
    Also, since the vast majority of students loans are now 
Federal loans, our answer to taxpayers shouldn't be that in 
response to unbearable student loan levels, all Congress can do 
is to increase the ways in which taxpayers get left holding the 
bag. That is exactly what happens when Federal student loans 
are discharged in bankruptcy cases. I really want to help Chair 
with his proposal and the senator as well and would ask all my 
colleagues to join in a real search for real solutions that we 
can find a total picture of this problem we have.
    It is something that needs to be fixed, but simply in life, 
sometimes the best answer is not free. It is how do we get in 
and dig and find our important answer. With that, I yield back.
    Mr. Cicilline. I thank the gentleman. We have two panels of 
witnesses today. It is now my pleasure to introduce today's 
first panel.
    Our first witness is Senator Dick Durbin. Senator Durbin is 
the 47th United States senator from the State of Illinois and 
is the state senior senator. He serves as the Senate Democratic 
Whip. Currently he sits on the Senate Judiciary, 
Appropriations, Agriculture, and Rules Committees. Senator 
Durbin is the author of S. 1414, the Student Borrower 
Bankruptcy Relief Act of 2019, which is identical to H.R. 2648, 
a bill introduced by Chair Nadler earlier this year.
    Our second witness, Congresswoman Nydia Velazquez, is the 
representative for New York's 7th Congressional District in the 
116th Congress. She is the Chair of the House Small Business 
Committee, a senior member of the Financial Services Committee, 
and a member of the House Committee on Natural Resources. She 
is currently serving her 14th term as a member of Congress. She 
is also the author of H.R. 683, which would impose disclosure 
requirements for professional persons employed by the Financial 
Oversight and Management Board for Puerto Rico.
    Our third witness on the panel is Representative Ben Cline 
of Virginia's 6th Congressional District. He is a member of 
both the House Judiciary Committee and the Education and Labor 
Committee. He previously served as a member of the Virginia 
House of Delegates from 2002 to 2018. Representative Cline is 
the author of H.R. 3311, the Small Business Reorganization Act 
of 2019.
    Our fourth witness on the first panel is Congressman 
Antonio Delgado, the first-term representative from New York's 
19th District. He is a member of the Agriculture, Small 
Business, and Transportation and Infrastructure Committees. 
Additionally, he is the author of H.R. 2336, the Family Farmer 
Relief Act of 2019.
    We welcome all our distinguished witnesses on our first 
panel and thank them for participating in today's hearing. 
Please note that each of your written statements will be 
entered into the record in its entirety. Accordingly, I ask 
that you summarize your testimony in 5 minutes. As you know, to 
help you stay within this time, there is a timing light on your 
table. When the light switches from green to yellow, you have 1 
minute to conclude your testimony. When the light turns red, it 
signals your 5 minutes have expired. We will, of course, try to 
afford you every courtesy we can.
    We will begin, of course, with Senator Durbin. You may 
begin.

              STATEMENT OF THE HON. RICHARD DURBIN

    Senator Durbin. Chair Cicilline, thank you for the 
introduction. Chair Nadler, good to see you again. My friend, 
Congressman Sensenbrenner, it is great to be here with you, and 
Congressman Collins who left earlier, we have worked together. 
I am going to submit my statement for the record. I would like 
to just make three or four points if I can.
    Number one, I recently had a conversation with a member of 
the Federal Reserve--I won't name the person--and I asked about 
the issue of student loans. This person said to me, this noted 
economist said to me, I don't get it. Why is it that no matter 
what you borrow money for, whether it is essential or 
frivolous, under our bankruptcy system, you can be discharged 
from that decision to borrow that money under certain economic 
circumstances, but not student loans. Student loans trail you 
to the grave. This is a decision you are making that is going 
to be with you to the bitter end because you cannot discharge 
it in bankruptcy.
    Now, think of the people most affected by it. They are the 
people in America least experienced when it comes to debt: 19-
20-year-old college students? What does $30,000 mean to that 
student? What does $50,000 mean to that student? Probably 
nothing because they don't have a life experience to measure it 
against as to what they are likely to earn and what they are 
likely to be able to pay back. That is the largest class of 
people who are affected by this decision which says we will not 
allow you to discharge your decision, even if it's a bad one, 
in bankruptcy except in the most extreme circumstances.
    I also would like to make a point that the Wall Street 
Journal a look at how many people qualify to be discharged in 
bankruptcy for student debt because of undue hardship. The Wall 
Street Journal found in the year 2017, despite the fact, as 
Chair Nadler said, we have tens of millions of people in debt 
with student loans, four--exactly four--in the entire United 
States of America could prove undue hardship.
    The Department of Education enforces the collection of most 
of these student loans. I have asked them to consider the 
possibility that if you are a quadriplegic disabled veteran 
saying it is an undue hardship to pay back your student loan, 
you just might be credible. Well, I haven't been able to 
convince them of that, but it shows you the extreme 
circumstances we have here. The only debt you cannot discharge 
in bankruptcy is incurred by people with little life experience 
and virtually no way to escape it by the current law requiring 
undue hardship to be proven.
    The other point I want to make to you is a point well 
taken. We need to address not only student debt, but the 
increasing cost of education. It has gone through the roof, and 
it is out of control. First stop, let me suggest to you, I will 
give you two numbers, and these two numbers are going to be on 
the final, so you might want to write them down: 9 and 35. Nine 
percent of high school graduates in America go to for-profit 
colleges and universities, 9 percent. Thirty-five percent of 
all student loan defaults are students from for-profit colleges 
and universities. What does that tell us? They are over-
charging and under-educating. They are not preparing the people 
with this debt to move forward in a life that can pay of that 
debt. So, 35 percent of all the student loan defaults can be 
addressed by addressing the outrages involved in the for-profit 
college and university industry.
    Secondly, I happen to believe that when it gets right down 
to it that there is going to be a restructuring within higher 
education. Jack Reed, well known to Chair, has a provision 
which says to a school you are going to have skin in the game. 
If you drag this student into a debt that is unimaginable, 
unpayable, your institution is going to be on the line, too. 
Why is that such an outrageous idea? They are borrowing money 
through the Federal government and, in some cases, in the for-
profit cases, running all the way to the bank. Why shouldn't 
they have some skin in the game when it comes to defaults on 
student loans? They might think twice about the loan. They 
might think twice about the cost of tuition in higher 
education.
    We have got to get them in sync with the reality that 
unless we do something, they have got a perfect world. They can 
use Federal taxpayers' dollars, make the profit off them, and 
leave the responsibility to those kids, their families, and 
future generations. Let's start with this. Let's do this change 
in bankruptcy. It wasn't that long ago that people could 
discharge loans in bankruptcy. Let's return to that. It will 
give not only these young people a second chance, but it will 
be a dramatic boost to the economy.
    Thank you, Mr. Chair.
    [The statement of Senator Durbin follows:]
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    Mr. Cicilline. Thank you, Senator Durbin. The Chair now 
recognizes Representative Velazquez for 5 minutes.

             STATEMENT OF THE HON. NYDIA VELAZQUEZ

    Ms. Velazquez. Chair Cicilline, Chair Nadler, Ranking 
Member Sensenbrenner, and Members of this subcommittee, thank 
you for the opportunity to testify today on my legislation, the 
Puerto Rico Recovery Accuracy in Disclosures Act. This 
important bill will close a loophole in the Island's debt 
restructuring process, improve transparency, and restore 
confidence and integrity in the process.
    Before Hurricane Maria devastated Puerto Rico in late 2017, 
the Island was already in a deep recession brought on in part 
by trying to pay down over $120 billion in government debt. In 
response, Congress passed the Puerto Rico Oversight Management 
and Economic Stability Act, known as PROMESA, in 2016 to set up 
an orderly bankruptcy process to restructure this debt, 
stimulate economic development, and put the Island on a path to 
financial recovery. While we can have a difference of opinion 
on how well the Oversight Board is carrying out its mission, 
one thing should be clear: the Island and her people are 
entitled to the same rights and protections as any debtor on 
the mainland.
    As the Committee is aware, the trust the American people 
have placed in our bankruptcy system is based on a fair, 
efficient, and transparent process. Transparency, as required 
by section 327 of the Code and Rule 2014, applies to every 
corporate bankruptcy, and ensures any conflicts of interest or 
even the perception of a conflict between those working on the 
bankruptcy and the debtor are disclosed. However, PROMESA does 
not have a similar requirement.
    My bill will address this oversight and apply a robust 
disclosure requirement to all PROMESA title III proceedings, 
eliminating the double standard the people of Puerto Rico are 
facing. Puerto Ricans should be confident that the Board's 
bankruptcy advisors do not have their thumb on the scale to 
favor certain debts where they have a self-interest and ensure 
integrity in the PROMESA process.
    The need for PRRADA was recently articulated when the 
Board-appointed law firm investigated potential conflicts in 
Puerto Rico's bankruptcy. One of the main recommendations in 
the law firm's report was that vendors should disclose 
affiliate relationships and found that trading in Puerto Rico's 
public debt is particularly problematic as it gives rise to the 
appearance of conflict. This is exactly what the PRRADA bill 
requires vendors to do and why the bill should become law. 
PRRADA will guarantee to the people of Puerto Rico the same 
transparency and disclosure practices required by law in U.S. 
mainland bankruptcies.
    In the interest of fairness for Puerto Rico's people and 
for the impartiality in restructuring and thereby securing 
Puerto Rico's future, we must pass H.R. 683 and close this 
loophole. I am proud to say this is bipartisan legislation with 
co-sponsors from both sides of the aisle, including Members of 
this Committee and Members of the Natural Resources Committee, 
which, as you may know, has been deeply involved in Puerto Rico 
policy.
    I kindly ask that the Judiciary Committee look favorably on 
this bill, and I thank you again for the opportunity to be here 
today and to bring fairness to the people of Puerto Rico. Thank 
you.
    [The statement of Ms. Velazquez follows:]
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    Mr. Cicilline. Thank you, Chairwoman Velazquez. The Chair 
now recognizes Representative Cline for his opening statement.

                STATEMENT OF THE HON. BEN CLINE

    Mr. Cline. Thank you, Mr. Chair, Ranking Member 
Sensenbrenner, and Chair Nadler for holding this hearing today 
and for the opportunity to appear before you to discuss the 
Small Business Reorganization Act, which I am proud to 
introduce alongside Chair and Ranking Member Collins.
    In 2010, the National Bankruptcy Conference Small Business 
Working Group identified a problem regarding small businesses 
in the current bankruptcy law and presented to Congress a 
report which recommended amendments to the Bankruptcy Code to 
add a new Chapter for small business reorganizations. Chapter 
11 of the Bankruptcy Code was primarily designed to allow a 
business to restructure its debt obligations while maintaining 
operations with the underlying principle being that a business 
in its entirety is more valuable than assets valued 
independently.
    The point of Chapter 11 is that preservation of the 
business benefits both the creditor, who should receive a 
higher recovery because of the debtor's restructuring than they 
would otherwise obtain through a liquidator, and the debtor, 
who can remain in business. Unfortunately, the current 
Bankruptcy Code makes it difficult for small businesses to 
reorganize and forces them to use alternatives that often lead 
to liquidation. When the choice is between a process that is 
time consuming and needlessly expensive or the simpler route of 
negotiating with creditors for liquidation under State law, 
many small businesses overwhelmed by their situation choose the 
latter.
    Our legislation intends to fix this problem by allowing 
small businesses with less than $2.5 million in debt to file 
bankruptcy in a timely, cost-effective manner, and hopefully 
allows them to remain in business. This not only benefits the 
owners, but employees, suppliers, customers, and others who 
rely on that business. Under our legislation, small business 
owners could retain a stake in the company if the 
reorganization doesn't discriminate unfairly and is fair and 
equitable with respect to each class of claims or interests. 
Bankruptcy courts couldn't approve the plan unless all of the 
small business' disposal income, excluding amounts necessary 
for the payment of ordinary operating expenses, is applied to 
the plan over a 3-5-year period.
    Mr. Chair, as you well know, our districts depend on their 
small businesses. They are convenience stores, restaurants, and 
pharmacies. Those who endeavor to open and run a small business 
are proud of their work and their standing in our communities. 
Unfortunately, they also take on sometimes insurmountable 
financial burden. When they are forced to close, it has a great 
impact on the community. I am proud to join you, Mr. Chair, in 
introducing the Small Business Reorganization Act to provide an 
important avenue of relief to the people in our communities who 
employ countless individuals and who drive our local economies.
    With that, thank you, Mr. Chair.
    [The statement of Mr. Cline follows:]
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    Mr. Cicilline. Thank you, Representative Cline. 
Representative Delgado is now recognized for 5 minutes.

