[House Hearing, 119 Congress]
[From the U.S. Government Publishing Office]
BANKRUPTCY LAW:
OVERVIEW AND LEGISLATIVE REFORMS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON THE ADMINISTRATIVE STATE,
REGULATORY REFORM, AND ANTITRUST
COMMITTEE ON THE JUDICIARY
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINETEENTH CONGRESS
FIRST SESSION
__________
TUESDAY, JULY 15, 2025
__________
Serial No. 119-29
__________
Printed for the use of the Committee on the Judiciary
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available via: http://judiciary.house.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
61-126 WASHINGTON : 2025
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COMMITTEE ON THE JUDICIARY
JIM JORDAN, Ohio, Chair
DARRELL ISSA, California JAMIE RASKIN, Maryland, Ranking
ANDY BIGGS, Arizona Member
TOM McCLINTOCK, California JERROLD NADLER, New York
THOMAS P. TIFFANY, Wisconsin ZOE LOFGREN, California
THOMAS MASSIE, Kentucky STEVE COHEN, Tennessee
CHIP ROY, Texas HENRY C. ``HANK'' JOHNSON, Jr.,
SCOTT FITZGERALD, Wisconsin Georgia
BEN CLINE, Virginia ERIC SWALWELL, California
LANCE GOODEN, Texas TED LIEU, California
JEFFERSON VAN DREW, New Jersey PRAMILA JAYAPAL, Washington
TROY E. NEHLS, Texas J. LUIS CORREA, California
BARRY MOORE, Alabama MARY GAY SCANLON, Pennsylvania
KEVIN KILEY, California JOE NEGUSE, Colorado
HARRIET M. HAGEMAN, Wyoming LUCY McBATH, Georgia
LAUREL M. LEE, Florida DEBORAH K. ROSS, North Carolina
WESLEY HUNT, Texas BECCA BALINT, Vermont
RUSSELL FRY, South Carolina JESUS G. ``CHUY'' GARCIA, Illinois
GLENN GROTHMAN, Wisconsin SYDNEY KAMLAGER-DOVE, California
BRAD KNOTT, North Carolina JARED MOSKOWITZ, Florida
MARK HARRIS, North Carolina DANIEL S. GOLDMAN, New York
ROBERT F. ONDER, Jr., Missouri JASMINE CROCKETT, Texas
DEREK SCHMIDT, Kansas
BRANDON GILL, Texas
MICHAEL BAUMGARTNER, Washington
------
SUBCOMMITTEE ON THE ADMINISTRATIVE STATE,
REGULATORY REFORM, AND ANTITRUST
SCOTT FITZGERALD, Wisconsin, Chair
DARRELL ISSA, California JERROLD NADLER, New York, Ranking
BEN CLINE, Virginia Member
LANCE GOODEN, Texas J. LUIS CORREA, California
HARRIET HAGEMAN, Wyoming BECCA BALINT, Vermont
MARK HARRIS, North Carolina JESUS G. ``CHUY'' GARCIA, Illinois
DEREK SCHMIDT, Kansas ZOE LOFGREN, California
MICHAEL BAUMGARTNER, Washington HENRY C. ``HANK'' JOHNSON, Jr.,
Georgia
CHRISTOPHER HIXON, Majority Staff Director
JULIE TAGEN, Minority Staff Director
C O N T E N T S
----------
Tuesday, July 15, 2025
OPENING STATEMENTS
Page
The Honorable Scott Fitzgerald, Chair of the Subcommittee on the
Administrative State, Regulatory Reform, and Antitrust from the
State of Wisconsin............................................. 1
The Honorable Jerrold Nadler, Ranking Member of the Subcommittee
on the Administrative State, Regulatory Reform, and Antitrust
from the State of New York..................................... 2
The Honorable Jamie Raskin, Ranking Member of the Committee on
the Judiciary from the State of Maryland....................... 4
WITNESSES
Douglas G. Baird, Harry A. Bigelow Distinguished Service
Professor, University of Chicago Law School
Oral Testimony................................................. 8
Prepared Testimony............................................. 10
The Hon. Paul M. Black, Chief United States Bankruptcy Judge,
Western District of Virginia
Oral Testimony................................................. 16
Prepared Testimony............................................. 18
The Hon. Michelle M. Harner, United States Bankruptcy Judge,
District of Maryland
Oral Testimony................................................. 21
Prepared Testimony............................................. 23
Melissa B. Jacoby, Graham Kenan Professor of Law, University of
North Carolina, Chapel Hill
Oral Testimony................................................. 39
Prepared Testimony............................................. 41
Edith Hotchkiss, Professor of Finance, Boston College
Oral Testimony................................................. 46
Prepared Testimony............................................. 48
Megan W. Murray, Attorney, Founding Shareholder, Underwood Murray
P.A.
Oral Testimony................................................. 57
Prepared Testimony............................................. 59
LETTERS, STATEMENTS, ETC. SUBMITTED FOR THE HEARING
All materials submitted for the record by the Subcommittee on the
Administrative State, Regulatory Reform, and Antitrust are
listed below................................................... 83
Materials submitted by the Honorable Jamie Raskin, Ranking Member
of the Committee on the Judiciary from the State of Maryland,
for the record
An article entitled, ``Older Americans at risk as government
restarts Social Security garnishment on student loan
debt,'' May 15, 2025, PBS News
A report entitled, ``I. Effectuating the Fresh Start,''
American Bankruptcy Institute
Materials submitted by the Honorable J. Luis Correa, a Member of
the Subcommittee on the Administrative State, Regulatory
Reform, and Antitrust from the State of California, for the
record
A letter to the Honorable J. Luis Correa, a Member of the
Subcommittee on the Administrative State, Regulatory
Reform, and Antitrust from the State of California, from
the National Consumer Law Center (NCLC), Jul. 11, 2025
A letter to the Honorable J. Luis Correa, a Member of the
Subcommittee on the Administrative State, Regulatory
Reform, and Antitrust from the State of California, from
National Association of Consumer Bankruptcy Attorney
(NACBA), Jul. 11, 2025
An article entitled, ``One in three student loan borrowers
risk default asdelinquency rates soar,'' Jun. 24, 2025,
The Guardian
A press release entitled, ``U.S. Department of Education to
Begin Federal StudentLoan Collections, Other Actions to
Help Borrowers Get Back into Repayment,'' Apr. 21, 2025,
U.S. Department of Education
An article entitled, ``Credit scores decline as student loan
collections restart--NBC Connecticut,'' Jun. 16, 2025,
The Associated Press
A Memorandum from The Community Service Society (CSS), New York,
Jul. 15, 2025, submitted by the Honorable Jerrold Nadler,
Ranking Member of the Subcommittee on the Administrative State,
Regulatory Reform, and Antitrust from the State of New York,
for the record
Materials submitted by the Honorable Scott Fitzgerald, Chair of
the Subcommittee on the Administrative State, Regulatory
Reform, and Antitrust from the State of Wisconsin, for the
record
A statement from Commercial Law League of America (CLLA),
Jul. 15, 2025
A letter to the Honorable Scott Fitzgerald, Chair of the
Subcommittee on the Administrative State, Regulatory
Reform, and Antitrust from the State of Wisconsin, and
the Honorable Jerrold Nadler, Ranking Member of the
Subcommittee on the Administrative State, Regulatory
Reform, and Antitrust from the State of New York, from
the Defense Credit Union Council (DCUC), Jul. 14, 2025
A letter to the Honorable Scott Fitzgerald, Chair of the
Subcommittee on the Administrative State, Regulatory
Reform, and Antitrust from the State of Wisconsin, and
the Honorable Jerrold Nadler, Ranking Member of the
Subcommittee on the Administrative State, Regulatory
Reform, and Antitrust from the State of New York, from
the Public Citizen, Jul. 15, 2025
A letter to the Honorable Jim Jordan, Chair of the Committee
on the Judiciary from the State of Ohio, and the
Honorable Jamie Raskin, Ranking Member of the Committee
on the Judiciary from the State of Maryland, from the
National Association of Insurance Commissioners (NAIC),
Jul. 15, 2025
A letter to the Honorable Scott Fitzgerald, Chair of the
Subcommittee on the Administrative State, Regulatory
Reform, and Antitrust from the State of Wisconsin, and
the Honorable Jerrold Nadler, Ranking Member of the
Subcommittee on the Administrative State, Regulatory
Reform, and Antitrust from the State of New York, from
National Association of Chapter Thirteen Trustees
(NACTT), Jul. 14, 2025
An article entitled, ``Company's PO box allows it to file for
bankruptcy in Texas, judge rules,'' Mar. 11, 2024, Reuters,
submitted by the Honorable Zoe Lofgren, a Member of the
Subcommittee on the Administrative State, Regulatory Reform,
and Antitrust from the State of California, for the record
APPENDIX
Materials submitted by the Honorable Jamie Raskin, Ranking Member
of the Committee on the Judiciary from the State of Maryland,
for the record
A letter to the Honorable Scott Fitzgerald, Chair of the
Subcommittee on the Administrative State, Regulatory
Reform, and Antitrust from the State of Wisconsin, the
Honorable Jerrold Nadler, Ranking Member of the
Subcommittee on the Administrative State, Regulatory
Reform, and Antitrust from the State of New York, and the
Member of the Subcommittee on the Administrative State,
Regulatory Reform, and Antitrust, from Student Borrower
Protection Center (SBPC), Jul. 15, 2025
A statement from International Council of Shopping Centers
(ICSC), Jul. 15, 2025
BANKRUPTCY LAW:
OVERVIEW AND LEGISLATIVE REFORMS
----------
Tuesday, July 15, 2025
House of Representatives
Subcommittee on the Administrative State,
Regulatory Reform, and Antitrust
Committee on the Judiciary
Washington, DC
The Subcommittee met, pursuant to notice, at 10:05 a.m., in
Room 2141, Rayburn House Office Building, the Hon. Scott
Fitzgerald [Chair of the Subcommittee] presiding.
Present: Representatives Fitzgerald, Issa, Cline, Harris,
Nadler, Raskin, Correa, Balint, Garcia, Lofgren, and Johnson.
Mr. Fitzgerald. The Subcommittee will come to order.
Without objection, the Chair is authorized to declare a recess
at any time. We welcome everyone to today's hearing on
bankruptcy law and potential legislative reforms.
I will now recognize myself for an opening statement.
Today's hearing will examine the effectiveness of the
bankruptcy system and help determine if narrowly tailored
legislative updates are warranted to ensure that the bankruptcy
system continues to work as intended. The bankruptcy system in
this country is designed to provide debtors with a fresh start.
The entrepreneurs and small businesses are the lifeblood of the
economy, and the calculated risks they take are responsible for
so much of the innovation in this country. These risks are
often funded by debt. While many entrepreneurs and small
businesses succeed, some of them fail.
Instead of being perpetually saddled with the unsustainable
levels of debt, the bankruptcy system allows debtors to enter
bankruptcy, reorganize their debts, maybe discharge some of it,
and exit bankruptcy in a position to continue to innovate and
take additional risks. The same is true for consumers. Some
consumers get themselves in an unsustainable financial
position, and the bankruptcy system throws them a lifeline.
While bankruptcy can greatly benefit debtors, creditors are
also entitled to repayment. Therefore, the bankruptcy system
must strike a balance between preserving the rights of
creditors to receive repayment and the opportunity for debtors
to start fresh. We have proposals before this Committee that
will change how the bankruptcy system works in the future.
Nearly 30 temporary bankruptcy judgeships will begin
expiring in 2026. While judges will not be kicked out of their
seats, certainly, new judges cannot be appointed when a judge's
term expires. We must determine whether those judgeships remain
necessary, and we will hear testimony from two sitting
bankruptcy judges to help inform our decision.
Also, the pay-per-case for Chapter 7 trustees has not been
increased in over 30 years. Chapter 7 trustees play a critical
role in our bankruptcy system, liquidating a debtor's assets,
disbursing funds to creditors, and ensuring that the only
eligible debtors enter Chapter 7 bankruptcy. We also must
determine whether to increase the debt limit for Subchapter V
cases.
