[Congressional Record Volume 142, Number 136 (Friday, September 27, 1996)]
[Extensions of Remarks]
[Pages E1738-E1739]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                      CONSUMER BANKRUPTCY CONCERNS

                                 ______
                                 

                            HON. SONNY BONO

                             of california

                    in the house of representatives

                      Thursday, September 26, 1996

  Mr. BONO. Mr. Speaker, along with many other Members I share a deep 
concern that the United States is about to set an economic record which 
is nothing to be proud of. I speak of the fact that by the end of 1996 
total U.S. bankruptcy filings are expected to exceed 1 million for the 
first time in the Nation's history. It is particularly worrisome that 
this level of bankruptcies is occurring in a time of relatively good 
economic news, as it raises significant concerns about what bankruptcy 
levels will be whenever the next cyclical economic downturn arrives. As 
a member of the Banking Committee I am of course worried about the 
potential impact of losses stemming from bankruptcy on the health of 
our financial institutions, and on the price and availability of 
credit. And, as a member of the Judiciary Committee, aware that 
bankruptcy filings constitute more than three-quarters of all cases in 
the Federal courts, I worry about this increasing burden upon the 
judicial system.
  About 9 out of 10 of all bankruptcy filings are consumer 
bankruptcies. About two-thirds of those are in chapter 7, where 
creditors are paid some percentage of what they are owed from the 
liquidation proceeds of the debtor's nonexempt assets, if there are 
any. Chapter 7 is a historical anachronism, a holdover from a time when 
credit was hard to come by and based upon what you owed. Today, of 
course, consumer credit is plentiful and is extended on the basis of 
the applicant's anticipated future income.
  The remainder of consumer bankruptcies are in chapter 13, where 
employed debtors with a regular income commit to a multi-year repayment 
plan covering some portion of what they owe.
  The majority of debtors filing for bankruptcy are in serious 
financial straits due to loss of employment, divorce, or medical 
emergency, and we must keep the system open and available to assist 
them in getting back on an even financial keel.
  But there appears to be a significant percentage of individuals 
abusing the bankruptcy system through multiple filings to forestall 
legal actions, hiding of assets, making false and incomplete financial 
statements, and similar actions. Some individuals enter into chapter 13 
repayment plans which are unrealistic and which inevitably fail, while 
other individuals with steady incomes and the ability to make 
significant repayment of their freely acquired debts choose to abandon 
them in chapter 7. The system is out of kilter, and its overburdened 
overseers are ill-equipped to catch those who abuse it.
  It is my belief that individuals with financial problems should 
consider filing for bankruptcy to be their last resort, not their 
first. All of the individuals involved in the system--judges, trustees, 
administrators, and attorneys--have an obligation to ensure that 
consumer debtors are fully aware of their nonbankruptcy alternatives 
for accomplishing financial restructuring. Consumer credit counseling 
services are widely available throughout the nation and can help 
individuals and families avoid bankruptcy through various financial 
management techniques. Creditors are extremely supportive of these 
efforts.

  Attorneys and other bankruptcy petition preparers have an obligation 
to fully disclose the very serious nature and consequences of filing 
for bankruptcy to individuals considering this step. Debtors need to be 
aware that this is a step with serious, negative long term consequences 
for their ability to obtain credit and other services, and that there 
are alternative means for redressing their problems which should be 
explored first.
  Unfortunately, some attorneys and other bankruptcy preparers 
advertise their services as ``debt reduction'', ``federal repayment'', 
or similarly vague and misleading terms to disguise the true nature of 
their business and to downplay the consequences of entering into 
personal bankruptcy. As a result, many thousands of individuals each 
year are placed into bankruptcy without fully informed knowledge and 
consent. Attorneys and other petition preparers have a constitutional 
right to advertise, but this type of deceptive and misleading practice 
needs to be curbed.
  In 1994 Congress passed bankruptcy reform legislation which 
established a National Bankruptcy Review Commission to review and 
further evaluate the bankruptcy system and make recommendations for 
fundamental reform to Congress. It is my understanding that the 
commission, which has a 2 year mandate expiring in the fall of 1997, 
has so far made very little progress in grappling with the fundamental 
problems rampant in the consumer bankruptcy system. It has instead 
permitted its staff to engage in a series of pointless academic debates 
and to advance proposals which have little support, much less 
consensus, in the broad bankruptcy community. While the other working 
groups established within the Commission have already issued numerous 
policy proposal in such areas as

[[Page E1739]]

corporate restructuring, small business bankruptcy, and system 
administration, the consumer working group has yet to make even a 
single, tentative recommendation for reform of the current system. With 
consumer bankruptcy filings constituting about 90 percent of all 
filings, this wheel-spinning cannot be allowed to continue. Therefore, 
I was pleased to learn that the Commission is finally going to begin to 
grapple with this area in a comprehensive way with a series of hearings 
beginning in November. Congress needs this Commission to deliver a 
series of pragmatic proposals to get the system back under control and 
to provide debtors with the relief they require, creditors with the 
repayment they deserve, and society at large with the right balance 
between forgiveness and obligation.
  One area which I hope the Commission devotes serious attention to is 
recommending ways in which individuals can be informed of alternatives 
to bankruptcy at the earliest possible time, perhaps even before their 
initial contact with the bankruptcy system. Consumer financial 
education must obviously play a larger role in addressing current 
problems.
  I also believe that both the Federal Trade Commission and state bar 
associations should do a much better job of monitoring bankruptcy-
related advertising, and should crack down on deceptive ads which fail 
to clearly and conspicuously disclose that the services being offered 
involve a declaration of bankruptcy along with all of its grave and 
lingering consequences. Disciplinary or enforcement action should 
certainly be utilized where appropriate.
  Finally, the Office of U.S. Trustee, which administers the bankruptcy 
system, should undertaken efforts to ensure that the standing trustees 
in chapters 7 and 13 are making inquiries to determine that debtors are 
aware of alternatives to bankruptcy and are fully aware of the long-
term effects of filing for bankruptcy.
  It is my intention to continue to monitor bankruptcy developments and 
the ongoing work of the Bankruptcy Commission. This subject involves 
matters of economics, judicial fairness, and personal values. There may 
be many ways to address the ongoing bankruptcy crisis--but they all 
require an initial recognition that this is indeed a crisis, most 
particularly for the millions of debtors and their families caught up 
in it. Bankruptcy must remain available as a last resort for those who 
truly require legal forgiveness of their contractual obligations. But 
it cannot grow into a first resort for those with the ability but not 
the desire to make good on their financial obligations.

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