             STATEMENT OF THE HON. ANTONIO DELGADO

    Mr. Delgado. Thank you, Chair Cicilline. I also want to 
thank Ranking Member Sensenbrenner as well as Chair Nadler, 
Ranking Member Collins, and the entire Subcommittee for the 
invitation. I appreciate you holding this hearing to make sure 
our nation's bankruptcy laws reflect today's economy and 
represent the experiences of our nation's farmers.
    I am proud to represent New York 19th Congressional 
District, which stretches nearly 8,000 square miles. It is made 
up of 11 counties and includes the beautiful Hudson Valley and 
Catskill Mountains. My district is the 8th most rural in the 
country and the 3rd most rural represented by a Democrat. It is 
home to more than 500 farms, 8,000 farm operators, and 5,000 
farmers. Today I am here to speak on behalf of family farmers 
across my district, who, along with farmers across the country, 
are facing alarming rates of foreclosure during this down-farm 
economy.
    I would like to take this opportunity to articulate for the 
Committee exactly what a down-farm economy looks like. Farmers 
are currently facing a 5th year of declining net farm income. 
Prices are low, inputs are high, and current trade policies 
make the future unknown. The year 2018 marked the 4th 
consecutive year of rising bankruptcy rates as a proportion of 
the farm population. In addition, at the 2018 Agriculture 
Economic Outlook Foreign Trade Forum, the USDA chief economist 
said net farm income is expected to remain flat over the next 
10 years, and, when accounting for inflation, to fall in real 
terms.
    This is a down-farm economy, and this story is not unique 
to New York 19 or upstate New York. This is an urgent national 
issue for our farmers. According to the National Farm Bureau, 
last year just 498 farms filed for Chapter 12 bankruptcy 
compared to nearly 766,000 consumer filings through Chapter 7 
and 13. Over the last 10 years, Chapter 7 and Chapter 13 have 
seen 10 million total filings compared to just 5,039 Chapter 12 
filings. It is clear the current debt cap has rendered Chapter 
12 inaccessible for today's farm families.
    This farm economy is exacerbated by an outdated filing cap 
that leaves farmers without options to restructure or repay 
their debt. This is why I introduced the Family Farm Relief 
Act, along with the Ranking Member, Mr. Sensenbrenner, and our 
colleagues on both sides of the aisle. H.R. 2336 is a 
bipartisan step to give these family farmers long-overdue 
relief through Chapter 12. Chapter 12 debt relief was, in fact, 
originally written for family farmers experiencing a down-farm 
economy. The rules as written allow for a seasonal repayment as 
farmers' incomes shift with the seasons.
    Our legislation modifies Chapter 12 bankruptcy rules to 
increase the debt cap for eligibility from $3,237,000 to $10 
million. These changes reflect the increase in land values as 
well as the growth over time and the average size of U.S. 
farming operations. These changes will provide farmers 
additional options to manage the current farm economy. Lifting 
the cap will allow farmers to retain assets and continue farm 
operation.
    The Family Farm Relief Act, which also has a bipartisan 
Senate counterpart, has the support of important voices in the 
farming community, including the American Farm Bureau 
Federation and the National Farmers Union. Upon introduction, 
the American Farm Bureau said this legislation will help to 
align bankruptcy law with the scale and credit needs of U.S. 
agriculture. The National Farmers Union also joined in 
endorsing the Family Farm Relief Act saying that it will help 
more family farmers avoid liquidation or foreclosure, allowing 
them to stay in operation. This legislation aims to do just 
that: Keep farmers operational.
    Allowing farmers increased flexibility is critical to the 
health and wellness of our family farmers in the upstate 
economy at large. I encourage the Committee to mark up this 
legislation and bring it to the House floor so we can give our 
farmers and growers the flexibility they need to continue 
operations.
    Thank you all again for the opportunity to testify today to 
address how we can aid our farmers in this difficult farm 
economy. I look forward to working with you all to advance the 
Family Farm Relief Act. Thank you.
    [The statement of Mr. Delgado follows:]
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    Mr. Cicilline. Thank you, Representative Delgado. In 
keeping with our committee's practice, the witnesses are at 
this point excused. We thank you very much for coming here 
today to share your thoughts about these various pieces of 
legislation and thank you for your leadership on this very 
important issue. This was very informative to the Committee and 
will certainly guide us as we consider these legislative 
proposals. Thank you again.
    The witnesses for the second panel will please take your 
seats after our staff have made the administrative 
arrangements, which is code for placing your name cards on the 
table.
    Thank you and welcome to our witnesses.
    Our first witness on our second panel is Hollister 
Petraeus. Ms. Petraeus retired from the Consumer Financial 
Protection Bureau in 2017 after spending 6 years as the 
director of the Office of Servicemember Affairs where she 
worked to strengthen consumer protection measures for the 
military, veterans, and their families. Prior to joining the 
CFPB, Ms. Petraeus served as the director of BBB Military Line, 
a program with the Council of Better Bureaus that fosters 
outreach between local better business bureaus and military 
communities. She currently sits on the board of directors of 
the Children of Fallen Patriots Foundation and the Board of 
Governors of the National Military Family Association. Ms. 
Petraeus received her bachelor's degree from Dickinson College 
and is the recipient of the Department of Defense Medal for 
Distinguished Public Service. Welcome.
    The second witness on our panel is Robert Keach, who 
appears on behalf of the American Bankruptcy Institute. He is a 
shareholder at Bernstein, Shur, Sawyer, & Nelson, and focuses 
on bankruptcy reorganization and out-of-court workouts. He has 
appeared before bankruptcy courts in seven districts across New 
England, New York, and California. He has been a panelist for 
national bankruptcy, lender liability, and creditors' rights 
programs. Mr. Keach served as the President of the ABI from 
2009 to 2010 and is currently an adjunct professor teaching 
cross-border insolvency and business bankruptcy at Boston 
College Law School. He received his B.A. from the University of 
Vermont and his J.D. from the University of Maine School of 
Law.
    Our next witness is Edward Boltz, representing the National 
Association for Consumer Bankruptcy Attorneys. Mr. Boltz 
currently serves as an attorney and managing partner at the Law 
Offices of John Orcutt. There he represents consumers across a 
broad spectrum of financial matters, including Chapter 7 and 13 
bankruptcies, mortgage issues, and student loan legislation. 
Mr. Boltz is also the vice President of NICBA, a position he 
has held since 2007. At various points he has served as the 
NICBA's director, president, and co-chair of the Legislative 
Committee as well. Mr. Boltz received his B.A. from Washington 
University in St. Louis and his J.D. from George Washington 
University Law School.
    Our third witness is John Rao, who appears on behalf of the 
National Consumer Law Center. Mr. Rao has been a staff attorney 
at NCLC since 1996 focusing on consumer credit, mortgage 
servicing, and bankruptcy issues. He provides testimony to 
Congress and Federal regulatory agencies on issues affecting 
low-income consumers and has filed amicus briefs in cases 
before the Supreme Court and various courts of appeal. Before 
joining NCLC, he was a managing attorney at the Providence 
office of Rhode Island Legal Services, heading the program's 
consumer unit. He received his B.A. from Boston University and 
his J.D. from the University of California Hastings Collee of 
Law. A special welcome to you, Mr. Rao.
    Our fifth witness is Professor Jimenez, a professor at the 
University of California Irvine School of Law. Professor 
Jimenez's research focus is on bankruptcy, consumer financial 
distress, and financial product regulation and their 
intersection with consumer protection and access to justice. 
She was a founding staffer with the Consumer Financial 
Protection Bureau where she worked on debt relief, credit 
reporting, and student loan issues. She received her M.S. from 
the Massachusetts Institute of Technology and her J.D. from 
Harvard Law School where she won the Outstanding Bankruptcy 
Student Award from the American Bankruptcy Institute. Welcome.
    Our last witness today is Judge Thomas Small, who is 
representing the National Bankruptcy Conference. Judge Small 
served as a bankruptcy judge for the Eastern District of North 
Carolina from 1982 to 2007, and as chief judge from 1992 to 
1999, and again from 2006 to 2007. From 2000 to 2001, he served 
as President of the National Conference of Bankruptcy Judges 
and chaired the U.S. Judicial Conference Advisory Committee on 
Bankruptcy Rules from 2000-2004. Additionally, since 2007, 
Judge Small has sat on the Board of Editors of the Collier on 
Bankruptcy Treatise. He received his B.A. from Duke University 
and his J.D. from the Wake Forest University School of Law.
    We welcome all our very distinguished witnesses on the 
second panel and thank you for participating in today's 
hearing. Now if you would please rise, I will begin by swearing 
you in. Please raise your right hand.
    Do you swear or affirm under penalty of perjury that the 
testimony you are about to give is true and correct to the best 
of your knowledge, information, and belief, so help you God?
    [A chorus of ayes.]
    Mr. Cicilline. Let the record show the witnesses answered 
in the affirmative. You may be seated. Thank you.
    Please note that each of your written statements will be 
entered into the record in its entirety. Accordingly, I ask 
that you summarize your testimony in 5 minutes. To help you 
stay within that time, there is a timing light on your table. 
When the light switches from green to yellow, you have 1 minute 
to conclude your testimony. When the light turns red, it 
signals that your 5 minutes have expired.
    Ms. Petraeus, we will begin with you. You are recognized 
for 5 minutes.