In 2020, shortly after enactment, Congress increased the
debt limit for Subchapter V cases to $7.5 million. Last July,
this increased debt limit expired and reverted to around $3
million. We must determine whether we should allow that number
to remain or whether the cap should again be raised, either
temporarily or permanently, to ensure small businesses can
continue to seek their avenue for reorganization.
We must also figure out what, if anything, we should do
about student loans in bankruptcy. Under the Biden-Harris
Administration, there were thousands of student loans that were
forgiven by largely waiving the bankruptcy code's undue
hardship requirement. As a result, we saw the number of student
loans discharged in bankruptcy increase by 330 percent. While
the cost of education has skyrocketed--it's something the
Subcommittee has already begun to examine--American taxpayers
should not be on the hook for someone who took out loans to get
a potentially useless undergraduate degree from a private
university and now cannot pay it back.
Finally, we will examine whether our bankruptcy laws as
written can sufficiently capture the treatment of genetic
information in bankruptcy proceedings. We should have robust
debates and, if proven necessary, enact narrowly tailored
changes to the Bankruptcy Code to make sure that the system
works better for small businesses, consumers, and creditors
alike.
I want to thank Ranking Member of the Subcommittee, Mr.
Nadler, for agreeing to hold a bipartisan hearing today. I
think that working together on bankruptcy reform will greatly
benefit the American people.
I also want to thank the witnesses for appearing here
today. We have assembled a large panel of bankruptcy experts
who are well-equipped to answer all our questions, and I look
forward to hearing what each of them has to say today.
I want to now recognize the Ranking Member, Mr. Nadler, for
his opening statement.
Mr. Nadler. Thank you, Mr. Chair, and thank you for holding
this bipartisan hearing.
Thank you, as well, to our distinguished panel of witnesses
for contributing their time and expertise to assist the
Committee in its efforts to streamline and improve our
bankruptcy system. I am pleased that we have come together in a
bipartisan fashion today to consider a variety of proposals to
make our bankruptcy system more accessible to individuals and
businesses in financial distress. These reforms can ensure that
the Bankruptcy Code is more efficient and beneficial for
debtors and creditors alike, and will help businesses,
especially small businesses, restructure in the face of
potential financial disaster.
One important issue that our hearings will touch on is
increasing the debt limit under Subchapter V of Chapter 11 of
the Bankruptcy Code. In 2020, eligibility for Subchapter V
bankruptcy treatment was temporarily increased to $7.5 million
from approximately $3 million, allowing a significantly greater
number of businesses to access relief under this part of the
code, which generally provides debtors an efficient and
successful restructuring plan. Unfortunately, this provision
was allowed to lapse in June of last year.
Data shows that the debt limit increase was a clear
success. While it was in effect, Subchapter V cases had doubled
the planned confirmation rate and a 20 percent lower dismissal
rate in relation to non-Subchapter V, Chapter 11 cases. This
means that small businesses were able to keep their doors open
and their employees on staff while ensuring that the creditors
were fairly compensated. I hope we can work together to
reinstate this important provision.
Congress similarly passed a temporary debt limit increase
for Chapter 13 filings, allowing for combined unsecured and
secured debt of $2.75 million. Chapter 13 bankruptcy is the
best path for many filers because it's less expensive and more
efficient than pursuing relief under Chapter 11. Unfortunately,
although this provision proved to be successful, it also
expired last year and has not been renewed.
Now, debtors must meet significantly lower levels of both
unsecured and secure debt, leaving many people without access
to the courts and needed relief. Resurrecting the higher
Chapter 13 debt limit would serve individuals and families with
regular income, who are facing higher housing prices, medical
costs, and other debts that present substantial financial
hardship, yet put them over the current debt limit.
In addition to facing higher prices, Americans are also
facing mountains of student loan debt. Under the Bankruptcy
Code, however, unlike nearly every other unsecured debt, such
as credit cards or auto loans, it is nearly impossible to
discharge student loans, leaving millions of Americans deeply
in debt with little hope of ever regaining financial security.
Nearly 43 million Americans have Federal student loan debt,
with the total Federal student loan portfolio exceeding $1.6
billion. Under current law, educational debt can only be
discharged in bankruptcy if the borrower demonstrates that
continued repayment of the debt would impose an, quote, ``undue
hardship on the debtor and the debtor's dependents.''
In practice, this standard has proven a nearly impossible
hurdle to overcome in the courts. 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. It is a long past time to repeal the current
limitation on educational debt and to place it on the same
footing as other debt--similar debt.
While the picture of student loan debtors is traditionally
of young recent college graduates, the reality is that a
significant population of student debt--of student loan debtors
are older Americans whose wages and Social Security checks are
being garnished toward loans that they will never be able to
repay. Student loan bankruptcy reform therefore would benefit a
wide swath of Americans, including the most vulnerable
borrowers in our society, who have no prospect of being able to
repay their debts incurred decades ago.
Finally, we will consider reforms to compensation for
attorneys and trustees in Chapter 7 cases, which would expand
access to justice for low-income debtors. Chapter 7 is a
critical lifeline for low-income individuals in the most severe
financial distress, offering the most direct and immediate path
to a fresh start. It eliminates unsecured debts without the
burden of a multiyear repayment plan, and its streamlined
structure makes it the only viable option for many households
facing wage garnishment, utility shutoffs, or eviction.
Yet, the current framework makes it exceedingly difficult
for those same individuals to access legal counsel. Chapter 7
debtors with attorneys are nine times more likely to obtain a
discharge than those without representation. As a result of a
clerical error in the law, however, attorneys representing
Chapter 7 debtors are generally ineligible for compensation
from the bankruptcy estate unless formally retained by the
trustee. Therefore, most debtors seeking a Chapter 7 pathway
have to pay for their representation upfront and in full,
despite their being insolvent, which either pushes them to the
less sufficient Chapter 13 or forces them to continue without
representation. I hope that our witnesses will help us examine
solutions to this problem.
A similar access-to-justice issue arises with respect to
trustee compensation. Under current law, trustees appointed by
the courts to administer Chapter 7 bankruptcy are paid just $60
per case. Additional compensation comes only when the case
involves liquidation of assets, which happens only rarely in
Chapter 7 cases. A fee of just $60 is clearly inadequate to
compensate trustees for a role that requires them to review
filings, conduct meetings with creditors, and identify
potential circumstances of abuse of fraud.
This results in experienced trustees not being able to
afford to take on no-asset cases or being unwilling to invest
their time in complex cases that would require their knowledge
and expertise. We must work to increase this fee to ensure that
debtors have the assistance they need to navigate the
complicated world of bankruptcy proceedings.
Today's hearing is an opportunity to discuss bipartisan
paths forward to increasing access and opportunity provided to
Americans under the bankruptcy system. I thank the Chair for
holding this important hearing. I look forward to the testimony
from our distinguished panel of witnesses, and I yield back the
balance of my time.
Mr. Fitzgerald. I now recognize the Ranking Member of the
Full Committee, Mr. Raskin, for his opening statement.
Mr. Raskin. Mr. Chair, thank you very much. Thanks for
holding this bipartisan hearing.
Thanks to our esteemed witnesses, who bring to us
exceptional insight into one of the most consequential
institutions of the American economy.
Too often bankruptcy is spoken of in hush tones or buried
in the back pages of law journals. It's not a footnote to the
American economy; at its core, it's a critical guardrail for
the life and dignity of the American people. Even President
Trump has repeatedly used the bankruptcy law six times in
Chapter 11 alone. This is where law meets hardship and where
financial distress is tempered by both process and principle.
More than a simple mechanism for discharging debt, our
bankruptcy system has moral implications. It affirms that
failure should not be fatal, and that dignity should not
surrender in the face of financial hardship and emergency. As
Justice McReynolds observed, its purpose is to relieve the
honest debtor from the weight of oppressive indebtedness and
permit him to start afresh.
At the same time, the bankruptcy system must recognize the
moral hazard of incentivizing bankruptcy and financial
recklessness. Although the Framers of the Constitution may not
have lingered long over the Bankruptcy Clause during their
debates in Philadelphia, they enshrined it for good reason. As
Madison said in the Federalist 42, the power to enact uniform
bankruptcy laws, quote, ``provides for the harmony and proper
intercourse among the States.'' It is so intimately connected
with the regulation of commerce and will prevent so many frauds
that the expediency of it seems not likely to be drawn into
question.
Today, Mr. Chair, we do not call into question the
expediency of a strong bankruptcy system. What we question is
whether that system as currently constituted fulfills its
democratic and economic promise. Does it reach the people it
was designed to protect? Is it responsive to the existence and
power of today's credit-industrial complex, where profits are
systematically wrung from the pockets of working families?
Across the country, small businesses and working families
are shouldering debts that would have once been considered
extraordinary but today reflect the mere cost of staying
afloat. Although it remains a remedy of the last resort, our
bankruptcy system must be equipped to provide relief when
economic pressures collapse the margins of household and
commercial stability. A well-calibrated system does not punish
misfortune or entrench failure. It provides a lawful path
forward when all else fails.
The hearing presents a chance to honestly assess the
challenges to our bankruptcy system and advance solutions in a
bipartisan way. Take Subchapter V of the Bankruptcy Code, the
streamlined bankruptcy process for small businesses to
reorganize and restructure. For five years, it offered small
businesses a path back to viability by providing a simpler
pathway to restructure debt, save jobs, and continue serving in
the community. Regrettably, that path is now narrowing, not
because the policy failed but because, in June of last year,
the debt limit set by Congress, the maximum debt small
businesses can have and still be eligible for Subchapter V's
process, lapsed and dropped by 60 percent, from $7.5 million to
$3 million.
Despite data in near unanimous agreement among the
bankruptcy bar that the $7.5 million debt limit was a success
for both small businesses and their creditors, reverting to the
old debt limit excludes way too many of the very small
businesses Subchapter V was designed to support. Without a
workable path to reorganize under Subchapter V, all that
remains of these businesses is used equipment and unpaid bills.
This tremendous loss in value is lost not only for business
owners but also for their employees, creditors, and entire
communities. I'm heartened by the bipartisan agreement that
restoring the $7.5 million debt limit is both sensible and long
overdue. The Committee should markup this legislation and send
it to the House floor quickly.
There is the million-strong class of student borrowers
whose staggering debt resulting from student loans lingers
stubbornly for decades beyond the end of their college
education, preventing investment in home mortgages or small
businesses. Student loan debt is the only type of consumer debt
not dischargeable under bankruptcy, and this was only made so
in 1976.
Although our bankruptcy system was built with robust
safeguards, judicial oversight, and, in some cases, stringent
means testing, it effectively treats all student borrowers as
presumptive abusers unless proven otherwise through an almost
mythical standard of undue hardship. This vague and undefined
standard has been interpreted by the courts and hardened over
decades into a nearly insurmountable burden of proof resulting
in nondischarge for greater than 99 percent of borrowers.
Among the most affected are seniors. As of 2024, nearly
three quarters of one million student borrowers are remarkably
over the age of 71, collectively holding $28 billion in student
debt. Many have spent decades in repayment only to fall into
default as interest compounds and the balances balloon.
Seniors now represent the fastest growing demographic of
student borrowers, and they face the highest rates of
delinquency and therefore default. For many of those older
Americans who live on a fixed income, the consequences are
severe: Garnished Social Security checks, skipped medications,
and postponed retirements. We've got to fix this. I hope my
colleagues will join us in restoring basic fairness to the
bankruptcy system by putting student debt on the same footing
as virtually every other kind of debt, all of which are
dischargeable.
This is not the only place where the system strains under
the weight of its design. Families who exceed the Chapter 13
debt limit are legally barred from filing under that chapter no
matter how regular their income or sincere their repayment
intentions, nor can they turn to Chapter 12, which is limited
to farmers and fishermen; or 15, which is limited to
international cases; or Subchapter V, which requires you to be
a small business. Because of Chapter 13's expired debt limit,
we risk pushing working people into Chapter 11. It's a system
that was never meant for someone trying to save their home
while paying down medical bills and putting kids through
school.
Chapter 7, finally, which should offer the most
straightforward form of relief, is weighed down by barriers of
its own. Debtors often have to pay their lawyers upfront even
when they can't pay their rent, locking many people out of even
applying for bankruptcy relief. Our Chapter 7 trustees, the
watchdogs of our system, are still doing critical work under a
compensation structure that's not been updated in more than
three decades.
