[Congressional Record Volume 144, Number 6 (Wednesday, February 4, 1998)]
[Extensions of Remarks]
[Pages E87-E89]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]





      INTRODUCTION OF H.R. 3150, THE BANKRUPTCY REFORM ACT OF 1998

                                 ______
                                 

                          HON. GEORGE W. GEKAS

                            of pennsylvania

                    in the house of representatives

                      Wednesday, February 4, 1998

  Mr. GEKAS. Mr. Speaker, yesterday, I had the honor, along with my 
colleagues Congressmen Jim Moran of Virginia, Rick Boucher of Virginia, 
and Bill McCollum of Florida, to submit to the Congress legislation to 
reform the Bankruptcy Code. This measure, the Bankruptcy Reform Act of 
1998--H.R. 3150--will be referred to the House Committee on the 
Judiciary, and then to the Judiciary Subcommittee on Commercial and 
Administrative Law. As the Chairman of the Subcommittee on Commercial 
and Administrative Law I can assure the Congress that this measure will 
be given an expeditious review and brought to the full House of 
Representatives as soon as possible. Why? Because bankruptcy reform is 
needed, and needed now.
  Mr. Speaker, I would like to submit to the body two items for 
printing in the Congressional Record which detail my position on 
bankruptcy reform and the major provisions of H.R. 3150. There will be 
much, much more information offered on this topic, this bill and the 
arguments for, and against, what is here being proposed. I look forward 
to a spirited debate and enactment of the best bankruptcy reform bill 
possible.

                   The Bankruptcy Reform Act of 1998


                            MAJOR PROVISIONS

       The Bankruptcy Reform Act of 1998 was introduced on 
     February 3rd by Rep. George Gekas (R-Pa.), Rep. James Moran 
     (D-Va.), Rep. Bill McCollum (R-Fla.), and Rep. Rick Boucher 
     (D-Va.). The bill is designed to restore personal 
     responsibility to the bankruptcy system and to ensure that it 
     is fair for debtors, creditors and consumers. Topics covered 
     by the bill include:

                          Consumer Bankruptcy

       In 1997, Americans filed an all-time record of 1.33 million 
     consumer bankruptcy petitions, which erased an estimated $40 
     billion in consumer debt. Those losses are passed on to all 
     consumers, resulting in a hidden tax of $400 for every 
     American household. In other words, consumers who pay their 
     bills are forced to pick up the tab for those who do not. The 
     consumer bankruptcy provisions of the Bankruptcy Reform Act 
     of 1998 are designed to address a flaw in bankruptcy law that 
     allows individuals to file for bankruptcy and walk away from 
     their debts, regardless of whether they are able to repay a 
     portion of what they owe.
       Needs-based bankruptcy--The Bankruptcy Reform Act of 1998 
     creates a system that would determine the amount of financial 
     relief a debtor needs and require people to repay what they 
     can. The amount of relief would be calculated based on a 
     formula that uses a debtor's income and obligations to 
     determine his or her ability to repay.
       If the debtor cannot repay all of his or her secured and 
     priority debts, and at least 20 percent of unsecured debts 
     over five years, the debtor has the option of filing for 
     complete relief under Chapter 7 of the bankruptcy code. 
     (Examples of secured debts are car loans and mortgages. 
     Priority debts are such obligations as alimony, child support 
     and back taxes. Unsecured debts include installment loans and 
     credit card debts.)
       If the debtor could repay all of his or her secured and 
     priority debts and at least 20 percent of unsecured debts 
     over five years, the debtor may not file under Chapter 7; if 
     the debtor still chooses bankruptcy, he or she would file 
     under Chapter 13 and begin a repayment plan. (Under Chapter 
     7, a debtor receives nearly complete relief from debts. 
     Under Chapter 13, the court establishes a timely repayment 
     plan that can run up to five years.)
       Those debtors with an annual income of less than 75 percent 
     of the national median family income can choose automatically 
     whether to file for bankruptcy under Chapter 7 or Chapter 13; 
     the needs-based test does not apply to these individuals.
       Debtor's Bill of Rights--This provision would protect 
     consumers from ``bankruptcy mills''--law firms and other 
     entities that steer consumers into filing bankruptcy 
     petitions without adequately informing consumers of their 
     rights and the potential harm bankruptcy can cause. Under the 
     legislation, an attorney is required to refund the full cost 
     of representing the consumer if he or she does not provide 
     full and fair representation. The bill would also crack down 
     on misleading advertisements and other tactics by requiring 
     full disclosure about an organization's services, and sets 
     out a series of rules under which for-profit ``debt relief 
     counseling organizations'' must operate so that consumers are 
     assured that they will get proper and adequate advice.
       Consumer Education--The bill contains two education-related 
     provisions. First, each consumer must receive information 
     prior to filing for bankruptcy about his or her options, both 
     within the bankruptcy system and alternatives to bankruptcy. 
     Second, the bill creates a pilot program of financial 
     management training for debtors and allows the Court to 
     require a debtor to complete such a program as a condition of 
     having his or her debts discharged.
       Exemptions--The bill increases from 180 to 365 days the 
     time in which a debtor must live in a particular state in 
     order to take advantage of that state's asset exemption 
     rules. This provision is designed to limit a debtor's ability 
     to move into a state with broader exemptions immediately 
     prior to filing for bankruptcy.