               TESTIMONY OF HOLLISTER K. PETRAEUS

    Ms. Petraeus. Chair Cicilline, Ranking Member 
Sensenbrenner, Chair Nadler, and distinguished Members of the 
subcommittee, thank you for the opportunity to speak to you 
today, most notably on the HAVEN Act, which was recently 
introduced by Representatives McBath and Steube.
    Let me say up front that I'm not a bankruptcy expert nor a 
lawyer, but I do have a long history of advocacy for the 
military on consumer financial matters. I'm the daughter, wife, 
and mother of Army officers. As I've lived a life of constant 
moves and, more recently, combat deployments, I saw the impact 
those events had on the finances of military personnel and 
their families.
    During the first year of the Iraq War, my husband's 
division went to war. I saw the families' financial challenges 
firsthand during that year, not just those of the active-duty 
troops, but also families of the Guard and Reserve who came to 
our family assistance center for help. I did what I could to 
help raise awareness with our Federal and State legislators who 
visited. I also worked with local business leaders to include 
the Better Business Bureau, which led to the job that I held 
there for 6 years.
    Running the BBB Military Line was an education for me on 
the fact that many scammers specifically target the military 
for their steady paycheck, which is often coupled with youth 
and financial inexperience. While I was at the BBB, we 
developed a number of free financial readiness workshops to 
provide in-person financial education for serviceMembers and 
their families. But while education is important, the sad truth 
is that in many cases, serviceMembers' finances are impacted by 
events that they cannot control: Deployments, shoddy loan 
servicing, inaccurate credit reporting, and the flouting of 
important consumer financial laws.
    So, when I was offered the opportunity to head up the 
Office of Servicemember Affairs at the newly-formed Consumer 
Financial Protection Bureau, I jumped at the chance. I knew 
that the Bureau had the power to enforce consumer financial 
laws, and that to me was a vital part of protecting military 
families' hard-earned money. I ran that office for 6 years, and 
in that time, we saw over $120 million returned to 
serviceMembers.
    Last year, I was asked to join an American Bankruptcy 
Institute Task Force on Veterans and Service Members. One of 
its most immediate missions was to correct a glaring error in 
the Bankruptcy Code of 2005, language that effectively denied 
disabled veterans the protections it provided to all other 
disabled Americans. Under the 2005 law, judges could no longer 
decide the debtor's disposable income but had to include 
virtually all income that the debtor received, except for three 
things: Benefits received under the Social Security Act, 
payments to victims of war crimes, and payments to victims of 
terrorism.
    That first item is the problem. Civilians receive 
disability benefits from the Social Security Administration, 
but disabled Service Members and Veterans do not. They get 
their disability benefits from the VA and from the Department 
of Defense. So, by using specific language referencing the 
Social Security Act, Congress effectively denied those who had 
become disabled in the service of their country the rights 
given to others who had not served, and that is obviously not 
right.
    I cannot imagine that Congress intended this, but with 
their disability pensions counted, veterans may fail the means 
test and not qualify for Chapter 7 bankruptcy which allows for 
a quick, fresh start. Instead, they must file for Chapter 13 
with a 3- to 5-year payment plan that they must fund from their 
current monthly income, including their military disability 
pension. Surely Congress never intended that a military 
disability benefit should go into the pockets of creditors. The 
HAVEN Act will fix that problem.
    Let me also mention one other item you are considering for 
National Guard and Reserve Members. Combat deployment, while a 
source of extra pay, could have a catastrophic impact on their 
civilian small business. If they opted for bankruptcy, the 
means test counted their military special pay and allowances, 
even though they were no longer receiving them. That could make 
their income too high for bankruptcy. The National Guard and 
Reservists Debt Relief Act of 2008 fixed that issue, and today 
you are looking to extend it for another 4 years, an action I 
support. Our citizen soldiers who put on the uniform of our 
country should not be financially penalized for doing so.
    Ideally, no one should need to declare bankruptcy, but it 
happens and at a higher rate for veterans. Many of them have 
disabilities that make it hard to earn a living wage, and that 
may limit their caregiver spouse, too. No veteran should face 
the added stress of pledging their disability benefits to 
creditors. You can eliminate the roadblocks and make it harder 
for them to discharge their debts, and I commend you--excuse 
me--for your efforts today. Thank you.
    [The statement of Ms. Petraeus follows:]
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    Mr. Cicilline. Thank you, Ms. Petraeus. Mr. Keach is now 
recognized for 5 minutes.

                   TESTIMONY OF ROBERT KEACH

    Mr. Keach. Mr. Chair--
    Mr. Cicilline. Would you please turn on your microphone?
    Mr. Keach. Thank you.
    Mr. Cicilline. Thank you.
    Mr. Keach. Chair Cicilline, Ranking Member Sensenbrenner, 
and Chair Nadler, distinguished Members of the subcommittee, 
thank you for inviting me to present the views of the American 
Bankruptcy Institute in support of the several bipartisan 
bankruptcy measures now pending before the subcommittee. ABI is 
the world's largest association of professionals practicing in 
appropriately structuring in personal bankruptcy with nearly 
11,000 Members worldwide.
    I was honored to serve as the co-chair of the ABI's 
Commission to Study the Reform of Chapter 11. The 400-page 
report of the Chapter 11 Commission was the product of more 
than 3 years of study on how best to improve and modernize the 
Bankruptcy Code with input from all sectors and viewpoints. The 
report has been an influential resource for stakeholders and 
cited by numerous Federal courts, including the Supreme Court, 
and inspires reform efforts like the bipartisan, bicameral 
items on today's agenda.
    Others will speak on some of these bills, but let me focus 
on two: The Family Farmer Relief and the Small Business 
Reorganization Act.
    The ABI endorses and urges passage of the Family Farmer 
Relief Act. This bipartisan and bicameral legislation would 
increase the debt limits for the filing of Chapter 12 cases 
from the existing limits, now about $4.1 million, to $10 
million. Since its enactment in the midst of the severe farm 
crisis in 1986, Chapter 12 has been a useful and durable 
support for the cyclical and economic challenges faced in 
American agriculture. The original debt limit for Chapter 12 
eligibility was $1.5 million. That was set in 1986. However, 
today's farming operations are larger. Farming has become much 
more expensive due to the need to access technology. 
Accordingly, debt loads are much larger given the capital 
requirements for farmland, equipment, and inputs.
    As a result, the liability cap under Chapter 12, which has 
been increased for cost of living and other factors over the 
years, does not align with the modern credit and risk 
environment associated with family farming. This bill would 
increase that cap to $10 million, which we think is long 
overdue. A crisis in this sector is already unfolding. 
Uncertainties in both the trade and commodities markets as well 
as the impact of natural disasters makes this an ideal time to 
reset Chapter 12 before a larger crisis arrives.
    I would also, Mr. Chair, move to admit a letter from the 
American College of Bankruptcy in support of the Chapter 12 
reform.
    Mr. Cicilline. Without objection, so ordered.
    [The information follows:]
     

                        MR. KEACH FOR THE RECORD

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

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    Mr. Keach. Thank you. Let me speak also briefly about the 
Small Business Reorganization Act. Chapter 11 of the Bankruptcy 
Code has long been of great value in preserving going concern 
value jobs and maximizing creditor recoveries from any 
businesses. Small businesses are the entities that drive job 
creation in a dynamic economy, but they are also most likely to 
experience financial distress. As Congress looks to find ways 
to help small businesses enter the marketplace and create jobs, 
it should also focus on helping existing businesses succeed and 
save jobs that otherwise would be lost if those businesses 
closed their doors.
    The Small Business Reorganization Act of 2019 is a good 
start, and we thank Representative Cline and Chair Cicilline 
for sponsoring it in the House. This is the jobs bill that has 
already been paid for. It costs us nothing to make the 
bankruptcy system work better for small business. With some 
tweaking, it can be an even more effective remedy.
    The testimony before the ABI Commission strongly 
established that the Chapter 11 process simply does not work 
for small- and medium-sized businesses. Witnesses testified 
consistently that small businesses were running away from 
Chapter 11, and those that filed were filing, frankly, merely 
to facilitate a quick liquidation. Only 27 percent of small 
businesses that file Chapter 11 confirm plans.
    Why is Chapter 11 in its existing form not working? It's 
simply too complex and too costly for these businesses. More 
importantly, current doctrines that apply in Chapter 11 means 
that it is a virtual certainty that the existing owners of the 
business will not get to retain their ownership interest in 
reorganizing under Chapter 11. The Small Business 
Reorganization Act fixes those problems. However, like the 
Chapter 12 bill, we think its debt limit is somewhat too low at 
$2.6 million. ABI would encourage that the same change be made 
to this bill in increasing the debt limit to $10 million for 
small businesses. The data studied by the ABI Commission seem 
to establish that as the right level to encompass the 
businesses that need help.
    Here, too, I would like to introduce letters from the 
American College of Bankruptcy and the National Conference of 
Bankruptcy Judges in support of this legislation.
    Mr. Cicilline. Without objection, so ordered.
    [The information follows:]

   

                        MR. KEACH FOR THE RECORD

=======================================================================
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    Mr. Keach. My time is about up, but I would just take my 
last statement to also note that the ABI supports the HAVEN 
Act, and like to submit a letter from the American College of 
Bankruptcy in support of the HAVEN Act as well.
    [The information follows:]

   
                        MR. KEACH FOR THE RECORD

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

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    Mr. Cicilline. Thank you, Mr. Keach. The Chair now 
recognizes Mr. Boltz for 5 minutes.

                     TESTIMONY OF ED BOLTZ

    Mr. Boltz. On behalf of NACBA, I want to thank Chair 
Nadler, Ranking Member Collins of the Judiciary Committee, and 
Chair Cicilline and Ranking Member Sensenbrenner of this 
Subcommittee for the opportunity to offer our views on the 
State of consumer bankruptcy and pending legislative proposals. 
While there are many issues related to consumer bankruptcy in 
play in both the courts and throughout the economy as a whole, 
I will limit my remarks to some currently-pending legislation 
directly related to bankruptcy as well as several other topics 
to which proposed legislation may serve as effective vehicles 
for essential change.
    First, we would talk about restoring the bankruptcy 
discharge for student loans. NACBA through its Members and, 
more importantly, its clients are often the first to see 
economic troubles affecting Americans. In 2007, NACBA, with the 
Center for Responsible Lending and the Consumer Federation of 
America, released a survey finding that there was a sharp rise 
in subprime mortgage-related problems. Shortly thereafter, we 
hit the great recession caused by the housing crash. In 2012, 
again NACBA first forecast the coming student debt bomb. Since 
then, student debt has skyrocketed to over $1.5 trillion, and 
the amount of student loan debt now surpasses all other 
consumer debt except for mortgage debt.
    In response to this unabated growth of the student loan 
crisis and greater questions about higher education, there have 
been numerous proposals, both large and small. While the 
Department of Justice, after consultation with NACBA, among 
others, has given guidelines about allowing Chapter 13 debtors 
to participate in various income-driven repayment plans during 
their bankruptcies, such plans have often faced resistance from 
bankruptcy courts as purportedly constituting unfair 
discrimination.
    Additionally, in February 2018, the Department of Education 
issued a request for information regarding its application of 
the undue hardship standard currently under the Bankruptcy 
Code. Despite more than 400 responses highlighting the harsh 
effects of this standard submitted more than a year ago, there 
have been no results, let alone any changes, in the practices 
by the Department of Education in this regard. Additional 
congressional oversight of the Department of Education would be 
welcome.
    These minimum efforts, however, show the inadequacy of 
piecemeal, non-comprehensive changes that stop short of 
restoring the general dischargeability of student loans in 
bankruptcy. Furthermore, while government loan programs 
generally lend to borrowers without regard to creditworthiness, 
private student loans are largely underwritten on the same 
basis as other consumer debts with lending risk reflected in 
the interest rates charged as well as requiring co-signers, 
often parents or elderly grandparents, and other demands for 
security. Research indicates that the non-dischargeability of 
private student loans made in 2005 by BAPCPA did not result in 
the lowering of interest rates by student borrowers, in large 
part because there is no showing of strategic default by 
borrowers prior to BAPCPA or since.
    Restoration of the discharge of bankruptcy for student 
loans and private student loans would help restore the most 
debt-burdened and make them economically functional again. For 
these reasons, we support Senator Durbin and the House bill, 
H.R. 2648, that would restore the complete discharge. We also 
would support as a smaller step H.R. 885, which would restore 
the dischargeability of private student loans.
    Regarding the HAVEN Act, the Bankruptcy Code uses a means 
test to determine the projected disposable income a debtor has 
to pay to unsecured creditors. These tests are based currently 
on monthly income, which excludes the debtor's Social Security 
Act, while Social Security and disability retirement benefits 
are excluded based on the protections outside of bankruptcy 
from collection by any creditors, with the sole exception 
largely being student loans.
    Debtors receiving veterans' disability benefits as well as 
veterans retirement benefits have these same protections 
outside of bankruptcy as do other forms of public retirement 
benefits, such as railroad workers and certain public school 
workers. As written in an article published earlier today, many 
of these people are worse off in bankruptcy than they would be 
outside of bankruptcy.
    For these reasons, NACBA supports the HAVEN Act, but would 
encourage this Subcommittee to look at expanding such to cover 
not just disability benefits, but also veterans' retirement 
benefits. We do recognize that should be capped, however, at 
the maximum amount of Social Security so as to not provide a 
windfall for retirees with substantial benefits otherwise.
    I thank you for your time.
    [The statement of Mr. Boltz follows:]
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    Mr. Cicilline. Thank you. Thank you, Mr. Boltz. The Chair 
now recognizes Mr. Rao for 5 minutes.