None of this is new, and none of it is unfixable. We have
bipartisan legislation. The Bankruptcy Administration
Improvement Act is ready to go. It would raise trustee pay and
extend the temporary judgeships that keep our courts
functioning. In Maryland, we're on track to lose three out of
seven temporary bankruptcy judges. That's nearly half our
bench, and it's happening at the very moment filings are
arising.
This is the moment to reaffirm a founding promise that in
the U.S. financial hardship must never strip a person of their
rights, dignity, or their future. By my count, Congress has
rewritten the code five times in the last two centuries before
arriving at the current framework. This is one of the most
dynamic areas of our law, and there's no reason we should not
act now again to refine it and improve it. We've got the facts
and the tools. We have a bipartisan agreement on the principal
fixes. The road ahead is clear for us.
Thank you, Mr. Chair. I yield back.
Mr. Fitzgerald. The Ranking Member yields back.
Without objection, all their opening statements will be
included in the record. We will now introduce today's
witnesses.
Professor Douglas Baird. Mr. Baird is the Harry A. Bigelow
Distinguished Service Professor of Law at the University of
Chicago Law School. He joined the University of Chicago Law
School faculty in 1980, served as dean between 1994-1999, and
has served as a Visiting Professor at the Law School of
Stanford, Harvard, and Yale. Professor Baird has authored more
than a dozen books on bankruptcy and commercial and debtor-
creditor law.
The Honorable Paul Black. Judge Black has served as United
States Bankruptcy Judge for the Western District of Virginia
since 2014. He currently serves as Chief Judge of that court.
Prior to joining the bench, Judge Black was also the Co-Chair
of the bankruptcy and creditor rights practice group at Spilman
Thomas & Battle. He previously served as Chair of the
Litigation Section and the bankruptcy section of the Virginia
State Bar Association.
The Honorable Michelle Harner. Judge Harner has served as a
United States bankruptcy judge for the district of Maryland
since 2017. She previously served as the Francis King Carey
Professor of Law at the University of Maryland Francis King
Carey School of Law, where she taught courses on bankruptcy and
creditors' rights, also business associations, business
planning, and corporate finance. Judge Harner has served in
various roles with the American Bankruptcy Institute, the
Administrative Office of the United States Courts, and as the
United Editor in Chief of the American Bankruptcy Law Journal.
Professor Melissa Jacoby. Ms. Jacoby is the Graham Kenan
distinguished Professor of law at the University of North
Carolina School of Law, where she teaches commercial and
bankruptcy law. From 2021-2024, she assisted in the Federal
Judicial Center on educational programming for bankruptcy
judges and has been elected to the American Law Institute, the
National Bankruptcy Conference, the American College of
Bankruptcy, and the American College of Commercial Finance
Lawyers.
Dr. Edith Hotchkiss. Dr. Hotchkiss is a Professor in the
Seidner Department of Finance at the Boston College Carroll
School of Management. Her research focuses on corporate
finance, bankruptcy procedures, restructuring mechanisms for
financially distressed firms, and the transparency and
efficiency of the corporate bond market. Professor Hotchkiss
previously served as a Visiting Professor at New York
University and worked as an Assistant Vice President at
Standard & Poor's Corporation.
Ms. Megan Murray. Ms. Murray is an attorney and a founding
shareholder of the Underwood Murray, a law firm focusing on
bankruptcy and restructuring and solvency-related litigation,
also distressed asset acquisitions and other corporate matters.
She has nearly 20 years of experience in corporate--excuse me,
reorganizations and currently serves on the Board of Directors
of the American Bankruptcy Institute.
We welcome our witnesses and thank them for appearing
today. We will begin by swearing you in. Would you please rise
and 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?
Let the record reflect that the witnesses have answered in
the affirmative.
Thank you, and you can be seated.
Please know that your written testimony will be entered
into the record in its entirety. Accordingly, we ask that you
summarize your testimony in five minutes.
Professor Baird, you may begin.
STATEMENT OF DOUGLAS G. BAIRD
Mr. Baird. I thank you, Chair Fitzgerald--
Mr. Fitzgerald. Microphone, Professor. Professor, can you
hit the mike, hit the button there.
Mr. Baird. Yes. Chair Fitzgerald, Ranking Member Nadler,
and the other Members of the Committee, I'm Douglas Baird,
Professor of Law at the University of Chicago and Chair of the
National Bankruptcy Conference.
My comments today, I wish to emphasize the need to increase
the existing debt cap for small businesses seeking to
reorganize under Subchapter V. Subchapter V has been an
unequivocal success in providing a more streamlined and less
costly means of resolving financial distress for small
businesses. It has fulfilled the goals of the bipartisan
legislation enacted in 2019.
A small business regime, like Subchapter V, must
distinguish those businesses which are eligible. Some sort of
line needs to be drawn between large businesses and small
businesses. This requires figuring out what we mean by small
business and how to establish that line. The simplest way to
think about a small business is it's that type of business
whose continued existence depend on the current owners
remaining in place. These are businesses like a mom-and-pop
restaurant, whose value cannot be separated from those who own
and run it anymore than people can be separated from their
shadows. A mom-and-pop restaurant without mom and pop is just
used kitchen equipment.
What's perhaps less appreciated is the businesses that
depend on their owner managers are often quite substantial.
These businesses can carry debt that easily exceeds the $3.5
million Subchapter V debt cap. Just to give some examples, a
decent-sized restaurant or brewpub can easily cost several
million dollars just to build and equip. A single unforeseen
setback, such as a catastrophic storm or an outbreak of
foodborne illness, can sink the entire enterprise.
To give another example, a general contractor often enters
into a web of contracts that exposes it to multimillion dollar
liabilities if things go wrong in building a large structure.
Even a single subcontractor can make a costly mistake, fail,
and leave the general contractor responsible for fixing the
mess.
The owner of a small manufacturing operation might have a
plant with equipment that itself costs multiple millions. When
such a manufacturer goes through a run of bad luck, it can face
substantial mortgage obligations, environmental and tax
liabilities, and unpaid bills from suppliers.
Another example, personal service firms, such as medical
practices or small law firms, can have substantial debt and
reverses that leave them unexpectedly without the revenues that
were reasonably anticipated. Without the ability to reorganize
under Chapter 5--all these firms will likely face liquidation,
an outcome that will yield little, if anything, to general
creditors, landlords, trade creditors, or employees.
Subchapter V is good for debtors, but it's also good for
creditors. Many businesses eligible for relief under Subchapter
V are similar to family farms that are permitted to reorganize
under Chapter 12. The Chapter 12 debt limit is $12.5 million.
It's hard to identify a principled reason for the Subchapter V
debt limit to be only a small fraction of the one for Chapter
12.
Subchapter V is a relatively new statute, and in any such
statutory regime, it may require some adjustment as cases
reveal imperfections, uncertainties, or abuses in its
operation. Nothing in our experience, however, suggests that
increasing the debt cap would itself be a source of mischief.
We believe that increasing the cap gives more small businesses,
for which it was intended, a viable and highly reliable remedy.
Now, I should also say, there are other areas of bankruptcy
and bankruptcy adjacent reform where I think incremental reform
is possible and would also enjoy broad support. These reforms
include potentially changes to rules governing State insurance
insolvencies. They also include technical corrections to
Chapter 15. There are also possibilities to have a
reorganization regime that allows a class of funded debt to be
restructured without interfering with other classes.
Again, these are all opportunities, and the National
Bankruptcy Conference stands ready as always to help you here
with these kinds of valuable incremental reforms that will
improve our bankruptcy laws. Thank you very much.
[The prepared statement of Mr. Baird follows:]
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Mr. Fitzgerald. Thank you, Professor Baird. Judge Black,
you may begin.
STATEMENT OF THE HON. PAUL M. BLACK
Mr. Baird. Chair Fitzgerald, Ranking Member Nadler, and the
Members of the Subcommittee, I'm Paul Black, United States
Bankruptcy Judge for the Western District of Virginia. I want
to thank you for the opportunity to speak today.
I went on the bench in January 2014, and many of my cases
are Chapter 13 repayment plans, where debtors are trying to
maintain their home, or Subchapter V cases, where small
businesses debtors are trying to save their businesses and keep
their employees on the job. A part of my district is in
Appalachia, and many of the debtors who appear before me have a
very limited income, including those on nothing but some form
of Social Security. In the cases I see, work at Congress makes
an impact with new bankruptcy legislation.
First, the Subchapter V debt limit. I will state for the
record today that the Small Business Reorganization Act is one
of the best pieces of legislation in the bankruptcy world in
many years. Congress did a good thing. When the SBRA went into
effect in February 2020, the debt limit was approximately $2.7
million. The pandemic hit, and it increased to $7.5 million.
The debt limit increase had a sunset, and it was extended
through June 21, 2024, when it reverted to its original limit,
adjusted for inflation.
What a small business may be in Southwest Virginia, where I
live, may be very different than what a small business may be
in Denver, Chicago, or New York, where the cost of living,
property values, real estate taxes, and debt loads may be
significantly higher. The $7.5 million debt limit was effective
and appropriate. The businesses with debt up to this level
simply struggle to afford the Chapter 11 process without the
SBRA. The increased debt limit brings opportunity for small
businesses to take advantage of the less costly and streamlined
provisions of the Bankruptcy Code enabling the debtors to more
quickly get a plan confirmed and exit the court system, also
maintaining entrepreneurial value and keeping employees on the
job.
The participation of the Subchapter V trustees has proven
very effective in getting these cases to a consensual
confirmation. Were these small business cases forced to go the
route of a regular Chapter 11 case, with its attendant
increased costs and procedural steps, many would likely just
fold the tent and go home. They just can't afford it. The SBRA
works, and it works at increased debt levels. I encourage
Congress to make the $7.5 million debt limit, which was so
effective in operation, a permanent addition to the Bankruptcy
Code.
Second, the bifurcation of fees in Chapter 7 cases. This,
to me, is an access to justice issue. The pro se debtor filing
rate varies across the country. Some districts are
significantly higher than others. One constant, however, is
that pro se cases, which are ones which are filed without the
assistance of counsel, they often struggle. They also tie up
the clerk's office staff when we are in difficult budget times
and the clerk's offices are being asked to do more with less.
Why is this a problem? Chapter 7 debtors often have
difficulty coming up with a lump sum attorney's fee necessary
to pay counsel to file liquidating Chapter 7 bankruptcy case.
In the Chapter 13 plan, debtors can and often do pay their fees
over time. Some debtors simply should not be in those cases for
no other reason than to pay their attorneys' fees. The Supreme
Court has held that a Chapter 7 attorneys' fees cannot be
treated as an administrative expense, meaning that the debtor's
attorney cannot be prioritized ahead of other creditors.
Further, several circuits have held that a prepetition
agreement to pay attorney's fees is subject to the automatic
stay, and any fee still owed post filing is subject to
discharge.
What would help Chapter 7 debtors to more readily obtain
counsel, as opposed to filing without a counsel going into an
unnecessary Chapter 13 plan? Allow them to bifurcate their fees
and pay some portion before filing and some portion afterwards.
I have set forth in my written statement proposed ways to do
that. We want to encourage counsel to take these cases by
allowing them to get paid with court oversight to prevent
overreaching, which would benefit the entire system.
Third, Chapter 7 trustees' fees. The last no-asset fee
increases for Chapter 7 trustees received was in 1994 from $45-
$60. The responsibilities of trustees have increased
substantially over this period, especially since the adoption
of BAPCPA in 2005. Pending before the House is H.R. 3867, the
Bankruptcy Administration Improvement Act of 2025, which has
bipartisan support to date. It has a Senate counterpart also
with bipartisan support.
This bill would raise the no-asset fee for trustees to $120
in such cases. The Chapter 7 trustees are the boots on the
ground that makes the system work. The bill has a funding
mechanism built in to pay for these fees by raising the fees in
certain Chapter 11 cases by 0.03 percent and would also extend
certain temporary judgeships already in place around the
country, including some that have looming expirations.
I'm also concerned about the aging of the Chapter 7 trustee
panels around the country, a common concern I hear from many of
the colleagues at the bench at national meetings. We need to
encourage younger bankruptcy practitioners to be willing to
serve on these panels, but it needs to be financially viable
for them to do so.