                     TESTIMONY OF JOHN RAO

    Mr. Rao. Chair Cicilline, Ranking Member Sensenbrenner--
    Mr. Cicilline. Please put on your microphone. Thanks.
    Mr. Rao. Chair Cicilline, Ranking Member Sensenbrenner, and 
Chair Nadler, Members of the subcommittee, thank you for 
inviting me to testify today. While there are a number of bills 
and proposals before this Committee that are worthy of 
consideration, including those in the report of the ABI's 
Commission on Consumer Bankruptcy, I wish to voice my strong 
support for Chair Nadler's Student Borrower Bankruptcy Relief 
Act, and will focus on that bill.
    When the bankruptcy discharge for student loans was 
eliminated in the Higher Education Reauthorization Act in 1998, 
the conference report stated that some protections still remain 
for borrowers in the form of undue hardship. While this was a 
questionable premise even then, we now know with certainty that 
undue hardship is effectively a non-existent right. It is 
virtually never used. One study has found that only one-tenth 
of 1 percent of bankruptcy filers with student loans seek an 
undue hardship discharge. The barriers to getting an undue 
hardship discharge are enormous and deny access to those most 
needing relief.
    Some will suggest more borrowers would try for undue 
hardship if Congress defined it in a way that would allow 
courts to apply a more lenient standard. No matter how defined, 
the undue hardship method of discharge will be random and 
arbitrary. In the two circuits where a less stringent test is 
currently used, student borrowers fare no better in the 
outcomes of their cases, and no more cases are brought in those 
circuits. Even with a less strict standard, the burden is on 
the student borrower to bring a court action and prove that 
their loan should be discharged. Any system that requires the 
poorest and most in need to come up with thousands, even tens 
of thousands, of dollars to fund contested litigation will not 
work. This economic reality alone explains why no cases are 
brought now and why none will be brought under a redefined 
standard.
    Another reason given in 1998 for changing the law was that 
borrowers in financial distress could rely upon the Department 
of Education's income-driven repayment plans. We now know after 
many years of experience that these programs are fraught with 
problems and their reach is limited. Many eligible borrowers 
are not enrolled in these plans despite clear potential 
benefits. Instead, borrowers are steered by servicers into 
forbearances and deferments, which causes their balances to 
grow as interest continues to accrue and is capitalized. 
Services do this because it is more profitable for them as it 
is much easier to put someone on forbearance than to enroll 
them in an income-driven repayment plan.
    Making bankruptcy dischargeable or making bankruptcy 
discharge available to borrowers would incentivize servicers to 
Act more responsibly. Even if servicer problems were fixed, it 
makes no sense to keep borrowers who might otherwise seek 
bankruptcy relief on an IDR for 20 years, especially those who 
don't have repayment ability to be paying nothing or some 
minimal amount. The administrative costs of annual 
recertifications and collection costs if the debtor re-defaults 
are a waste of taxpayer funds and further drains the student 
loan program.
    As each of the bankruptcy discharges for student loans was 
eliminated over the period 1977 to 2005, there was no evidence 
of abuse by consumer borrowers. The debate was moved by 
perception rather than reality. Still, any concern about the 
potential abuse is even less compelling now because of the 
substantial changes that were made in the Bankruptcy Code in 
2005, including a means test, document requirements, and 
exemption limitations.
    The question remains, why student loans are treated 
differently? The government financially supports a number of 
loan programs with laudable goals similar to student loans, 
such as loan programs for veterans, farmers, small business 
owners, and homebuyers. While many of these programs also have 
less strict underwriting, somehow, we treat them differently 
and make them non-dischargeable. Some argue that this is 
because student loans help borrowers obtain a college degree, 
which is an asset that will guarantee future income. This 
ignores the many student borrowers who are struggling with 
large amount of debt never completed their schooling or 
obtained a degree. Even those borrowers who obtain a degree run 
into unexpected life traumas or other circumstances that 
prevent them from having sufficient incomes to repay their 
loans.
    In conclusion, it is time to directly confront the myths 
about student loans dischargeability and rebut the rationales 
for treating student loans differently in bankruptcy. Congress 
should reverse this policy and Act immediately to ensure that 
student loans are not exempted from discharge. Thank you, 
Chair.
    [The statement of Mr. Rao follows:]
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    Mr. Cicilline. Thank you, Mr. Rao. The Chair now recognizes 
Professor Jimenez for 5 minutes.

                   TESTIMONY OF DALIE JIMENEZ

    Ms. Jimenez. Chair Cicilline, Ranking Member Sensenbrenner, 
and Members of the subcommittee, thank you for the opportunity 
to express my views to you today. In the few minutes before 
you, I want to urge the Subcommittee to approve bills that 
would make the bankruptcy discharge available to all student 
loan borrowers.
    The $1.5 trillion in outstanding student loans and the 
rising defaults are symptoms of structural problems that 
bankruptcy cannot solve. Bankruptcy, however, is well suited to 
bring relief to individuals who are today suffering greatly 
under the weight of this crushing system. I want to make the 
case for dischargeability of private student loans first and 
then focus on rebutting objections to the dischargeability of 
Federal loans.
    In 2005, owners of private student loan debt received a 
tremendous gift. With the stroke of a pen, the $56 billion of 
outstanding private loans that were originated at a time when 
those loans were immediately dischargeable in bankruptcy 
suddenly became practically nondischargeable. There was no 
economic justification for doing this. None.
    What did the American people get from this? A few studies 
examined the effect of the 2005 amendments on the private 
student loan market, including two studies that I coauthored. 
To summarize them, basically, making private student loans 
presumptively nondischargeable harmed students. It increased 
the cost of the loans. It did not translate into savings for 
subprime borrowers, and it was done despite any evidence of 
opportunistic behavior by private student loan borrowers.
    Since 2005, private lenders have increased their 
requirements for co-borrowers by 1.5 times. In 2005, it was 60 
percent of under budget loans had a co-borrower. Now it is over 
90 percent.
    What does the market look like today? Well, interest rates 
range from 0 to 20 percent, and defaults are quite low, similar 
to credit cards, around 2 percent. This is very different from 
Federal student loans that have about 11 percent default.
    Less than 2 percent is the only data we have from 2005 to 
2011, less than 2 percent of private student loans are included 
in a bankruptcy filing. The special treatment of private 
student loans in bankruptcy is utterly indefensible, and I urge 
you to end it.
    I now want to address some of the arguments against 
discharging Federal loans--Federal student loans in bankruptcy. 
A typical one is the student benefited from the education at 
the expense of the creditor, and thus, they ought to be 
obligated to repay. That is an argument against bankruptcy 
discharge generally, and it ignores in this context the public 
benefits of a well-educated citizenry.
    Another common objection is that students will get loans, 
graduate, and file bankruptcy as quickly as possible. But there 
has never been any empirical evidence of any widespread abuse. 
In fact, the individual anecdotes that people point to are of 
cases in which the bankruptcy judge denied a discharge.
    That objection also ignores the moral hazard consequences 
of the current system on creditors and servicers. These players 
yield tremendous power by virtue of their treatment in 
bankruptcy and lack, therefore, market incentives to improve 
their treatment of students.
    Theorized objections to changing the system ignore the 
real-life consequences of bankruptcy. Filing bankruptcy is 
expensive. It affects the cost and availability of important 
products, like obtaining credit, insurance, living 
arrangements, and job prospects for years to come. These 
arguments also ignore the many tools the bankruptcy system 
already have to control abuse--means testing, good faith 
requirements, limit on how often someone can obtain a 
bankruptcy discharge, among others.
    Another argument for the status quo is that making these 
loans dischargeable would compromise the viability of the 
student loan program. That argument assumes that making a 
discharge available for Federal borrowers would precipitate 
massive numbers of the 45 million student loan borrowers to 
file bankruptcy. This would require astronomical growth in 
bankruptcy filings, which at their height saw about 2 million 
people filing. The numbers just don't add up.
    Second, this argument assumes that the availability of 
Federal student loans depends on repayment. The funding of the 
Federal student loan program is a political question. It does 
not depend on the fiscal solvency of the program itself. The 
real question is where do American people think their 
government should invest?
    I would argue that higher education is one such place, 
although we do not necessarily need to do it through loans. 
Changing the bankruptcy treatment of these students' loans 
would allow us to focus on the people who are suffering the 
most. I urge you to report these bills positively out of the 
Subcommittee and to amend the Bankruptcy Code immediately to 
make all student loans dischargeable.
    Thank you.
    [The statement of Ms. Jimenez follows:]
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    Mr. Cicilline. Thank you very much, Professor Jimenez.
    I now recognize Judge Small for 5 minutes.

                 TESTIMONY OF HON. THOMAS SMALL

    Judge Small. Thank you, Mr. Chair, Mr. Sensenbrenner, 
Committee Members.
    The National Bankruptcy Conference is grateful for the 
opportunity to participate at this hearing this morning to 
present its views with respect to small business 
reorganizations.
    As a bankruptcy judge, I saw this problem firsthand and 
have known for over 30 years that Chapter 11 doesn't work well 
for small businesses. Chapter 11 is too expensive. Confirmation 
requirements are too onerous. Creditors have too much control 
of the process.
    House bill 3311, which incorporates the essential aspects 
of the National Bankruptcy Conference's proposal, would remedy 
all these problems and provide incentives and procedures for 
debtors and creditors to arrive at consensual plans. There 
would be a new voluntary subchapter, Chapter 11, subchapter V, 
that small business enterprises could use to reorganize.
    The debtor would be a debtor in possession, but in every 
case, there would be a standing trustee, much like in Chapter 
11--or Chapter 12. Only the debtor could file a plan, and the 
plan must be filed quickly, within 90 days. There would not be 
a creditors Committee in most cases. There would be no 
disclosure statement unless the court ordered otherwise. Even 
without a disclosure statement, the debtor would have to 
provide a lot of information, including all of the information 
and periodic reports that small business debtors now provide 
under Chapter 11.
    A confirmed plan under subchapter V may be either 
consensual or nonconsensual. If the plan meets most of the 
current Chapter 11 requirements, including the high voting 
requirements, the plan would be confirmed, and the case would 
proceed as if it were a regular Chapter 11 case. The trustee 
would disappear, and the debtor would receive a discharge upon 
substantial consummation.
    If the debtor cannot meet the requirements for a consensual 
plan, the plan can still be confirmed if it meets subchapter 
V's ``crammed down'' requirements, the most important of which 
is that the plan must provide that all the debtor's projected 
disposable income be received in a 3- to 5-year period, as 
determined by the court, and be applied to make payments under 
the plan.
    If the court confirms a nonconsensual plan, the trustee 
remains in place and monitors compliance with the plan, and the 
debtor's discharge would be delayed until all plan payments are 
made.
    Now the National Bankruptcy Conference tried really hard to 
make this a balanced proposal that would benefit both debtors 
and creditors. Obviously, reorganization will be more feasible 
for small businesses, but there are benefits for creditors as 
well.
    For one thing, every subchapter V case has an impartial, 
independent standing trustee who provides oversight of the 
debtor's operations. Every case will move fast. Debtors will 
not be allowed to languish in Chapter 11, and the plan may 
provide for specific remedies, including liquidation, that can 
be executed by the trustee if the debtor fails to meet its 
obligations under the plan. Most importantly, reorganizations 
would avoid liquidations, and asset values would be preserved.
    Now in 1985, I had the privilege of testifying before--with 
my late colleague, bankruptcy judge Thomas Moore before two 
Senate Judiciary Committee subcommittees looking into 
bankruptcy and the farm crisis. Our message in 1985 was that 
Chapter 11 did not work well for family farmers, and what was 
needed was a new Chapter to deal with their specific problems.
    Today, my message with respect to small businesses is 
similar. Chapter 11 does not work well for small businesses, 
and legislation is needed. Chapter 12 saved thousands of family 
farms for the benefit of family farmers and their creditors, 
and I strongly believe that today, House bill 3311 would save 
thousands of small businesses for the benefit of their owners, 
their creditors, their suppliers, their customers, their 
employees, and the economy as a whole.
    I would be glad to answer any questions you may have.
    [The statement of Judge Small follows:]
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    Mr. Cicilline. Thank you, Judge Small.
    Thank you to all the witnesses for your opening statements.
    We will now proceed under the 5-minute rule with questions, 
and I will begin by recognizing the gentleman from Georgia, Mr. 
Johnson, for 5 minutes.
    Mr. Johnson of Georgia. I thank Chair for holding this 
important hearing.
    Bankruptcy reform for vulnerable groups has gone overlooked 
for too long and gathering the experts we have before us today 
is an important step towards passing meaningful legislation and 
fixing the problems that they have testified about.
    Make no mistake. We are here because the rich are getting 
richer, and the poor are getting poorer. After decades of 
adding pro Wall Street laws to the books, we have settled into 
a system with loopholes that stack the deck against fairness 
for people in bankruptcy proceedings.
    The so-called Bankruptcy Abuse Protection--or excuse me, 
Bankruptcy Abuse Prevention and Consumer Protection Act, passed 
in 2005, made student loan debt nondischargeable in bankruptcy. 
This legislation should have been called the Bankruptcy 
Protection for Private Lenders for For-Profit Colleges and 
Universities Act because the private lenders were the ones who 
benefited the most from making student loans nondischargeable 
in bankruptcy.
    Ms. Jimenez, you say that it was $56 billion on the books 
at the time the 2005 legislation passed. That was a gift, a 
panacea for the private loan industry. These so-called schools 
that they left money for student loans too often had humongous 
advertising budgets. They swept in a bunch of unqualified 
students. They accepted everybody, regardless of whether you 
could read, and when you finished matriculating, the diploma 
that you received was not worth the paper that it was written 
on. Graduates had degrees but couldn't find a job.
    As a result of this change in Federal law, people are stuck 
paying back these student loans for the rest of their lives. 
Even gambling debt is dischargeable, but student loan debt is 
not dischargeable. Even timeshare debt is dischargeable in 
bankruptcy, but student loan debt is not.
    I am proud to be a cosponsor of Chair Nadler's bill. It is 
H.R. 2648, the Student Borrower Protection--excuse me, Student 
Borrower Bankruptcy Relief Act of 2019. I am proud to be 
cosponsor of that bill, and I hope that it will pass. It is 
time to take steps to ensure that groups such as these students 
are protected, and I am looking forward to hearing about the 
solutions that we are testifying about today.
    Ms. Jimenez--well, actually, Mr. Boltz, in your testimony, 
you discussed the development of bankruptcy law in the realm of 
student loans, commenting about Congress having made it 
increasingly difficult to discharge student loans. Why do you 
think that was the case? Why did Congress do that, Mr. Boltz? 
If you are--
    Mr. Cicilline. Could you put on your microphone?
    Mr. Boltz. Mr. Johnson, as best I know, most of the changes 
that made student loans dischargeable were made in bills that 
were not even through the Judiciary Committee. They were often 
in a higher education act. Some of the changes were made in 
crime bills.
    Mr. Johnson of Georgia. Why was this change made, though?
    Mr. Boltz. It was often made as part of a deal to increase 
the amount of lending that was available on the idea that the 
poorest people who were unable to pay, if we kept them on the 
books, that somehow that would increase the liquidity of the 
student loan programs. As Ms. Jimenez has testified, that is 
really not the case.
    Mr. Johnson of Georgia. Well, what do you say about it, Ms. 
Jimenez? Why did they do it?
    Ms. Jimenez. I think it is partly as we opened, talking 
about Federal loans first or Government-guaranteed loans, is we 
opened up more and more Federal loans available to students and 
asked--didn't ask about their ability to repay, then it was 
basically the bogeyman story that people were going to come in 
and start filing bankruptcy--start going to school, graduate, 
file bankruptcy--
    Mr. Johnson of Georgia. Do you think it was--let me ask 
you? Do you think it was to protect the lenders more than to 
protect borrowers and shore up the system? What do you think 
the real motivation was for passing the legislation?
    Looks to me like it was to protect those who were giving 
the campaign contributions to those who were passing the laws, 
but I will move on.
    Mr. Rao, according to a recent study, Black men and women 
who take out loans to finance their education are forced to 
take out more money than their White peers. What is the reason 
for this disparate impact on minority populations, and how can 
we in Congress work to stop it?
    Mr. Cicilline. The gentleman's time has expired, but the 
witness may answer the question.
    Mr. Rao. Yes, Mr. Johnson. I would say that, actually, 
Professor Jimenez has done a lot of research on this, and there 
has been a lot of evidence that minority families lack the same 
amount of resources that some White families have and will 
often be required to incur additional debt. They are also going 
often to private schools, which charge more. There are actually 
a number of reasons that Professor Jimenez has outlined in her 
research.
    So, thank you.
    Mr. Johnson of Georgia. Thank you. I yield back. I thank 
Chair.
    Mr. Cicilline. Thank you.
    The Chair now recognizes the Ranking Member of the 
subcommittee, Mr. Sensenbrenner, for 5 minutes.
    Mr. Sensenbrenner. Thank you very much.
    I have been on this Committee since I was first elected to 
Congress in 1978. Before I was elected to Congress, there was a 
major redo of the Bankruptcy Code that was passed in '78, and 
that made student loans nondischargeable. I believe in '82 or 
'83, this committee, which was still heavily run by Democrats, 
made the loans nondischargeable. Now at that time, there was 
very little Federal lending, and most of the lending were 
guaranteed student loans through the private banking sector.
    I remember the debate when that happened that said that 
there were a lot of graduates, particularly those with advanced 
degrees, that were filing for bankruptcy to discharge their 
student loans even before the ink was dry on the diplomas they 
got for getting an advanced degree.
    I think most of us agree that a college education is a way 
to have increased income, and an advanced degree is a way to 
have even better advanced incomes. I think with the exception 
of you, Ms. Petraeus, everybody here has a law degree on that. 
That might have been the motivation a while ago when you 
decided to go to law school.
    Now my question is, yes, there is a problem with student 
loans, defaulted student loans. If we make them 
nondischargeable, how do we prevent people who have a diploma 
that will get them having six-figure incomes in their practices 
from gaming the system and getting a major part of their debt 
discharged, when that debt ended up giving them the opportunity 
for significantly increased income if they did not have those 
degrees?
    So, who would likely to be first?
    [Laughter.]
    Mr. Sensenbrenner. Because we cannot repeat that mistake. 
If we repeat that mistake the American taxpayers will rise up, 
saying the Federal Government lent them money, and they had no 
intention of paying it back because the bankruptcy court was 
across the street.
    Mr. Rao. Ranking Member Sensenbrenner, that problem that 
you address, even though I don't acknowledge that it did exist, 
was fixed in 2005 by the amendments that Mr. Johnson referred 
to. While many of them have made bankruptcy filing much more 
difficult, they absolutely address the issue you are talking 
about, someone coming right out of college with--the doctor 
with the six-income figures, that person would never be able to 
get a discharge under our current bankruptcy law. The means 
test would preclude that person. Forgetting whether it is 
student loan or any other debt, they would never be able to get 
a discharge.
    The reports of abuse--and Ranking Member Sensenbrenner, you 
refer to 1978. This Judiciary Committee asked for a GAO study 
to be done to look at how much student loan was being 
discharged in bankruptcy when it was dischargeable, and that 
study showed that there was virtually no abuse and that the 
same amount of--
    Mr. Sensenbrenner. Then why did the Judiciary Committee 
turn around and make it nondischargeable?
    Mr. Rao. Actually, it didn't. This Committee did not vote 
in favor of it. Eventually, it was included as a compromise 
with the GAO study, and then all the other changes were not 
done by this committee. They were done by the higher education 
committees. This--
    Mr. Sensenbrenner. This doesn't answer my question. If we 
make student loans dischargeable again, how do we prevent a 
gaming of the system?
    Now, if you look at a means test on this, you walk out of 
med school or you walk out of law school, you don't have bags 
of money unless you have got a trust fund sitting around. So, 
most people will be able to qualify under a means test because 
their income is not very much, and their assets are probably 
negative.
    So, how do we do that? Because the key to getting this 
passed is to figure out how to prevent people from gaming the 
system. If we just say, well, nobody ever did that in the past, 
sir, you are in denial, and you are having this proposal, which 
I think has got some merit to it if it is properly done, 
leading it down to defeat.
    Now, somebody else in my remaining 24 seconds? Yes, Ms. 
Jimenez?