Thank you for your time, and I welcome your questions on
the matters discussed.
[The prepared statement of Mr. Black follows:]
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Mr. Fitzgerald. Thank you, Judge Black. Judge Harner.
STATEMENT OF THE HON. MICHELLE HARNER
Ms. Harner. Chair Fitzgerald, Ranking Member Nadler, and
the Members of the Subcommittee, good morning. My name is
Michelle Harner, and I am a United States bankruptcy judge for
the District of Maryland. I am honored to be here this morning
to share information and data with you concerning the U.S.
bankruptcy system.
I'm in a unique position to do that because I have been a
partner at the law firm of Jones Day representing both debtors
and creditors in bankruptcy. I have been a law professor at two
different law schools, and I am now a bankruptcy judge. I
should say I am here in my individual capacity, and I do not
speak for the United States Judicial Council, the
Administrative Office of the United States Courts, or any other
individual organization.
With my allotted time, I would like to do three things:
First, I want to talk about Subchapter V; next, Chapter 13
cases; and, finally, the student loan debt. Before doing so,
however, I want to underscore the basic fact that, every year,
hundreds of thousands of Americans, whether as an individual
debtor, a business debtor, or a creditor, uses the United
States Bankruptcy Code that this Congress has enacted to
address issues stemming from financial distress. It's not
perfect. We probably could do things better. During our
conversation today, I do not want us to lose sight of the fact
that the Bankruptcy Code helps everyday Americans.
On that point, in 2024, over 500,000 bankruptcy cases were
filed, and the recent study shows that one out of every 11
Americans will at some point turn to the bankruptcy system for
help. With respect to Subchapter V, since its effective date in
2020, over 10,000 cases have been filed. Subchapter V helps
smaller companies reorganize and pay their creditors quicker.
The data shows that Subchapter V debtors confirm plans in over
50 percent of the cases; and, of those plans, over 60 percent
are consensual, meaning that they met the requisite creditor
support. The process is quicker, cheaper, and more effective.
Unfortunately, at the moment, the data also shows that the
current level of the debt cap, which gauges eligibility for
Subchap-
ter V, is excluding numbers of smaller companies, and they
cannot use the subchapter to keep their business or to repay
their creditors.
With respect to Chapter 13, in 2024, there were over
197,000 Chapter 13 cases filed. Chapter 13 allows individuals
to repay their creditors under a 3-5-year plan. The national
data shows that Chapter 13 debtors complete their repayment
plans in 40-50 percent of these cases. I know from talking to
my colleagues, many districts have much higher completion
rates.
Similar to Subchapter V, the current debt cap in Chapter
13, which, again, is the eligibility gate for Chapter 13, is
set at a level and bifurcated in a way that excludes many
individuals, approximately 2,000 every year, from using Chapter
13. In addition, those individuals also might be foreclosed
from Chapter 7 because of the means test.
Finally, with respect to student loans, the outstanding
amount of student loan debt and the defaults they're under
continue to rise. Yet, individuals cannot use the bankruptcy
system to address student loan debt. Moreover, student loan
debt may actually keep an individual out of the bankruptcy
system. For example, the student loan debt of an individual may
be so high that the debtor doesn't qualify under the debt cap
for Chapter 13. That Chapter 13 would-be debtor can't file and
can't repay the creditors.
A path to addressing student loan debt in bankruptcy
actually as a result might help not only debtors but all the
debtors' other creditors. That kind of path would serve the
dual objectives of the Bankruptcy Code. The Bankruptcy Code
strives to provide the honest, but unfortunate debtor with a
fresh start and pay as much as possible to all the creditors.
Thank you, and I look forward to your questions.
[The prepared statement of Ms. Harner follows:]
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Mr. Fitzgerald. Thank you, Judge Harner. Professor Jacoby.
STATEMENT OF MELISSA B. JACOBY
Ms. Jacoby. Good morning. We're here because the
Constitution empowers Congress expressly to enact uniform laws
of bankruptcy, which coordinate responses to financial
distress, and, thus, the responsibility to update those laws
when the need is required.
My written statement discusses several issues that are of
interest to this Subcommittee, including support for the
Bankruptcy Administration Improvement Act of 2025, and
including a brief discussion of the 23andMe bankruptcy, which
is of interest to some of you.
Right now, I will focus on two issues. The first is to
continue the discussion of small business bankruptcy. The law
that's been discussed by my fellow witnesses is of relatively
recent vintage, but it reflects decades of development and
thought. As implemented, that law truly is the bankruptcy
system at its best.
I used to describe Subchapter V as having fewer creditor
requirements, and I did have some concerns. That framing turned
out to be misleading because Subchapter V swaps some types of
requirements that would be less effective in this context with
those that work more effectively in this context, such as a
trustee. Restoring eligibility to the rate it's been most of
the time this law has been in effect would make this law
accessible, especially in high-cost areas, to the benefit of
workers, creditors, and, of course, the small businesses
themselves.
Let me return then to the thorny issue of student loans.
The bankruptcy law has treated student loans differently from
other kinds of debts since the 1970s, but that statement in and
of itself is misleading because the details of that law have
changed dramatically through uncoordinated incremental
movements.
There used to be three paths to relief from student loans,
and now there's just one. As you've already heard, it doesn't
work well at all. The path is broken. In addition, the scope of
student loans that get special protection has broadened well
beyond the initial rationale for having this exception to
discharge.
Highlighting some other issues that are relevant to reform
in this area, please remember that, since 2005, all personal
bankruptcy filers have been subject to additional layers of
scrutiny. Widespread undue hardship we could find among all
bankruptcy filers essentially if measured in an appropriate
way. We also must consider the demography. We're not just
talking about an issue of youth with decades of potential
income in their futures. A big proportion of older student loan
debtors in the United States continues to grow, and that really
affects the kinds of tools you would want to think about in
developing further a rational student loan policy and
bankruptcy.
In the 1990s, I worked on bankruptcy policy with former
Representative Caldwell Butler. He's a Republican from Roanoke,
Virginia. The law around student loans was more forgiving than
it is now. Yet, Congress and Butler advocated for full repeal
of the special treatment of student loans. He thought the
general bankruptcy requirements were sufficient to ensure
legitimate use.
I recognize that one may not be willing to go that far,
although that is an important option on the table, but there
truly is a menu of narrowly tailored and sensible middle ground
proposals that I hope could get bipartisan support from this
subcommittee. Thank you.
[The prepared statement of Ms. Jacoby follows:]
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Mr. Fitzgerald. Thank you, Professor Jacoby. Dr. Hotchkiss,
you're next.
STATEMENT OF EDITH HOTCHKISS
Ms. Hotchkiss. Thank you. I am very honored to have the
opportunity to speak with you today. I am an economist, and I'm
here mostly to talk with you about the empirical research that
we've been doing related to SubV. I'll add that SubV falls
squarely in the realm of research that I have been doing for
more than 30 years looking at the overall efficiency of the
U.S. Bankruptcy Code as well as globally.
Now, we've completed a study where we have, with a lot of
help, gone in and looked at nearly all the outcomes for
business SubV cases for firms--I should say Chapter 11 cases
for firms under $15 million in total liabilities and documented
the outcomes and tried to get a better understanding of a
couple of things.
First, it gives us an understanding of how great the extent
of a problem that we have because we also compare SubV cases to
traditional Chapter 11s. We can look at whether Chapter 11--
sorry, SubV has achieved its goals so far. Also, I can speak a
bit about the $7.5 million threshold and some of the safeguards
that might be in place that help prevent future abuse of that
threshold.
Second, to give you an extent of the magnitude of the
problem we would have absent SubV, and I'm not going to
inundate you with the facts, but I just want to share a couple
of factoids with you. First, in the period before the enactment
of SubV, so 2010-2019, the 70 percent of small businesses with
less than $7.5 million in total liabilities went directly into
Chapter 11 liquidation--so not even attempt to reorganizing. To
look at the ones that attempt a Chapter 11 reorganization, only
one-third of those are successful in confirming a plan, and
that's probably overstating their success rates, because very
often those plans are liquidating plans. Then, last, the vast
majority of firms we know from the U.S. Census simply shut down
their doors out of court and don't even bother to enter the
bankruptcy system.
This raises the natural question of why is a traditional
chapter so unfriendly to small businesses and why SubV is
necessary. There's this couple of simple explanations for that.
One is that Chapter 11 is very expensive, very time consuming.
SubV addresses that issue by reducing certain requirements for
expensive disclosures, seting timelines, et cetera. Many small
businesses, as Professor Baird has already mentioned, wouldn't
continue to exist without that small business owner remaining
in place.
Last, for small firms, it's often very difficult to get
agreement from creditors, particularly when that creditor might
be a single bank. In these instances, the role of the SubV
trustee becomes particularly important. This has led, not
surprisingly, to the introduction of SubV as a simplified
procedure for small businesses. I should say not unlike what's
been done in, I believe it's 11 other countries in the last 10
years have also introduced similar types of fast tracks,
simplified procedures for small business.
I want to very quickly summarize the findings of our work.
Basically, what we find is that SubV more than doubles the
probability of confirming a plan of reorganization. We find
there is no evidence of any harm to unsecured creditor
recoveries in the SubV cases, and that we interpret as saying
that the unsecured creditors can also share in the gains from
preserving viable businesses.
We look at the post-emergence survival rates of these
businesses because the concern might be that SubV is helping a
lot more firms reorganize, but these companies are just going
to fail anyway, and we find no evidence of excessive
continuation. I'll note here that the SubV's role in coming up
with the plan and its feasibility is particularly important to
the process.
I want to speak about the issue of the threshold and how
our evidence might speak to that. We don't find any evidence in
what's happened so far of what we call bunching below this
threshold, meaning firms manipulating to find themselves just
below the eligibility requirement. In my last seconds here, I
do want to note that it is a valid concern for larger firms
potentially to manipulate liabilities to use this threshold.
The FSX-FSS Alex Jones case is probably the most egregious
example of that. There are safeguards within the process that
reduce the likelihood of that happening, particularly the
judicial discretion so that when there are other claims as the
predominant liability those are not allowed to use Subchapter
V.
Thank you very much.
[The prepared statement of Ms. Hotchkiss follows:]
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Mr. Fitzgerald. Thank you, Doctor. Ms. Murray, you're now
recognized for five minutes.
STATEMENT OF MEGAN W. MURRAY
Ms. Murray. Thank you, Chair, Chair Fitzgerald, the
Subcommittee Ranking Member Nadler, and the Committee Members,
for having me here today to talk about the important issues of
Subchapter V in our Bankruptcy Code.
I have been a member of American Bankruptcy Institute, a
nonpartisan organization, since 2009, and I currently serve on
its board of directors. During my legal career, like Judge
Harner, I have significant experience on both the creditor and
debtor side of bankruptcy cases. I have filed corporate
reorganizations for both large and small corporate debtors, and
I also have experience representing large and small creditors
and fiduciaries whose job is to maximize value for the benefit
of the estate.
Last year, I was selected by the ABI President to Co-Chair
a task force to study the effectiveness of Subchapter V with
Judge Harner. My views today are not necessarily that of ABI or
its board, but they've certainly been informed by the work we
did on the task force. My views are also informed by my own
practices.
Chapter 11 is a powerful tool that preserves jobs and is
strategically used to reorganize businesses while
simultaneously maximizing value to creditors and owners. Our
country is built on entrepreneurialism, and small businesses,
as previously noted today, are their lifeblood. As we discussed
in our task force report, however, not all dreams are viable,
and 50 percent of small businesses statistically fail within
the first five years.
Subchapter V was enacted to address challenges in the
bankruptcy process and to help small businesses survive
economic turmoil. Subchapter V, as discussed today, appears to
be working well, especially in Florida, which is the leading
filer of Subchapter V since its enactment. Confirmation rates
of Subchapter V cases nationally are slightly over 50 percent,
according to the United States Trustee Program as compared to
Chapter 11 cases, which historically have had much lower
success.
To be eligible to file a Subchapter V case, a business
debtor must at least have liquidated noncontingent secured and
unsecured debts of roughly $3.4 million. The $3 million, $3.1
million cap has just increased slightly over the last 60 days.