    Ms. Jimenez. Could I answer? So, I want to talk about both 
the idea that this is something that will happen, and even if 
it did, that we cannot stop it. The means test didn't just 
create barriers based on income, as you were just referring to, 
Ranking Member Sensenbrenner. It also added bad faith and 
dismissal for cause provisions to the code under both Chapter 
7, 13, and 11 that allow a bankruptcy judge to take into 
account exactly the circumstances that you are afraid of, the 
person who graduates and then doesn't currently have a job, so 
has no income, but has very good prospects.
    In that situation, and there are a few other things in the 
Bankruptcy Code, the judge can dismiss those cases or deny a 
discharge in general or a discharge of that particular debt.
    Mr. Sensenbrenner. Yes, my time is up, but I am a skeptic. 
You have got to convince me.
    Thank you.
    Mr. Cicilline. Thank you, Mr. Sensenbrenner.
    The Chair now recognizes the Chair of the Full Committee, 
Chair Nadler, for 5 minutes.
    Mr. Nadler. Thank you, Mr. Chair.
    Before I ask my question, I want to note for the record 
that Professor Jimenez interrupted her stay with her family in 
Germany to fly back yesterday so she could participate in 
today's hearing, which was rescheduled from last week. I think 
all of us very much appreciate your significant efforts, and we 
are glad you are with us today.
    Now my question. Among the staggering statistics you cite 
in your prepared testimony are the following. One in five 
adults have student loans, and approximately 20 percent of the 
outstanding amount of these loans are in default. What impact 
do these factors have on our nation's economy?
    Ms. Jimenez. Thank you for the question, Representative 
Nadler.
    There is abundant evidence that the number of defaults and 
the amount of student debt that people are holding are delaying 
marriage, purchasing of homes, not--people are choosing not to 
go into public service careers. They are choosing to delay all 
sorts of purchases, including cars.
    We live in a consumption economy, and we need consumers to 
actually participate, and this is stopping that participation.
    Mr. Nadler. Thank you.
    As a result of your research, you have observed the 
disparate impact of student loan debt with respect to gender 
and race. Could you explain what those disparate impacts are 
and the principal factors causing them?
    Ms. Jimenez. Absolutely. So, basically, this is just 
reproducing the racial gaps and the racial differences that we 
have in our society. The racial wealth gap, in general, is 
widening and is wide, and that means that, say, Black borrowers 
are forced to borrow student loans at higher rates than White 
borrowers because they don't have family wealth to support 
them, and they also tend to attend for-profit schools, which 
are schools that are actually marketing themselves more towards 
blacks, Latinos, women, and working people. They have much 
worse outcomes in terms of graduation rates, employment rates, 
repayment rates, basically everything--everything that would 
matter.
    So, the higher education is sold as some kind of panacea 
out of poverty or lower middle class, and that works for some 
people, but it doesn't work for everyone. It is basically a bet 
that the student is taking, and sometimes that bet fails. It 
happens to fail more often for Black and Latinos.
    Mr. Nadler. Thank you.
    Mr. Rao, what are some of the so-called reforms enacted by 
the 2005 amendments to the Bankruptcy Code that make it more 
difficult for all consumers, let alone those with overwhelming 
student debt, to file for and obtain bankruptcy relief?
    Mr. Rao. Yes, Chair Nadler. The major change, of course, 
was the means test. There were also--and so that means test 
requires all filers to calculate their current monthly income. 
There are additional filing and document requirements. If you 
are above the median income in your state, you are subjected to 
the full means test, which does remove those who have an 
ability to repay. It creates a presumption of abuse and would 
ultimately deny those folks a discharge.
    There were also changes for exemptions so that particularly 
higher-income consumers couldn't move to States with unlimited 
homesteads and high assets in that way. There were also 
counseling requirements that were imposed that haven't actually 
proven to have done much in terms of really making bankruptcy 
relief having exposed those individual debtors to other 
options.
    Mr. Nadler. As a result of these reforms, if student loan 
obligations were made fully dischargeable, would the argument 
that such legislation would invite abuse be even less 
compelling?
    Mr. Rao. Yes, absolutely. It would address that problem, 
which even though I would say that it didn't exist, it 
certainly would address the problem of bankruptcy filers.
    Mr. Nadler. Thank you. Finally--thank you.
    Finally, Judge Small, you were a bankruptcy judge for many 
years. Based on that experience, what are your thoughts about 
the current law with respect to the dischargeability of student 
loans?
    Judge Small. It is almost impossible to discharge a student 
loan in most circuits under the Brunner undue hardship test. If 
you are not going to repeal 23(a)(8), you should at least do 
something to make the standard of the Brunner test easier so 
that a debt could be discharged for hardship, maybe not undue 
hardship.
    Mr. Nadler. Thank you very much. My time is 4 seconds from 
expiring. I yield back.
    Mr. Cicilline. Thank you, Mr. Chair.
    I recognize the gentleman from North Dakota, Mr. Armstrong.
    Mr. Armstrong. Thank you.
    So, I am a sponsor of H.R. 236, the Family Farmer Relief 
Act, and it is important because over the last 20 years, the 
increase in production from our farmers all across the country 
has gone up significantly. These are some of the best 
scientists and producers in any industry in the world. At the 
same time, the decline in farm income, combined with trade 
fluctuations, has created a really difficult time for farmers.
    I think one of the reasons we don't notice the farm crisis 
that is actually going on right now, and partially because of 
the farm crisis in the '80s, is because there are less family 
farmers than there were 20 years ago. Some of that is because 
of prior farm crises. Some of it is just based on economies of 
scale, which is where we get to a revamp of Chapter 12.
    According to the USDA, debt-service ratios are projected to 
reach all-time highs very shortly, with the 5-year 50 percent 
collapse in farm income, it is imperative that producers have 
adequate safety nets to rely upon should they need to make the 
extraordinarily difficult decisions for their farm.
    In both 2017 and 2018, approximately 500 farms filed each 
year under Chapter 12 bankruptcy. The Upper Midwest has 
witnessed a 19 percent increase in Chapter 12 filings since 
2017, and that statistic does not include the effects of 
droughts, floods, and recent trade disputes.
    Just like any good business, our egg producers need updated 
and flexible tools to reorganize their debt. Chapter 12 
bankruptcy is an important and unique provision that allows 
farmers to restructure their debt while maintaining their 
farming operations and uniquely recognizes some of those 
challenges that are based on a farm business income.
    Unfortunately, the current debt cap from Chapter 12, it is 
$4.1 million, it unnecessarily excludes farmers' most desperate 
need of reorganization. Just to be quite frank, it doesn't 
recognize what the current family farm looks like. By 
increasing the debt cap from Chapter 12 bankruptcy from $4 
million to $10 million, this bill will keep more farmers in 
fields and farms and in the family.
    I always am on a continuing quest to educate people about 
North Dakota, and one thing that is great, we do not have 
corporate farming. So, every farm in North Dakota is a family 
farm. I will note this bill is particularly beneficial to my 
State because we only have family farms.
    Yet the effect of this bill won't just be felt by farmers, 
but it is felt by the rural communities who rely on them as an 
economic driver. Strong farms support strong rural communities. 
So, we need to give them the tools that meet their needs in the 
current economy.
    Family farms are more than just a business. They are a 
commitment to a tradition passed down from generation to 
generation. We owe it to our farmers to make this simple change 
and stand with them when we need to make the most difficult 
decisions.
    I would just note that this bill was in desperate need of 
introduction prior to what is going on in the farm community 
right now, and whether it is floods that are going on all 
across the country, droughts that some people are experiencing, 
and obviously, the uncertain trade situation that everybody 
faces.
    Last, but not least is we have gone from a scenario where 
the family farmer can work on a $120,000 piece of equipment to 
a $1 million piece of equipment that is more computer than 
mechanical at this point, and inputs continue to rise, whether 
it is transportation, anhydrous, all these things. So, the 
number of acres you need to do to produce and have a valid 
family farm is going up every day. They provide not only my 
region, my State, but every State across the country with food 
and actually, quite frankly, feed the world.
    So, I am proud to be a part of that bill. I will just say 
one thing that on this student loan debt, and I think it is 
something that we have to address. That is that college tuition 
is increasing at an unsustainable rate. There has been a 213 
percent in tuition from 1987 to 2017, and we have great 
colleges in North Dakota. We have great colleges all across the 
country. I am not sure they are getting 217 percent better 
education than those people who got in 1987 did.
    There really are no market forces that drive down college 
tuition, but there are plenty of market forces that benefit 
schools increasing, whether it is a local chamber of commerce, 
State education. We continue to grow these campuses.
    Oftentimes, employment is going up at not quite 213 
percent, but a very high rate. The employment that is on 
college campuses isn't academic. It is more administrators, 
more deals with those.
    So, when we deal with these student loan issues, we also 
have to figure out how to put some kind of federally backed 
student loan. We have an incentive to keep local college 
tuition costs down, and that has to be a part of this 
conversation. Otherwise, I worry that we open the flood gates 
to an ever-increasing tuition cost where we get into a 
situation where not only are we increasing college tuition 
everywhere, but we are not necessarily preparing our students 
for a 21st century workforce.
    So, I yield my time without asking a single question, and I 
don't think I have done that before.
    Mr. Cicilline. Very thoughtful comments. Thank you.
    The gentleman yields back. I now recognize the gentlelady 
from Washington, Ms. Jayapal, for 5 minutes.
    Ms. Jayapal. Thank you so much, Chair Cicilline, for 
holding this hearing, and thank you to all of you for your 
comments.
    I am confused by the comments earlier about people gaming 
the system because I feel like the student loan system is a 
giant trap. We say to people you have to get an education. K-12 
used to be enough to get a good job. It isn't anymore. We all 
know that.
    We say to people go get a trade or a vocational skill or do 
something, get a 4-year degree. Then they do that, but they 
come out with an average of $40,000 to $50,000 in debt, $1.5 
trillion in student loan debt in this country.
    When I think about gaming the system, I think about the 
fact that, actually, the Federal Government right now is 
charging so much on interest, so much more than we actually pay 
for that money, that many of these borrowers--I got a whole 
bunch of tweets yesterday because we introduced our ``College 
for All'' bill. A whole bunch of these borrowers were telling 
me they are paying $700 a month for their principal payments, 
trying to pay off their student loans, and $4, $5 is actually 
going to principal.
    The rest of it is going to interest because we are charging 
these enormous interest rates for these students. So, they are 
never going to be able to get out of debt.
    When I think about, again, gaming the system, I wonder how 
it is that we can bail out Wall Street firms because they are 
supposedly too big to fail, but these student borrowers, 44 
million people with student loan debt in this country today, 
are too small to fail. They can have their entire lives 
destroyed, no future, and yet somehow there is this different 
standard.
    So, let me ask you, when big businesses fall on hard 
times--you have all talked about this--they can take advantage 
of the relief that bankruptcy offers. When students have the 
same problem, they cannot.
    That means an organization like the Trump Administration, 
for example--the Trump organization, excuse me, can declare 
bankruptcy with taxpayer costs. Any big organization, I am not 
picking on Trump. Any of them can declare bankruptcy, and 
somehow, they are not gaming the system. Tet students are. So, 
why aren't we worried about the gaming of the system with those 
big organizations or, to the counter, why don't we say, look, 
to these students, we can give you the same benefit?
    So, Mr. Boltz, in your written testimony, you described 
this ever-increasing set of restrictions on how and when 
ordinary people can discharge their loans. What is any logical 
reason--I will take any single logical reason for why clients 
with student debt should face this heavier, higher burden to 
discharge their student loans than major corporations?
    Your mike.
    Mr. Boltz. Thank you, Ms. Jayapal.
    Particularly, in regard to the private student loans, there 
is absolutely no basis for this whatsoever. When it comes to 
the Federal loans, there is the argument that has been made and 
is not terribly solid that because the Government is on the 
hook for these amounts that it affects the liquidity of making 
future loans.
    One of the things that is important to consider, however, 
of the $1.5 trillion in student loans, 11 percent of the 
borrowers, of the 44 million people, they are in default, which 
is a technical term under--in student loan law, which means 
they are more than 9 months without a payment. More than a 
third of people are delinquent on their student loan.
    So, part of what that means is that of the $1.5 trillion, 
the Government is not going to ever see all of that. So, there 
is a large fallacy that this is somehow going to undermine the 
ability to continue to make loans for students.
    Ms. Jayapal. In fact, if we are really concerned about the 
State of the economy, there are reports that say that if we 
were to cancel all $1.5 trillion in student loan debt, we would 
bring $1 trillion over the next 10 years into our economy. Even 
the Federal Reserve has said people are putting off major 
decisions like buying homes or investing in a car or whatever 
else they need, even getting married or having kids, because of 
their student debt.
    Mr. Rao, you are an attorney at the National Consumer Law 
Center, and you pointed out that currently in bankruptcy law, 
the business entrepreneur is given an opportunity for a fresh 
start, while the student borrower is given no margin of error. 
Do student borrowers present some very special risk to the 
bankruptcy system that I am missing?
    Mr. Rao. No, I don't believe they do. In fact, they 
probably present less risk than particularly some of the 
business filers or, you know? There was one point in 1978 when, 
as a member of this Committee had said, that it was 
inappropriate to really view the student loan programs as a 
social program when we are granting the loans, but then to 
treat them as business, strictly as business when you are 
trying to collect the debt.
    I would say it is even worse than that because, as you have 
pointed out, we allow the business entrepreneur to get a 
discharge, but we don't allow the student loan borrower.
    Ms. Jayapal. Thank you, Mr. Rao.
    Thank you, Ms. Jimenez, for making the trip back.
    I had one more question, but I am out of time. I would just 
say before I yield back, Mr. Chair, that yesterday, I 
introduced with Senator Sanders and Representative Omar a bold 
package to cancel $1.5 trillion in student loan debt and to 
ensure that we can actually invest in the future of our young 
people by making college tuition free and debt free. I look 
forward to the day when we can make that kind of investment for 
our future.
    Thank you.
    Mr. Cicilline. I thank the gentlelady.
    I now recognize the gentlelady Pennsylvania, Ms. Scanlon, 
for 5 minutes.
    Ms. Scanlon. Thank you very much.
    The issue of student loan debt is one that comes up at 
every town hall and every constituent conversation that I have. 
Pennsylvania has the highest student debt levels in the 
country, 1.8 million people have some amount of student loan 
debt in Pennsylvania, and the average of $36,000 per person is 
about 20 percent higher than the rest of the country. So, it is 
a huge issue in my community.
    What has really been striking to me is the 
intergenerational impact that we are seeing now. So, last 
August I met a woman who had just dropped her daughter off at 
college, and she was emotional. It wasn't because her daughter 
was going to college. It was because her daughter was going to 
her second-choice college. Mom and Dad were still paying off 
their student debt, so the daughter couldn't go to her first-
choice college.
    Then there is Nate and Natalie, who attend church with me. 
Young parents, they have boys ages 4 and 6. They can't start 
saving for their kids' education because they are still paying 
their student loans.
    These are responsible people. They are paying their taxes. 
They are paying their loans. They are doing what they are 
supposed to do.
    My own kids' friends, my three have just graduated from 
college, and I am hearing how people aren't buying cars, and 
they are not buying houses. They are not getting married and 
they are delaying having children. So, clearly, there is an 
emotional drag on the system.
    I just saw an article a couple days ago from Adweek about 
targeting millennial customers, millennial consumers. Our 
corporations are having to adjust their marketing tactics 
because the metrics that held true for previous generations 
aren't working because the millennials have such a debt load, 
they don't have the discretionary income. So, this whole drag 
on our economy is really something I am pleased that we are 
having this hearing to start chipping away.
    Obviously, amending the Bankruptcy Code does not solve the 
whole problem. We have to go after the predatory private 
colleges and the predatory loans and revamp the system for how 
people pay for it. I do think that this bankruptcy piece is so 
important. The piece that really is striking to me is that 
student loans were dischargeable. That there was this chipping 
away at it, and now we are treating student loans differently 
than credit card debt. It is kind of astounding to me.
    So, I guess maybe Ms. Jimenez, am I correct that the 
amendment suggested here would not create special rules for 
student loan debt, like favored treatment for student loan 
debt, but would lump it in with the general category of debt. 
Is that right?
    Ms. Jimenez. That is right. Absolutely correct. The student 
loan debt special treatment is the rare event, and so the 
Representative Nadler's bill and Senator Durbin's bill would 
just take that special treatment away.
    Ms. Scanlon. Okay. Mr. Rao, so when we are treating student 
loans like other debt, that doesn't mean that someone is going 
to be able to walk in and say I just don't feel like paying, 
kind of like I just don't feel like paying my credit cards, 
does it?
    Mr. Rao. Right. Again, the Bankruptcy Code does screen for 
consumers who would really have an ability to repay their debt 
based on their income. So, if they do have that, they would be 
presumed to be abusive and they would not get a discharge.
    Ms. Scanlon. Okay. So, we still have the courts and the 
rest of the Bankruptcy Code to Act as a stopgap against abuses?
    Mr. Rao. Yes.
    Ms. Scanlon. Okay. Ms. Jimenez, your statement talked a 
little bit about the difference in student loan debt and 
defaults with communities of color and that we have got some 
disparity there. Can you explain that a little?
    Ms. Jimenez. Absolutely. The fact that we have chosen to 
support the higher education system through loans means that we 
have created or re-created and exacerbated the wealth gap in 
this country because we are making people who already come from 
families who don't have as much wealth as others, we are making 
them borrow. They already don't have--there is already 
disparities in education, in job prospects based on implicit 
bias and just outright racism, and we are making those people 
take out loans.
    Then there is actually evidence that we are suing them more 
often and that they are not receiving the same benefits as 
others in income during the repayments.
    Ms. Scanlon. The thing that really surprised me when I 
started looking into this was the statistic that women actually 
hold more student loan debt. Two-thirds of all student loan 
debt is women, despite the fact that they have less wealth with 
which to repay. Can you comment on that?
    Ms. Jimenez. Exactly. A lot of that is actually working 
women, single parents, who are preyed upon by for-profit 
colleges. They mostly take out private loans. The for-profit 
college's business model is really around Federal loans. So 
there, even if we made private student loans nondischargeable, 
that wouldn't really solve that problem.
    Ms. Scanlon. Okay. So, that is kind of an intersection of 
the two problems?
    Ms. Jimenez. That is right.
    Ms. Scanlon. Okay, thank you. I yield back.
    Mr. Cicilline. I thank the gentlelady.
    The Chair now recognizes the gentleman from Colorado, Mr. 
Neguse, for 5 minutes.
    Mr. Neguse. Thank you, Mr. Chair, and thank you for holding 
this important hearing. I appreciate the witnesses and their 
testimony.
    I want to focus in on an issue that many of my colleagues 
have talked about already at great length, which is, of course, 
the student loan debt that is harming so many people across our 
country and really drastically impacting the lives of nearly 45 
million people, and the crippling effect of student loans on 
our nation's financial health is, of course, well known to this 
Committee and, I believe, to the witnesses as well.
    Just to give you some sense of context, I represent the 
great State of Colorado. In Colorado, student loan debt, as of 
January 2019, is $26 billion and impacts 700,000 Coloradans, 
and more than 20,000 rural Colorado residents are severely 
delinquent. So, this is an issue that we must address with the 
urgency that it requires, which is why I am proud to be one of 
the co-lead and lead sponsors of the Student Borrower 
Bankruptcy Relief Act of 2019, with Chair Nadler and Senator 
Durbin, to ensure ultimately the Bankruptcy Code is fair to 
all.
    I want to have a question for you, Mr. Keach. I reviewed 
your written testimony. I guess I am trying to better 
understand the rationale for the exception as it was enacted in 
the early 1970s. Then, obviously, over time it was changed, 
right?
    So, in your written testimony, you offer that the Consumer 
Commission, which is the commission of the ABI, weighed the 
rationale--I am quoting from your written testimony--for 
student loan dischargeability against the current and projected 
student debt landscape. Then I will just give you a quote. 
``The commission considered, but rejected the notion of making 
student loans freely dischargeable,'' which is a misnomer in 
terms of the word ``freely,'' but I understand that this is 
from the commission, ``freely dischargeable like any other 
debt, concluding that the rationale supporting 
nondischargeability remained valid.''
    So, could you explain what was going on in the minds of 
policymakers 40 years ago as to why they came up with this 
exception in the first place?
    Mr. Keach. Sure, I can try. I think my colleagues to the 
left, all three of which are Members of the ABI Consumer 
Commission--and I thank them for their service--in that 
respect, could probably speak to this.
    The historical antecedents that have been talked about are 
largely accurate, and that is that there were beliefs about 
moral hazard. That has been addressed. The bigger concern was 
probably for the solvency of the Federal student loan program 
or at least for the liquidity and solvency of the program.
    The ABI Consumer Commission recommendation actually is 
somewhat of a midpoint between those people who are concerned 
about that and complete discharge and, in fact, would discharge 
private loans. It would also allow for the discharge of 
federally provided, guaranteed, or insured loans that were more 
than 7 years old at the time of the bankruptcy.
    It would also allow for discharge of loan obligations of 
people other than the students themselves. Would also 
materially reform the so-called Brunner hardship test to make 
that test meaningful and allow for people to actually get 
discharged under that test. As Judge Small said, that doesn't 
happen today.
    It doesn't allow for full dischargeability of federally 
funded, guaranteed, or insured student debt other than under 
the hardship test.
    Mr. Neguse. So, on that precise point, notwithstanding the 
undue hardship test and, obviously, the recognition that that 
test has not been--with the lack of any real discernible 
standards makes it largely toothless. I guess I am trying to 
better understand why adhere to this purported rationale that 
was adopted 50 years ago if the underlying presuppositions of 
that rationale have not come to pass?
    Mr. Keach. Sure. I don't want to speak for the full ABI 
Consumer Commission, but that I don't think there is any 
support in that commission or in the commission recommendation 
with a rationale about moral hazard. That has gone out the 
window. I don't think anybody is making that argument anymore.
    To the extent that there is balance built into the ABI 
Consumer Commission report, which is probably somewhere near 
where Ranking Member Sensenbrenner was and the Nadler bill, is 
really about a concern for continued solvency and funding of 
the Federal system. It doesn't at all try to protect the 
private lending system.
    Mr. Neguse. To that point, do we have--thank you for your 
answer--do we have any empirical data that suggests that that 
concern is substantiated? I guess that is my point. Because 
with a wide variety of other common loan structures, right, I 
am thinking home mortgages by way of example. We certainly--
those are dischargeable in bankruptcy, and we don't have wide 
concerns about the security of that program.
    I guess that is what I am trying to get at, and I--
    Mr. Keach. Well, interestingly enough, actually, 
residential mortgages that are within the various Federal 
programs actually do have more protection under the Bankruptcy 
Code than regular private loans. So, there is actually a pretty 
direct parallel here.
    Mr. Neguse. They are dischargeable.
    Mr. Keach. Well, they are not fully modifiable or fully 