As we know, this debt limit reverted from $7.5 million
approximately a year ago.
The Subchapter V cases that I have been involved with are
distinct from my traditional Chapter 11 cases. A good
bellwether for a small business is the size of the loans that
the SBA provides to small business owners. For example, the SBA
7(a) loans made by participating lenders provide smaller
businesses with access to capital, loans to start their
companies. The maximum size of these loans is $5 million.
SBA 504 loans have a maximum of $5.5 million and are made
to acquire assets, capital assets, and machinery equipment.
Both the 504 and the 7(a) programs provide attractive, probably
more attractive borrowing terms than your traditional capital.
Most businesses--small businesses also at least have one other
form of debt, including idle loans, bank loans, maybe debt
consolidation loans, and most likely friends and family.
The combination of SBA loans of up to $3.4 million,
together with the secondary source of capital, demonstrates why
the current $3.4 million limit is just too low for small
businesses. The addition of trade debt on top of that due to
inflation really pushes small businesses over the limit. Yes,
there are a few high-profile cases that have raised concerns
about abuse. However, the checks and balances in our system,
from judges to trustees to creditors, minimize abuse or
unintended consequences. I'm also aware that unsecured
creditors have concerns with increasing the SubV limits, and it
is undisputed that Subchapter V shifts the dynamic for
unsecured creditors due to the requirements at confirmation.
In my experience, however, bankruptcy courts recognize this
balance of power and take it seriously. The debtors seeking
protection under Subchapter V must follow strict guidelines and
deadlines. One judge has appropriately noted that the SBRA
provides qualifying debtors with the opportunity to use this
new powerful tool to reorganize and save its business, but it
must do so quickly.
In addition to shortened deadlines, creditors have other
protections, including the best interest of creditors test,
feasibility requirements, and others. In Florida, where I
practice, SubV trustees also utilize their professional skills
to ensure debtors' operations match their plan projections.
Aspirational plans without support are not likely to be
confirmed.
I'm here today prepared to discuss the leverage that
creditors have in Subchapter V cases, which I think is
sufficient to support an increase in the debt limits.
Subchapter V was enacted to give small businesses a fresh
start. It appears to be working. Increasing the debt limits
back to $7.5 million would give more Main Street businesses a
reasonable opportunity to reorganize in difficult
circumstances.
Thank you for your time, and I welcome your questions.
[The prepared statement of Ms. Murray follows:]
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Mr. Fitzgerald. Thank you, Ms. Murray.
We'll now proceed under the five-minute rule with
questions. I'm going to recognize myself for the first set of
questions.
Professor Baird, as you mentioned in your opening
statement, the Federal Priority Act allows receivers in State
insurance insolvency cases to be held personally liable if the
receiver disperses funds without repaying the Federal
Government first. The bankruptcy cases are specifically exempt
from the Federal Priority Act, but the Bankruptcy Code has the
procedural protections to ensure the government is repaid.
I guess what we're seeing is the same is not true of
insurance insolvency cases, which are largely handled under
State law. If we're considering legislation to limit liability
for State insurance receivers, what types of procedural
safeguards should be in place so that the government does not
get skipped over or becoming the first in line when attempting
to collect on its claims?
Mr. Baird. Well, the thing to remember here is that the
absence of the kinds of rules we have in bankruptcy for State
insurance insolvencies is not a deliberate Congressional
decision but rather is an artifact for the way the law has
evolved over time. The Federal Priority Act was established
first in 1797. In bankruptcy, we've realized that we need to
have procedures. Having procedures for State insurance
insolvency would make sense.
What you need to make sure of is the government is notified
of the State insurance receivership and knows about the
procedure. It's also reasonable that, once the government is
notified, that it has a certain clock that starts to tick
because, unless you have clear procedures, you're not going to
be in a world in which receivers will feel confident that they
can dispense assets and not expose themselves to personal
liability.
Again, to answer your question directly, the easiest thing
to do is simply ensure that there is proper notification to the
government and that the technical rules are satisfied. This
shouldn't be a terribly difficult problem.
Mr. Fitzgerald. Thank you.
Judge Harner, I'm going to skip around a little bit, but
you discussed a new hardship test in your opening statement,
and I wanted to focus a little bit on the student loans. It's
been noted that relatively few student loans are discharged in
bankruptcy. During your time on the bench, has there been any
times when debtors satisfied the undue hardship test, such as
that you've ordered discharged under the student loans?
Ms. Harner. It's a great question, Chair. I will say I do
not see many student loan cases, and that's--it could be in
part--I don't have any empirical data to back me up here, but I
will say, procedurally, it's difficult for a debtor. They have
to commence an adversary proceeding. They have to file a
complaint, and then they have to meet what we call the Brunner
standard, at least in my circuit, the Fourth Circuit, which
incorporates the undue hardship standard you just referenced.
I have had one opportunity where I had a 67-year-old woman
who had incurred over $500,000 of student loan debt in the
hopes of becoming a business executive. She was trying to
repay. She was never going to be able to repay that entire
amount doing the analysis based on the facts that she,
representing herself as a pro se debtor, put into evidence. I
was able to grant a partial discharge of some of her student
loan debt, which was not appealed by the student loan lender. I
could not find, under the Brunner standard, even in that
situation with an older individual, who had only limited time
left to work to try to repay her debt, the ability to grant a
full discharge.
Mr. Fitzgerald. Thank you. Judge Black, there have been
some claims that medium-size, well-capitalized businesses or
small subsidiaries of larger businesses have been using
Subchapter V to circumvent the creditor protections associated
with general Chapter 11 cases. Have you seen any type of
behavior in your courtroom that would suggest that this is
actually happening?
Mr. Baird. No, I really haven't in my court. I've had some
cases that may look right out of the gate like a single asset
real estate case that probably shouldn't be there. I have not
seen any type of manipulation of insider debt or anything of
that nature in the Western District of Virginia that would
present itself in the cases that I see.
The cases that have been presented to me have all been well
suited for Subchapter V. Again, as Judge Harner and some of the
other witnesses have pointed out, if there are cases that come
before us, we have the ability to prevent shenanigans, for the
lack of a better description. We've got the ability to appoint
a creditors committee. The different avenues are available for
the Subchapter V trustee to have a different allocation of
powers to investigate the debtor's business. In the cases where
I am, in Southwest Virginia, I'm not seeing that.
Mr. Fitzgerald. Thank you. I yield back and recognize the
Ranking Member Nadler for his five minutes.
Mr. Nadler. Thank you, Mr. Chair.
As I noted in my opening statement, student loans are the
only kind of unsecured debt that consumers cannot discharge in
our current bankruptcy system. Although we generally imagine a
young person when we consider tackling the issue of student
loan debt, this issue affects people of all ages. Increasingly,
it's our senior citizens with loans going back many decades who
are shouldering this nondischargeable debt.
Thanks to changes in the bankruptcy laws passed in 2005, to
which I led the opposition, we now have a system in which
debtors who are presumed to be too insolvent to pay medical or
credit card debt must remain on the hook for their student
loans. The legal hurdle to prove, quote, ``undue hardship in
order to discharge student loan debt means that disabled
veterans, senior citizens, and low-income individuals, among
others, are on the hook for decades for debt that they will
never realistically be able to repay.'' To make matters worse,
right now student loan debtors are subject to wage garnishment
and garnishment of their Social Security benefits for these
debts that they can never discharge.
Professor Jacoby, is there any logical reason why only
student debt should not be dischargeable in bankruptcy?
Ms. Jacoby. The traditional argument for special treatment
of student loans in bankruptcy is related to protection of the
public fisc to preserve money for educational opportunities to
others. There also were unsubstantiated concerns early in the
history of developing the 1978 Bankruptcy Code about
individuals who might not deserve bankruptcy relief running
from graduation right to the bankruptcy court, which, of
course, for a variety of reasons, is not even possible under
the current system that we have.
The first--that latter instance I discount completely.
There are plenty of checks and balances for that. The first
one, it does raise broader matters of education policy, but in
that case, the rest of the law needs to be written very, very
differently to retailor it to that objective.
Mr. Nadler. Thank you.
Professor Jacoby, what is the impact of saddling millions
of Americans with nondischargeable student loan debt, and do
you believe that Congress should act to ensure that debtors can
discharge their student loans?
Ms. Jacoby. I believe that this part of the Bankruptcy Code
is well overdue for reform. This section of the Bankruptcy
Code, 523(a)(8), is indeed broken, and that none of you, none
of the Members of this esteemed Subcommittee would write it
this way if you were to do it today. I hope you do act.
Mr. Nadler. Should we make a distinction between private
and public loans?
Ms. Jacoby. Yes.
Mr. Nadler. Why?
Ms. Jacoby. To your original point about where student
loans fall in the general range of unsecured debts, there is no
reason to distinguish a loan for food or medical care made by a
private for-profit lender from a loan that someone might use
while they are a student in their education. Those are loans
that are part of our marketplace and can manage the risk very
differently.
Mr. Nadler. Thank you. Finally, Professor Jacoby, the undue
hardship standard was added to all address presumed or feared
abuse of our bankruptcy standard. Is this a realistic fear?
Ms. Jacoby. It is not a realistic fear. Undue hardship used
to be used in a narrower way because there were other paths,
including older student loans to discharge without even
overcoming that hurdle. That's two reasons why undue hardship
does not work today in our system.
Mr. Nadler. Why is it different from what it used to be?
Ms. Jacoby. It used to be that, if a loan had been under
repayment for five years and then seven years, that it could be
discharged in bankruptcy independent of any questions of undue
hardship. Only a more recent loan would somebody have to file a
lawsuit and prevail on the argument that it was an undue
hardship, which might explain the impossibly high standards
that courts adopted then that they still use today.
Mr. Nadler. That was changed when?
Ms. Jacoby. Well, it's been done incrementally in pieces. I
believe the seven-years would have disappeared in 1998, but I
would need to check to make sure because it's changed so many
times.
Mr. Nadler. OK. Thank you. I yield back.
Mr. Fitzgerald. The gentleman yields back. The gentleman
from Virginia is now recognized for five minutes.
Mr. Cline. Well, thank you, Mr. Chair. I want to thank you
for holding this hearing to provide an overview of U.S.
bankruptcy law and explore avenues for potential reform.
I also want to welcome Judge Black from Western Virginia.
It includes the Sixth District. Judge Black has been a
consistent leader in our part of Virginia, and I appreciate
having his expertise here today.
I'll start with you, Judge. What benefits have you seen
from the Small Business Reorganization Act, which was signed
into law in 2019? I was proud to be the lead patron of that.
What benefits have you seen for both debtors and creditors
since the enactment of Subchapter V, and do you think those
benefits would extend--what do you think the impact would be if
the $7.5 million cap were made permanent?
Mr. Black. First, with the increase of the debt limit, it
would make more small businesses eligible, not only in
Southwest Virginia but across the country, because, as I
mentioned earlier, what may be a small business in Southwest
Virginia may not equate to what may be a small business in Los
Angeles or elsewhere where they have higher debt loads.
The other thing is what I have seen in small business cases
before me--and I've probably had 30-35 of those so far--is the
speed with which they're able to get the confirmation and the
less fighting and less wheel spinning. I've seen some cases, if
they were in a traditional Chapter 11, they would be on their
third or fourth amended disclosure statement; and we would be
six or eight months into the case, and it's just not
progressing. The presence of the Subchapter V trustee is
helping keep the debtors and the creditors on the ball.
A lot of these cases are two-party disputes, and if you can
bring those parties together and try to eliminate some of the
fighting that often goes on in Chapter 11 cases--it keeps the
case moving forward. Again, you have got to file a plan within
90 days after the petition date, absent from some unusual
circumstances.
When these cases are filed, the debtor's counsel has to
think about the plan before they file the case. It tends to
move a lot faster; we have a higher confirmation rate. For all
those reasons, it's been a great benefit.
It's much less expensive. Chapter 11 with a traditional
case--it's hard to put Bob's Backhoe into the same
reorganization scheme as Circuit City or General Motors. The
absolute priority rule, the absence of that, and the ability to
get a case to confirmation quickly is a real benefit to small
businesses. Nobody wants to be in bankruptcy if it could be
avoided.
Mr. Cline. Thank you. I hope the Committee can move forward
on that issue.
I want to shift gears a little bit. Our bankruptcy laws
were not written with the biotech and consumer DNA era in mind,
which is why I'm proud to join with the gentlelady from
California, Congresswoman Lofgren, and others in my Senate
colleagues in introducing the Don't Sell My DNA Act, which
would explicitly amend the Bankruptcy Code to add genetic
information to the definition of personally identifiable
information, require written affirmative consent from
individuals before their genetic data can be sold or
transferred, and mandate the secured deletion of unsold genetic
data.
The bill responds directly to recent bankruptcy filings by
23andMe and recognizes the genetic data, unlike a phone number
or email address, is uniquely identifying and permanent, even
without a name attached.
Professor Jacoby, if I could ask, how does the bankruptcy
system currently treat mass privacy-related claims,
particularly those involving genetic data, in terms of
classification, priority and valuation, and are breach victims
essentially treated as unsecured tort creditors?
Ms. Jacoby. Let me address your last question first. Yes,
breach victims, those who experience the major cybersecurity
breach of 23andMe, are treated as general creditors. In the
23andMe bankruptcy, the central feature of which was selling
the company to a third party, although a related third party as
it turns out, the breach claimants will have to turn to any
proceeds left in the pot after higher priority creditors get
paid.
In terms of the broader question that you asked, I will
welcome further specific questions, but I would say generally
there is a real issue--it needs to be made more clear that
applicable nonbankruptcy law must apply here in the bankruptcy
context, but also should apply outside of the bankruptcy
context. Those should be the same protection in both places.
Mr. Cline. Given how difficult reputational and identity-
related damages are to quantify, should Congress or the courts
reconsider how to account for these harms in bankruptcy
proceedings, especially in light of the long-term consequences
for consumers?
Ms. Jacoby. Yes. I think there is broader thinking to be
done outside of bankruptcy in terms of some broader Federal
level protection.
Mr. Cline. Thank you. I yield back.
Mr. Fitzgerald. The gentleman yields back.
The Ranking Member Raskin is now recognized for five
minutes.
Mr. Raskin. Thank you, Mr. Chair. I've got a question for
all the witnesses. Do you think that the Subchapter V debt
limit should be restored to $7.5 million from the current $3
million? Answer with yes or no, if you can. Ms. Murray?
Ms. Murray. Yes.
Mr. Raskin. Dr. Hotchkiss?
Ms. Hotchkiss. Yes.
Mr. Raskin. Professor Jacoby?
Ms. Jacoby. Yes.
Mr. Raskin. Judge Harner?
Ms. Harner. Yes.
Mr. Raskin. Judge Black?
Mr. Black. Yes.
Mr. Raskin. Professor Baird?
Mr. Baird. Yes.
Mr. Raskin. Wonderful. If I wonder if you can answer with
the same admirable concision about whether you think student
loan debt should be dischargeable. Ms. Murray.
Ms. Murray. I'm actually going to decline to answer that
one just because it's not part of my practice.
Mr. Raskin. Dr. Hotchkiss?
Ms. Hotchkiss. As an economist, I'll also not answer that.
Mr. Raskin. OK. Professor Jacoby?
Ms. Jacoby. This section of the Bankruptcy Code should be
at least reformed, if not repealed.
Mr. Raskin. Judge Harner.
Ms. Harner. I will echo Professor Jacoby's comment, this
section needs to be revisited, and we need to rethink how we
treat student loans in bankruptcy.
Mr. Raskin. Got you. Judge Black.
Mr. Black. I agree that the code section needs work. It's
so expensive to come in and litigate a student loan case that
we're just not seeing these cases being filed because they know
they're probably not going to win. They're so hard to win, and
they're so hard to litigate, and it really shouldn't be that
way.
Mr. Raskin. It just seems like an insurmountable climb
for--
Mr. Black. It is a very difficult climb.
Mr. Raskin. Yes. Profession Baird.
Mr. Baird. Yes, I agree. There's a balance between debtors
and creditors. In the case of student debt, we're at one end of
the extreme. The idea that essentially no student debt can be
discharged, I think it can't be the right solution to the
problem.
Mr. Raskin. Got you. Judge Harner, let me come to you
because you are a Marylander, I have got a couple of questions
for you. Sticking with the student loan debt for a second, it
seems to me the whole basis for bankruptcy law is that we're
willing to indulge the potential moral hazard of people acting
in financially profligate ways because we want to incentivize
businesses to invest, innovate, experiment, and grow. Why
shouldn't that logic apply to people going to college?
In other words, maybe there's some slight moral hazard that
somebody will use their college student loans for reckless or
profligate purposes, but overwhelmingly most people are going
to use them in a responsible way, and we want to incentivize
people to go to college and to invest in their own education.
Does that logic correctly undermine the categorical exclusion
of educational debt from the bankruptcy process?
Ms. Harner. So, Ranking Member Raskin, that's a great
question, and I'll answer it by telling you that my years of
studying the Bankruptcy Code showed the consistent theme, that
the code is meant to balance the rights of debtors and
creditors. What the code wants at the end of the day is for the
debtor, whether it's a business or an individual, to be able to
return to the community as a productive contributing member.
That benefits everyone. That fresh start is so important, not
only to the business but also to the individual.
As Congress is thinking about policy, and it is Congress'
choice on the policy, those guiding principles underlying the
code, balancing the rights of debtors and creditors, and
providing an opportunity for the individual to become a
productive constructive member I think would be a helpful
guide. It suggests similar treatment in thinking about
Subchapter V or Chapter 13.
Mr. Raskin. We got rid of debtors' prison a long time ago,
which I think everybody pretty much believes in, or most
everybody. I don't want to speak for everyone. A staggering
life-long insurmountable debt is a kind of financial prison as
well. Obviously, it doesn't have the harshness of actually
being behind bars, but it can be extremely confining and
constraining for a person's life potential, right?
Ms. Harner. Again, Ranking Member Raskin, that's an
insightful comment. The data, if you look at it closely,
suggests that many people will die with student loan debt. They
just cannot pay it back in their lifetime.
I want to underscore something that Professor Jacoby said,
``the Bankruptcy Code includes checks and balances.'' At least
I'll speak for myself, I do not want to see anyone abuse the
bankruptcy system, whether it's a debtor or a creditor.
Mr. Raskin. Right.
Ms. Harner. I want to preserve that system to help the
people that deserve that fresh start and to make sure we can
get as much money to creditors as we can through it.
Mr. Raskin. Great. Very quickly, we're about to lose half
of the judgeships on the bankruptcy court in Maryland. What
will that mean for us if we lose three or four temporary
bankruptcy judges?
Ms. Harner. As you noted, in Maryland, we have three
temporary seats. The preservation of the temporary seats simply
comes down to maintaining flexibility and stability in the
system. If those seats are needed, they can be filled to make
sure we're providing the services needed in our community. If
they're not needed, they won't be filled. They're there just in
case. Stability and providing that kind of reassurance to the
community I think is important.
Mr. Raskin. Thank you. I yield back, Mr. Chair.
Mr. Fitzgerald. The Ranking Member yields back. We have
conflicting hearings going on, as you can probably tell. We're
going to go to the gentleman from California at this point, Mr.
Correa.
Mr. Correa. Thank you, Mr. Chair, Ranking Member, for this
hearing, and I want to thank the witnesses for being here
today.
I concur that Subchapter V, subchapter--13 raising the
limits, is important, but I also want to focus on student debt.
The 43 million Americans owe $1.6 trillion in debt. Veterans,
other Americans, older Americans, many are delinquent, default,
meaning, many are going to fall out of the workforce. They're
going to work for cash. They're just not going to be as
productive as they could be would they have a fresh start.
Currently, under the undue hardship standard of the Brunner
Test, followed by most courts, it is almost impossible to
discharge this debt. That's why I'm introducing legislation,
The Student Loan Bankruptcy Improvement Act, that modifies the
law to require only hardship, meaning, eliminating the undue
hardship. I believe this strikes a balance creating a more
equitable and reasonable test keeping the safeguards like the
Means Test, Elevated Test, for the bankruptcy process, and
doesn't really endanger the availability of student loans.
I want to note that several Members of this Committee, Mr.
Johnson, Mr. Sewell, Ms. Ross, and Ms. Lofgren, have joined to
coauthor my legislation. This legislation is also supported by
the Consumer Federation of America, Association of College
Admissions Counseling, National Association of Student Loan
Lawyers, Century Foundation, and the National Law Center.
My first question will be for Judge Harner, Professor
Baird, Professor Jacoby, would you agree that, by striking
``undue'' from the test, strikes a fair balance in protecting
the integrity of the bankruptcy and helping student loan
borrowers move ahead? Judge Harner.
Ms. Harner. Thank you, Representative Correa, for that
question. I can't provide any advisory opinions, but what I can
say is, right now, the Brunner Test, which you have up so
nicely behind you, and the standard we're required to follow in
the courts, this undue hardship, all the case law focuses on
that term. The definition is of the term, ``undue hardship.''
If legislation removes the word ``undue'' from that term,
courts will have to rethink the standard. There will have to be
a new definition. It will reform student loan treatment and
bankruptcy.
I can't predict exactly how, but what I can say is I think
courts would see it as a signal to rethink how student loan
debts are treated, and it may provide the path that you were
speaking of before.
Mr. Correa. Professor Baird.
Mr. Baird. It's an excellent approach. It's a surgical way
to correct the problem of Brunner. Brunner was a mistake, but
Brunner now binds all bankruptcy judges. Judge Harner and Judge
Black don't have any choice. They're bound by circuit
precedence. It was a mistake to have the Brunner Test, which
emerged, as Professor Jacoby said, under different
circumstances. This particular surgical approach, which
essentially enables judges to press the reset button and
reconsider how to strike the balance, is an excellent idea.
Mr. Correa. Professor Jacoby.
Ms. Jacoby. The reset reference is exactly what I was
thinking as well. Circuit Courts have said in their opinions
that they have no reason to back away from the very harsh
interpretation of undue hardship because Congress has kept that
part the same, even as it's changed the other pieces. This
would send the message to Circuit Courts and invite other
courts to use a more appropriate standard.
Mr. Correa. To everybody here, quick question in my 40
seconds left, eliminating ``undue,'' would that essentially
tilt the system in favor of the debtors?
Professor Baird.
Mr. Baird. No. The balance is so out of whack that this is
just--
Mr. Correa. Judge Black.
Mr. Black. I don't think it would. It would provide the
courts a little more flexibility in how to address these
issues, and it's a flexibility that we don't really have right
now given the--
Mr. Correa. Judge Harner.
Ms. Harner. I agree with Judge Black, it would give
flexibility.
Mr. Correa. Professor Jacoby.
Ms. Jacoby. Yes. We have to remember this isn't just debtor
versus creditor. It's what debts get paid when other ones do
not.
Mr. Correa. Dr. Hotchkiss, any thoughts?
Ms. Hotchkiss. Again, as an economist, it seems--you've
reached an all-or-nothing solution, and in the moment, it's
nothing. I can't speak to the specific tweaks in the law--
Mr. Correa. Ms. Murray.
Ms. Murray. Thank you, Representative. It's not part of my
practice. I'm going to decline to answer this one.
Mr. Correa. Thank you very much, again, to the witnesses.
I'm out of time. I appreciate your thoughtful comments.
Mr. Fitzgerald. The gentleman yields back.
I will now recognize the gentleman from California, Mr.
Issa, for five minutes.
Mr. Issa. I think we're going to pick up where we left off.
Judge Harner, or actually, Professor Jacoby, historically, when
the private sector was doing college loans, the laws were in
place to give them an assurance that they would not easily find
themselves with no money as a result of bankruptcy, and that
allowed for a given level of return on investment but, most
importantly, a return of capital over time. We took it away
from them; we put it in the government's hands. Since that time
the government has taken massive $100 billion-plus losses.
As we're looking at a change that liberalizes, under the
Biden Administration, liberalizes dramatically the ability not
to pay it, how do we reconcile the fact that there was a
mandate from Congress that it break even? Do we increase the
interest rate, or do we continue subsidizing people who get a
college education and then don't want to pay for it?