dischargeable, right?
    Mr. Neguse. Sure. They are in part dischargeable. 
Certainly, far more dischargeable than a student loan.
    Anyway, I see my time has expired, but--
    Mr. Keach. Well, to the extent there is a deficiency, that 
is true. You can't actually modify materially in Chapter 13, 
for example, a first mortgage because of the Federal mortgage 
insurance program. So, there are some parallels to that.
    Mr. Neguse. Thank you, Mr. Chair.
    Mr. Cicilline. The Chair now recognizes the gentlelady from 
Georgia, Ms. McBath, for 5 minutes.
    Ms. McBath. Thank you, Mr. Chair.
    I am so glad for each of you spending a few moments with us 
this morning. I am very excited to be the cosponsor of the 
bipartisan HAVEN Act of 2019, along with my Republican 
colleague Mr. Steube. This measure has also been endorsed not 
only by Ms. Petraeus and Mr. Keach, but also endorsed by the 
Veterans of Foreign Affairs, the American Legion, Disabled 
American Veterans, among others.
    I appreciate this opportunity to discuss ways in which we 
can reform our bankruptcy system to better serve people and 
small businesses that are facing financial hardship. No one 
wants to turn to bankruptcy, and we should ensure that these 
systems effectively help people rescue their financial lives.
    I am especially pleased to have the opportunity to discuss 
my bill, the HAVEN Act, which I introduced, as I said once 
before, with my Republican colleague Congressman Steube. This 
bill would help veterans qualify for bankruptcy relief by 
excluding their VA and Department of Defense benefits from the 
calculation of their income, as it is already done with Social 
Security disability payments.
    This small change will help veterans who are most in need, 
and no one should ever be penalized for the payments they 
receive for their injuries resulting from their brave service 
to our country. I am proud to support this bipartisan bill and 
to discuss it with you today.
    Mr. Keach, I will turn to you, if you will. Can you think 
of any reason why Social Security benefits should be treated 
differently than VA or Department of Defense benefits for 
bankruptcy income calculations?
    Mr. Keach. The ABI can't think of any reason why that 
should be true. We fully support the HAVEN Act. We, frankly, 
are of a belief that the inclusion of these benefits for our 
veterans in disposable income calculation was an error, and 
that error should be corrected. This bill would do that.
    Ms. McBath. Thank you very much.
    Ms. Petraeus, in your written testimony today, you cite a 
study indicating that 125,000 veterans filed for bankruptcy in 
2017. The study also found that although veterans comprise only 
10.3 percent of the population, they make up 14.7 percent of 
Chapter 7 debtors and 15 percent of Chapter 13 debtors.
    Why is it important for veterans to be able to access 
Chapter 7 bankruptcy rather than counting their benefits as 
income and potentially making only Chapter 13 bankruptcy relief 
available for themselves?
    Ms. Petraeus. Thank you for the question.
    I must say this has been an education for me on bankruptcy. 
Chapter 7 is the equivalent of a fire sale. Everything must go. 
You dispose of your assets, and then you walk away, freed of 
your obligations.
    Chapter 13 is a whole other thing, where you end up paying 
for 3 to 5 years. You have to set up a payment plan. Frankly, 
for many of these veterans, they don't have a whole lot of 
money to start with. If they end up having to even take their 
disability pension and apply it to their payment plan, they 
have got almost nothing left.
    The military leads a very mobile lifestyle. I, myself, 
moved 24 times in 37 years while my husband was on active duty. 
The spouse unemployment is a very significant issue for the 
military, which means they have not had a spouse who has had 
the opportunity to build a career or to have a very significant 
income. When you add in disability, that spouse may now be a 
full-time caregiver as well.
    So, they just don't have a lot of money, frankly, and to, 
again, take away their pension and apply it to a payment plan 
is just punitive. I can't imagine that that was really 
intended.
    Ms. McBath. Thank you. One more question.
    Based on your many years of experience working with service 
Members and veterans dealing with financial challenges, why do 
you think so many veterans are seeking bankruptcy relief?
    Ms. Petraeus. Again, some of it is just a part of the life 
they have led. The military is not a place where you get rich. 
It is very meaningful service. I was lucky enough to live in 
that community my whole life. They do it for the best of 
reasons. But, they tend to have lower income as a group.
    A significant number of them do have issues after serving 
that may impact their ability to get or to keep a job. I will 
also say they are not exempt from the student loan crisis. Even 
though they have the GI bill, a surprising number of veterans 
have significant student loans, in many cases because they have 
been targeted by unscrupulous for-profit colleges that have 
marketed to them.
    They have spent not only their GI bill, but then taken out 
private student loans to fund what in many cases is a fairly 
worthless education. So, they have a lot of the same issues. 
They have a mobile lifestyle, and they don't have a good income 
to start with. So, when they get out of the military, that may 
put them in a very shaky financial situation.
    Ms. McBath. Thank you so much for your service, and thank 
you so much for your testimony.
    Ms. Petraeus. Thank you.
    Ms. McBath. I am out of time.
    Mr. Cicilline. I thank the gentlelady for yielding back.
    I now recognize myself for 5 minutes. Thank you again to 
our witnesses that have participated in today's hearing.
    Ms. Petraeus, thank you for your work and the passion with 
which you bring to this important work. We all recognize the 
current system that creates or provides or exempts, I should 
say, Social Security benefits from the law's current definition 
of current monthly income for purposes of determining 
eligibility for consumer bankruptcy relief.
    While at the same time disability benefits from the 
Veterans Administration and the Defense Department are not, 
seems to make very little sense to anyone. I am just wondering 
if any of the witnesses on the panel today can think of any 
good reason for this disparate treatment?
    [No response.]
    Mr. Cicilline. Okay. The record should reflect that no 
witness saw them. I thank you again for your advocacy for this 
important bill.
    I want to just turn now to the student loan bankruptcy. I 
misspoke in my opening statement when I indicated that student 
loan debt is at $1.5 trillion and will be at $2 trillion by 
2022. I think I said billion by mistake.
    For me, sort of in line with what Ms. Jayapal said earlier, 
when we talk about this gaming the system, it is fair to say 
the system is gaming young people. That the system right now 
forces young people to go into tremendous debt with really no 
ability to get out, and the consequences for that on the 
individual borrower, as well as our economy broadly, is 
enormously significant.
    I want to just respond to a question that was raised 
earlier about how do we make sure young people aren't just 
gaming the system? There was--Mr. Rao, made references to this 
report. The GAO study found that only a fraction--in fact, I'll 
summarize the GAO findings.
    First, the general default rate on educational loans is 
approximately 18 percent. Of that 18 percent, 3 to 4 percent of 
the amounts involved are discharged in bankruptcy cases. Thus, 
approximately 0.5 to 0.25 of 1 percent--0.5 of 0.25 of 1 
percent of all matured education loans are discharged in 
bankruptcy. This compares favorably with the consumer finance 
industry.
    So, there wasn't a problem of young people gaming the 
system. It was 0.5 or 0.25 of 1 percent. You must wonder what 
resulted in the creation of this undue hardship standard. In 
addition to there being no evidence that it is necessary, Mr. 
Rao, why has this standard been difficult to administer, and 
why has this undue hardship application kind of varied from 
case to case? What does that mean for kind of this system 
overall?
    Mr. Rao. Yes, Chair Cicilline. As I mentioned in my 
statement, it is just not a viable way to approach the student 
loan problem. The cost alone--so there is the issue of the 
vagueness of the standard and the fact that judges apply it in 
different ways and the fact that it has been interpreted by the 
circuit courts to apply a very strict standard.
    Even putting that aside for the moment, the system requires 
that there be a litigation. We are talking about the consumers 
who would be most eligible for an undue hardship could barely 
pay for the cost to file the underlying bankruptcy case, let 
alone tens of thousands of dollars to fund contested 
litigation.
    The Department of Education fights these cases very hard, 
as well as the contractor that is hired by them, ECMC. So, it 
is just not happening. People aren't getting undue hardship 
discharges.
    Mr. Cicilline. Many of my colleagues in this hearing have 
referenced our additional responsibility to figure out how we 
make the cost of higher education affordable and accessible, 
and we are dealing today with some of the symptoms of a system 
that is broken, where people are accumulating enormous debt and 
are unable to pay it.
    We have to do both. We have to address this question, but 
we also have to deal with kind of the source of the problem in 
a different Committee with different legislation.
    I really want to thank you because this is a very serious 
issue. We hear about it all the time from young people and from 
families. I hear about it every day from my sister, who has two 
children who just finished school and are saddled with enormous 
student loan debt. We hear this wherever we go. So, these are 
important bills that we intend to move.
    The last issue I want to just raise is a slightly different 
issue, and that relates to Chapter 7 bankruptcies. Trustees Act 
as a fiduciary appointed by the Justice Department to ensure 
that debtors comply with various requirements, including filing 
documents with the court and surrendering their nonexempt 
assets for liquidation, along with other essential 
responsibilities.
    The fee for trustees is paid by debtors, and in addition to 
paying for legal representation and compulsory debt counseling, 
debtors must also pay a $335 fee to file for Chapter 7 
bankruptcy. The Chapter 7 trustees receive just $60 of this 
filing fee, a compensation level that has not been adjusted in 
25 years and the only method of compensation in more than 90 
percent of Chapter 7 cases. So, this is a significant problem.
    It is an understatement that increasing Chapter 7 trustees' 
compensation is long overdue. Everyone recognizes that.
    Mr. Rao, you previously testified in favor of adjusting 
this problem to resource the funds outside of steep increases 
in consumer debtor filing fees. What are some of those sources, 
and what are some other ways to reduce consumer debtors' 
burdens in bankruptcy while also addressing this sort of 
unfairness of the $60 fee, which has been unchanged for 25 
years?
    Mr. Rao. Yes, Chair Cicilline. Trustees are also 
compensated by the assets which are sold in a bankruptcy case, 
and there is a certain percentage that are in the Bankruptcy 
Code as to how much of a percentage of the asset that they are 
able to receive as a commission.
    Our proposal would be to adjust those cutoffs so that they 
would receive higher amounts in those asset cases through the 
commission on the sale of assets.
    The other way to approach the problem, the opposition that 
we have had to the bills that have been introduced is that they 
focus solely on having debtors pay for the increased 
compensation through filing fees. The other possibility is to 
make it possible so that there are savings for consumers in 
reducing some of the filing requirements so that there is less 
burden on them in filing the case, and then possibly there may 
be that they could share some of the costs through an increase 
in filing fee, but only if there is a compensating reduction in 
their cost of access to the bankruptcy system.
    Mr. Cicilline. Thank you.
    With that, I think there are--no, sorry. I just want to 
make sure I properly close the hearing.
    First, I want to say thank you to the witnesses for this 
incredibly useful testimony. It will inform and guide our work.
    I ask unanimous consent to include a number of letters and 
statements in the record regarding proposed measures to address 
issues in our Bankruptcy Code--two statements from the American 
College of Bankruptcy, one endorsing the Family Farmer Relief 
Act and the Small Business Reorganization Act, one supporting 
the HAVEN Act, and a statement from the Association of Young 
Americans endorsing the Student Borrower Bankruptcy Relief Act.
    Without objection.
    [The information follows:]

                        CICILLINE FOR THE RECORD

=======================================================================
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Mr. Cicilline. This concludes today's hearing. Thank you 
again to our distinguished witnesses.
    Without objection, all Members will have 5 legislative days 
to submit additional written testimony--sorry, additional 
written questions for the witnesses or additional materials for 
the record.
    Without objection, this hearing is adjourned.
    [Whereupon, at 12:03 p.m., the Subcommittee was adjourned.]

                               APPENDIX

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