Ms. Jacoby. I'd first observe that the existence of
protection in bankruptcy is not what causes someone to pay or
not pay. We're finding that many people are unable to pay
either way.
Mr. Issa. Let me challenge that. The balance of undue and
the ability to discharge, there's no question at all, in any
bankruptcy, the judge, any judge has the ability to set up a
schedule if you have the ability to pay, or a deferral until
you do. I'm going to challenge that and say, even if you can't
discharge it now, you don't have to pay it now if you're unable
to. Ultimately, the question is, should you eventually pay it?
We have had Members of Congress making $174,000, by the
way, who have never paid back their college loans. Is that
fair?
Ms. Jacoby. With respect, Congressman--
Mr. Issa. Skip the respect. I'm a Congressman. I can take
it.
Ms. Jacoby. Great. Still, with respect, I need to tweak the
premise because judges almost never see the underlying details
of these cases. There's a complicated procedure. In addition to
all the disclosures a financially distressed family makes in
bankruptcy, they have to do a separate process for it ever to
get before a judge. A judge does not have the opportunity under
the law of this land to do what you're saying.
Mr. Issa. Congress has a balancing act. Do we turn this
back over to the private sector and allow them to dramatically
increase the cost of student loans so that it pays for itself
based on the events on the ground, or do we continue simply
writing multibillion dollars per year, hundred billion dollars
and more, per year taxpayer money to pay for people's
education? Are we effectively turning the loan program into a
Pell Grant? The answer, of course, is, if we don't make a
change, we are.
Is there anybody that disputes the fact that Congress does
not want this to be a subsidized program, but it has become a
subsidized program?
Back to the bankruptcy, if Congress' intent was that you
not be able to bankrupt out from underneath it, is the current
balance in this undue harm, is it, in fact, out of whack based
on the fundamental, Professor Baird, you look like you want to
answer, the fundamental question, which was Congress said,
``This isn't something you bankrupt out from underneath because
it's too important,'' and we're not talking about people who
had strokes the day they graduated from college. We're talking
about people who haven't got a job or who have decided to do
something that doesn't pay enough. They use the bankruptcy
court to discharge and then, at a later time, make the money
from their education off it. Professor.
Mr. Baird. It's important to distinguish between the
student loan problem, which is enormous, and the bankruptcy
problem, and the particular types of people who enter into
bankruptcy.
Unfortunately, many of the debtors we're talking about in
bankruptcy, the money is uncollectible in the sense that
interest actually builds up faster than they're able to pay it
off given these numbers. It's a difficult problem--
Mr. Issa. Let me close with one quick question. The IRS
does not allow discharge in bankruptcy effectively, right?
Therefore, why is it that, if we consider this similar, we
can't have an abatement and other process, as we do in the IRS,
but ultimately have the principal remain until discharged or
agreed in some program? Anyone have an answer on that?
Professor?
Ms. Jacoby. I would like to answer that. There was a time
when an individual who completed a payment plan through Chapter
13, at the end of that, would have some relief at the end.
Congress eliminated that, and I don't think they gave that as
much deliberation as you might have today.
There is room for looking historically at the different
levers and different pieces one can adjust in the system to
move more in that direction. What we have now doesn't do any of
those things that you're talking about.
Mr. Issa. To be continued. Thank you, Chair.
Mr. Fitzgerald. The gentleman's time has expired. He yields
back.
The Ranking Member Raskin is recognized for a unanimous
consent request.
Mr. Raskin. Thank you, Mr. Chair. The first is a May 2025
article titled, ``Older Americans at Risk as Government
Restarts Social Security Garnishment on Student Loan Debt.''
It's from PBS. Then, a chapter from the report from the
American Bankruptcy Institute's Commission on Consumer
Bankruptcy entitled ``Effectuating the Fresh Start About
Student Loan Over-indebtedness.''
Mr. Fitzgerald. Same request from Mr. Correa.
Mr. Correa. Thank you, Mr. Chair. Unanimous consent to
introduce the following: A letter from National Consumer Law
Center, dated July 11th of this year, in support of the Student
Loan Bankruptcy Improvement Act; a letter from the National
Association of Consumer Bankruptcy Attorneys, July 11th, in
support of the Student Loan Bankruptcy Improvement Act--Dunbar
Marina--``One in Three Student Loan Borrowers Risk Default as
Delinquency Rates Soar.''
Another one, ``U.S. Department of Education to Begin
Federal Student Loan Collections, Other Actions to Help
Borrowers Get Back Into Repayment.''
Finally, ``Credit Scores Decline for Millions as U.S.
Student Loan Collections Restart,'' Associated Press of this
year.
Mr. Fitzgerald. Without objection.
The gentlewoman from Vermont is now recognized for five
minutes.
Ms. Balint. Thank you, Mr. Chair. Thank you to all the
witnesses for taking the time to come here today.
I'm really glad that we're here in a bipartisan hearing on
an important and often overlooked subject under our
Subcommittee's jurisdiction.
Before I get to the questions for the witnesses on
bankruptcy, there is one thing that I feel like I must mention
because it is harming consumers right now, and that's the Trump
Administration's assault on the Consumer Financial Protection
Bureau.
We're here to talk about legal protections for Americans
who are in financial crisis. Bankruptcy can help people rebuild
from crisis, and the CFPB helps prevent the crisis in the first
place. It's one of the few government entities whose entire
mission is to protect Americans from companies that rip them
off, like banks, payday lenders, securities firms, and for-
profit colleges. We cannot have a serious discussion about debt
and bankruptcy if no one is enforcing consumer protections
against the scams that drain American's bank accounts.
For nearly six months now, CFPB staff had been locked out
by the Trump Administration. They literally cannot do their
jobs. The 1,500 people are barred from doing their job of
protecting and standing up for American consumers, except for
the people who are working to drop enforcements and to cut
financial protections. Trump is dismantling the agency before
our very eyes, and Republicans are letting him do it.
I will move on to questions for the witnesses, but it's
maddening. We can't forget that many personal bankruptcies can
be prevented. OK. We can talk about the law, but they can be
prevented. We can have a role in preventing it, but only if
government is there to protect Americans from financial
exploitation.
That said, turning to the witnesses, I am deeply concerned
that the recently passed Republican tax bill has taken a
sledgehammer to many of the programs that help Americans before
bankruptcy becomes their only option.
Judge Harner, thank you for coming here today. Would it be
fair to say that economic hardship increases the rates of
bankruptcies?
Ms. Harner. Representative Balint, thank you for that
question. I am just reflecting on the data I've seen because
I'm trying to make sure my answers correspond to studies and
data that I'm familiar with. What the charts would show you is,
any time there's economic hardship, we see a spike in filings.
Ms. Balint. It makes sense, right? You put the squeeze on
Americans, and they face more financial constraints, and
perhaps leading to personal and familial crises.
In your experience, Judge Harner, did courts see an
increase in individual and business bankruptcies resulting from
the COVID pandemic?
Ms. Harner. We did not.
Ms. Balint. You did not?
Ms. Harner. We did not.
Ms. Balint. Why do you think that is?
Ms. Harner. I will say I think we expected to see one, but
there are a number of factors that took place during that time
that helped both businesses and individuals deal with the
economic shock of COVID. Things like the moratorium on
foreclosures, the moratorium on evictions, and other relief
that was provided is the reason we actually saw a decline in
bankruptcy filings.
Ms. Balint. I really appreciate that. I was in the State
legislature when this happened, and certainly a lot of the
infusion of money and protections at the Federal level, and
things that we put in place at the State level helped. I really
appreciate that.
Would you say that the bankruptcy court system is equipped
to handle more bankruptcy cases right now?
Ms. Harner. Yes. Yes.
Ms. Balint. Is there a caveat?
Ms. Harner. Well, I was just reflecting on my comment to
Ranking Member Raskin and the resources of the courts, and
things like ensuring that the temporary judgeships are extended
speak to that. So, yes, we are equipped, we will do our jobs
for the American people, but having support is always
appreciated.
Ms. Balint. I appreciate that. We have no doubt that you
will do your jobs and that you are dedicated committed people.
In the time remaining, what is the most important policy
recommendation regarding Subchapter V, from your perspective?
Ms. Harner. From my perspective?
Ms. Balint. Yes.
Ms. Harner. It's just to continue to recognize the
subchapter is quicker, more effective, and is helping both
companies and creditors, and that we should reflect on the
right pool of companies that could utilize that subchapter. The
data shows that companies between the current debt cap of $3
million and 7.5 actually were using it even more effectively
than the current pool of companies.
Ms. Balint. I really appreciate it. I see that I'm out of
time. I yield back.
Mr. Fitzgerald. The gentlewoman yields back. I now
recognize the gentleman from North Carolina for five minutes.
Mr. Harris. Thank you, Mr. Chair. Thanks to all of you on
the panel for sharing with us your thoughts. I've been in and
out to other hearings this morning, but I enjoyed reading all
your written testimonies.
I did have just a couple of questions that I wanted to kind
of toss out. I'll go to Judge Paul Black for this first one.
When a debtor files for Chapter 7 bankruptcy, he's assigned
a trustee to oversee the case, and these trustees, as we know,
are attorneys, accountants, or other professionals who ensure
that the debtor pays what they can. Currently, if I understand
correctly, these trustees are only paid $60 per case.
Judge Black, can you speak to the impact that these fees
have on the recruitment of future Chapter 7 trustees?
Mr. Black. Yes, Congressman. Asset cases are what the
Chapter 7 trustees hope to get at some point to be able to
administer assets and pay some portion of what they collect to
the creditors that have filed claims in the case. The reality
is that a large majority, if not a significant majority of the
cases are what we call no-asset cases. The trustees are going
to get $60 for the work that they do, and they've got work to
do like evaluating Means Test and reviewing tax returns, and
they have got a lot of other paperwork that they have to do in
conducting the 341 meeting of creditors, and it's quite a bit
of work, but if all they're getting is $60, we're worried about
recruiting some younger attorneys to come into this practice
area.
It's been fixed at $60 since 1994. In 1994, they got a $15
raise from $45-$60 for a no-asset case. In the meantime,
inflation, the cost of doing business, just to keep the lights
on, it has become an expensive process. We want to get younger
folks that are young people to consider joining these panels.
We have an ageing Chapter 7 trustee bar across the country, and
we need to get some young folks to come into this practice
area. It's going to be hard for them to do that if they can't
keep the lights on while they are waiting for an asset case.
Mr. Harris. Would you encourage or recommend to us today
that Congress increase the per-case payments to Chapter 7
trustees, and what value do you think that could provide to
that system?
Mr. Black. Yes, I would encourage you to do that. Judge
Alan Stout from Louisville, Kentucky, came before this
Committee in 2018 and was encouraging Congress to do the same
thing at that time, and it just hasn't changed. In the
meantime, the bar is getting older. We're getting fewer folks
willing to get on these panels. We think that it would be a
real benefit to the system to encourage people to join the
panels in that regard.
Mr. Harris. OK. Well, thank you. Also, Judge Black, as of
now, there are 29 temporary bankruptcy judgeships across the
United States, and two of those 29 temporary judgeships are
located in my home State of North Carolina. As we all know,
these temporary judgeships are set to expire beginning in
January 2026.
Can you speak, Judge Black, to the effects of allowing
these temporary judgeships to expire, and should Congress
extend these judgeships, or perhaps just make them permanent?
Mr. Black. Well, there are the Judicial Conference of the
United States, I believe, has some recommendations on what
should be permanent and what should not be permanent, and I
would probably defer to them on the permanent aspect of it.
On the temporary judgeships, it's a whole lot better to
have them and not need them than to need them and not have
them.
Mr. Harris. Right.
Mr. Black. I would very much like to see the judgeships
extended for that very reason.
I wanted to go over to the Congresswoman from Vermont's
comment about when things are needed. People file bankruptcy
when they're pushed.
Mr. Harris. Right.
Mr. Black. During the pandemic, following up on what Judge
Harner said, there's a moratorium on foreclosures; there's a
moratorium on evictions in a lot of places.
The other thing that I saw in my court was medical debt.
The hospitals really weren't garnishing wages. Nothing puts
people into bankruptcy faster than a wage garnishment.
When we have those types of things backing off, the filings
come down. If you see things like that come back to the
surface, the filings could go up. We are in a rising filing
environment right now. Yes, I would like to see those
bankruptcy judgeships extended. Obviously, Congress would have
to decide whether to make them permanent or not, and there are
other factors that go into this, that I'm not qualified to
speak to. Thank you.
Mr. Harris. Well, thank you for your input.
Mr. Chair, I yield back.
Mr. Fitzgerald. The gentleman yields back. The gentleman
from Illinois is now recognized for five minutes.
Mr. Garcia. Thank you, Chair Fitzgerald, and thanks to all
the witnesses here today.
Bankruptcy, as you all are aware, is a very complex area of
law, and Congress should address these issues in a nuanced way
that protects the rights of creditors but doesn't improperly
favor them at the expense of working families, small businesses
or municipalities, and that's why I strongly support bipartisan
efforts to extend the debt limits of Subchapter V and Chapter
13 cases, which would provide much needed relief to small
businesses and working families in financial distress.
It's also why I believe that excluding student loans from
the Bankruptcy Code has unfairly benefited private student
lenders and made life harder for millions of Americans,
especially vulnerable borrowers like seniors, disabled
veterans, and low-income individuals, and it's why I'm deeply
concerned about the ongoing bankruptcy proceedings involving
the Puerto Rico Electric Power Authority, known as PREPA.
Throughout my time in Congress, I've advocated for the
Puerto Rican people as they face a vicious cycle of corruption,
mismanagement, prioritization, and exploitation, and, of
course, a series of natural disasters. The cycle comes as
Puerto Rico remains excluded from the Bankruptcy Code. The
PREPA bankruptcy process enters now it's ninth year, and the
Puerto Rican people pay some of the highest electricity rates
while receiving the lowest quality of service in the country.
Despite the dire economic and energy situation, PREPA's
creditors are trying to strip PREPA and the Puerto Rican people
of resources that they don't have. Rather than accept fiscal
reality and resolve the case, the creditors went to court and
won a ruling giving them a claim over all PREPA's past,
present, and future net revenues. Now they want immediate
payment, even though the value of their secured interest in
these revenues is disputed and even though most of the money in
PREPA's bank account is Federal grant money and creditors
cannot touch.
What these creditors are really asking for is PREPA to jack
up electricity prices and force the people of Puerto Rico to
pay these private companies, all while the island's electricity
rates are over 50 percent higher than the national average. It
continues to suffer crippling blackouts, and the median income
is less than half of that in Mississippi, the poorest State in
the U.S.
This situation, of course, has set up a false choice
between the maximum protection of private property rights and
the decimation of public good rather than a reorganization and
a fresh start.
Professor Jacoby, thank you for being here today. Let me
ask you, first, what were the implications of excluding Puerto
Rico from the Bankruptcy Code; and, second, how could public
bankruptcy law better manage cases involving public utilities
and Federal grant dollars?
Ms. Jacoby. About 10 years ago, Congress had a choice to
make when it was realized, and everyone realized that Puerto
Rico's instrumentalities needed some sort of access to debt
relief but were excluded. The most straightforward way to do
that would have been to expand eligibility for Chapter 9,
municipal bankruptcy, to instrumentalities in Puerto Rico. That
would not have included Puerto Rico's--some of Puerto Rico's
debt, but it would include instrumentalities, such as PREPA.
That law is fairly expansive relative to its history, yet
it has a somewhat clear track record. It would not have
involved an oversight board. The PROMESA is a much more
extensive set of rules. This case is really the first time it's
been tested using all the different components of Puerto Rico's
debt.
Mr. Garcia. Thank you for that.
This should not be a Democratic issue or a Republican
issue. We should all stand with Puerto Rican people and urge a
fair and speedy resolution to the PREPA bankruptcy that does
not require them to pay even higher electricity rates than they
pay already.
Thank you, and I yield back, Mr. Chair.
Mr. Fitzgerald. The gentleman yields back. The Ranking
Member Nadler is recognized for a UC request.
Mr. Nadler. Thank you. I ask unanimous consent to enter
into the record a statement from the Community Services Society
of New York which calls for an end to the double standard in
bankruptcy law that makes student loans, both Federal and
private, functionally nondischargeable.
Mr. Fitzgerald. Without objection.
I would also ask for unanimous consent that the following
statements be entered into the record: A statement from the
Commercial Law League of America, a statement from the Defense
Credit Union Council, a statement from Public Citizen, and a
letter from the National Association of Insurance
Commissioners, dated July 15, 2025. Also, a letter from the
National Association of Chapter 13 Trustees, dated July 14,
2025.
We'll now recognize the gentlewoman from California for
five minutes.
Ms. Lofgren. Thank you, Mr. Chair. Thanks for this hearing.
I was reminded that I first worked on bankruptcy
legislation in this Committee room in 1974 when I was a
staffer, and that effort was arduous and very bipartisan.
Bankruptcy law is one of those areas that does benefit from
bipartisan efforts, and I'm encouraged that we are looking at
some bipartisan efforts to make some tweaks to this bill.
Based on all your testimony and your comments, it seems to
me that there is consensus on the cap on Chapter 13, and I'm
hopeful that we can address that in a bipartisan way. It will
help our constituents across the United States, and the Members
of the Committee have made that clear.
I want to address another issue. Under current law, a
company can file for Chapter 11 in virtually any district where
it has an affiliate, even if that affiliate is really nothing
more than a newly created shell.
If you take a look at the Purdue Pharma case, the company
behind the opioid crisis, it was able to steer its bankruptcy
case into a friendlier court in White Plains, New York, simply
by changing the mailing address of a subsidiary without moving
any real operations to game the system.
I would like to ask unanimous consent to put into the
record a Reuters article that discusses a company in San Diego
that opened a post office box in Texas hours before it filed
for bankruptcy to have its case heard in Texas. It had no
employees. It had no operations, no real presence, but it met
the requirements of the Act. The Department of Justice was late
in objecting. That was a problem.
Mr. Fitzgerald. Without objection.
Ms. Lofgren. This legal theater exploits a loophole and
erodes trust in the bankruptcy system, and sidelines the people
most affected, people who--employees, retirees, small business
creditors, and local communities are disadvantaged.
Let me just ask a simple yes or no from each of the
witnesses. Do you believe that this kind of forum shopping,
where a company creates or moves a shell affiliate just to file
for bankruptcy in a handpicked court, undermines the
credibility of the bankruptcy system? Do you think that's a yes
or no?
Ms. Murray. Yes.
Ms. Hotchkiss. Yes.
Ms. Jacoby. Yes.
Ms. Harner. I'm respectfully going to abstain because it's
more of a policy matter that I will trust to Congress.
Ms. Lofgren. OK.
Mr. Black. I'm going to concur with Judge Jacoby. Judge
Harner, Sorry.
Mr. Baird. This is a very difficult policy question where
you should exercise your judgment.
Ms. Lofgren. Well, I'm going to be reintroducing the
Bankruptcy Venue Reform Act to close this loophole and to
restore fairness by requiring companies to file where they
actually do business. I am hoping that we can have a bipartisan
effort to close this loophole. Whether the small businesses are
in Minnesota or California being disadvantaged, it's our
constituents that are getting the short end of the stick, and
I'm hoping that we can pursue this in a bipartisan way.
I just want to comment on the genetic data issue. Mr. Cline
mentioned the bill he and I are working on together. I do think
that's very important. When the code was written, the idea that
you would have DNA information in a company was not anything
that anybody was thinking about and that we might need to
protect. There should be broad consensus that this will make
sense.
Once again, having worked on bankruptcy legislation, first
as a staffer and then as a Member of this Committee, I remember
when Chair Hyde pursued--I didn't agree with everything. That
was a little more partisan effort than the 1974 effort, but we
can make progress on this.
In the Constitution, it assigns us this role. Article I,
Section 8.4, gives to Congress the responsibility for Uniform
Bankruptcy Acts, and I'm looking forward to discharging that
obligation.
With that, Mr. Chair, I yield back.
Mr. Fitzgerald. The gentlewoman yields back. We'll now
recognize the gentleman from Georgia for five minutes.
Mr. Johnson. Thank you, Mr. Chair. Thank you to all the
witnesses for being here today.
Chapter 7 trustees are paid out of the debtor's filing fee;
is that correct, Professor Jacoby? Or anyone on the panel.
Ms. Jacoby. I look to--
Mr. Johnson. It is a fact. Please take judicial notice of
that fact.
Ms. Jacoby. I'll take professorial notice. I'm sorry. I had
a moment there.
Mr. Johnson. That's OK. They get paid out of the debtor's
filing fee. Chapter 7 trustees have not received a raise since
1994, but yet, in 1994, the filing fee was $130, and today,
2025, the filing fee for Chapter 17 debtor is $338. Where did
the money go? How did the Chapter 7 trustees get cut out?
Anybody have any idea? Well, it's a big oversight. It's
something that we need to cure.
I'm here basically to--I'm concerned mostly about this
issue of student loan debt. Americans, Marvin Gaye wrote this
song ``Trouble Man,'' and he said, ``There's three things
that's for sure: Taxes, death, and trouble.'' For our young
people growing up today, if he were around today, he would add
a fourth thing that you're going to incur, and that is student
loan debt. It is nondischargeable, and we have Americans
holding about $1.8 trillion in student loan debt. That is half,
almost half of the debt that was added to the Federal debt by
Republicans when they passed this big ugly bill. The $4
trillion in debt, but we've got Americans--that $4 trillion is
for the entire Nation. That $1.7 trillion is just for a select
number of individuals who can't get out from under their
crushing debt. The fact that the student loan debt is
nondischargeable in bankruptcy leaves people more vulnerable to
other kinds of debt like medical expenses, and it makes it more
difficult for them to buy a home, a car, or even start a
family.
Professor Jacoby, it's true that, prior to 1976, all
student loans were dischargeable through bankruptcy just like
any other type of debt, correct?
Ms. Jacoby. Correct.
Mr. Johnson. Thereafter, the law has changed so as to allow
student loan debt to be dischargeable if the debtor bears the
expense of commencing an adversary proceeding with a Chapter 7
or 13 case--within a 7 or 13, and bear the burden of proving
undue hardship, correct?
Ms. Jacoby. Correct. Originally there were other paths to
getting relief in addition to bringing that lawsuit.
Mr. Johnson. Judge Harner, I believe you answered the
question earlier about the number of times you have actually
granted a hardship discharge in a 7 or 13 case. Judge Black,
same situation with you?
Mr. Black. Yes, sir.
Mr. Johnson. The 67-year-old woman who did get a partial
discharge of her debt, was she thrust into Chapter 7 or 13
protection because her social security check was being
garnished?
Ms. Harner. Representative, that's a great question, and I
honestly don't recall that particular fact.
Mr. Johnson. Well, it was probably due to some collection
activity that forced her into bankruptcy. That's a shame, that
a 67-year-old woman, maybe went to Trump University, I don't
know, $500,000 in debt, student loan debt, that's a lot of
money.
Listen, the big ugly bill has only made the problem worse.
It reduces the number of repayment plan options, and it also
eliminates grant plus loans, which helps people finance high
education degrees, and caps Federal loans for graduate degrees.
This will push more people into the private loan market with
its predatory interest rates. The big ugly bill eliminates the
deferment provisions for borrowers facing economic hardship.
Thanks to the big ugly bill, if you fall behind on your bills
because you lose your job, you can no longer defer your student
loan payments. We've got to change the law so that student
loans are dischargeable in bankruptcy just like every other
consumer debt.
With that, I yield back.
Mr. Fitzgerald. The gentleman yields back.
That concludes today's hearing. We thank our witnesses for
appearing before the Subcommittee today.
Without objection, all the Members will have five
legislative days to submit additional written questions for the
witnesses or additional materials for the record.
Without objection, this hearing is adjourned.
[Whereupon, at 11:57 a.m., the Subcommittee was adjourned.]
All materials submitted for the record by Members of the
Subcommittee on the Administrative State, Regulatory Reform,
and Antitrust can be found at: https://docs.house.gov/
Committee/
Calendar/ByEvent.aspx?EventID=118492.
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