                       Small Business Bankruptcy

       More than 50,000 American businesses file for bankruptcy 
     each year, including many small ones. The Bankruptcy Reform 
     Act of 1998 implements reforms recommended by the National 
     Bankruptcy Review Commission to streamline the treatment of 
     small business Chapter 11 cases. The legislation defines a 
     small business as one with less than $5 million in debts. The 
     Commission found that the Chapter 11 process, which is 
     designed to give business owners time to reorganize and get 
     the business back on its feet, often had inadequate oversight 
     and was ineffective for small businesses. Major reforms in 
     this area include:
       Requiring all small businesses to confirm Chapter 11 plans 
     within 150 days of filing, or prove that they are deserving 
     of an extension.
       Enlarging the grounds for conversion to Chapter 7, under 
     which a Bankruptcy Trustee is required to liquidate the 
     business.
       Charging U.S. Trustees and Bankruptcy Administrators with 
     overseeing small business debtors and ``blowing the whistle'' 
     early on cases that cannot succeed in Chapter 11. (The 
     current oversight system, which involves court-appointed 
     creditors' committees, has proven ineffective).

                       Single-Asset Realty Cases

       These provisions also implement recommendations of the 
     National Bankruptcy Review Commission in a specific area of 
     Chapter 11. Single-asset realty cases typically involve in 
     office or apartment building where the rents are inadequate 
     to cover payments due on the mortgage. Owners often file 
     Chapter 11 to postpone foreclosure. Usually there are few or 
     no creditors other than the mortgage holder. The Commission 
     found that owners in this situation often propose ``new 
     value'' plans, whereby the mortgage holder's claim is reduced 
     to the current value of the building, the excess claim is 
     canceled, and the owner contributes a new amount of money 
     toward the new value. The Bankruptcy Reform Act of 1998 takes 
     steps to streamline this process and to ensure that the ``new 
     value'' must be in cash equal to 25% of the full value of the 
     property.

                        Enhanced Data Collection

       A common complaint about the current bankruptcy system is 
     that data is limited, making it difficult for Congress to 
     recommend changes. The Bankruptcy Reform Act of 1998 would 
     require: Uniform, national reporting forms for Chapters 7, 11 
     and 13; monthly filing forms for Chapter 11, so that the 
     progress of a business reorganization can be easily 
     monitored; a ``sense of the Congress'' declaration that all 
     non-confidential data should be stored electronically and be 
     made available to the public via the Internet; and a ``Sense 
     of the Congress'' declaration that a national data system 
     should be established for tracking bankruptcy trends.

                         Bankruptcy Tax Issues

       The Bankruptcy Reform Act of 1998 makes a number of changes 
     to existing law to close loopholes that limit the 
     government's ability to collect taxes. The bill also improves 
     the system for notifying government representatives of a 
     bankruptcy filing in which taxes may be involved.
       The Bankruptcy Reform Act of 1998 also incorporates the 
     major elements of S. 1149, the Investment in Education Act, 
     which was unanimously reported by the Senate Judiciary 
     Committee last October. This language ensures that local 
     school districts and governments are given a priority in 
     bankruptcy proceedings to recover back property taxes. School 
     districts around the country are losing money because they 
     tend to be last in line to collect back taxes owed by 
     property owners who have filed for bankruptcy. These 
     provisions ensure that more money is put back into schools.

                             Direct Appeals

       Under current law, there are two levels of appeals in 
     bankruptcy cases. The first is an appeal to a district court 
     or a bankruptcy appellate panel and the second is to the U.S. 
     Court of Appeals. This proposal would

[[Page E88]]

     streamline and expedite the appeals process by eliminating 
     the first step and allowing appeals to be taken directly to 
     the U.S. Court of Appeals.

                      Making Chapter 12 Permanent

       The bill would also make permanent Chapter 12 of the 
     Bankruptcy Code, which is scheduled to expire in 1998. 
     Chapter 12 is designed to preserve family farms by limiting 
     the power of a bank to exercise a veto over a farmer's 
     reorganization plan. This provision was adopted unanimously 
     by the Senate in October.
                                                                    ____


Statement of Chairman George W. Gekas, Chairman, Judiciary Subcommittee 
  on Commercial and Administrative Law--Bankruptcy Reform Act of 1998

       The greatest, and perhaps most dangerous, irony I have come 
     across in the past decade is that despite economic growth, 
     low inflation, low unemployment, and increasing personal 
     income, our nation has seen as alarming increase in the 
     number of bankruptcy filings--1.3 million in 1997 to be 
     exact. Think about that for a second. That's more than one 
     family per every hundred in the United States and over $40 
     billion in debt that has been erased--in a year of strong 
     economic growth. It only further illustrates the problem when 
     you consider that the number of filings in the '90s is eight 
     times as many, per household, as there were during the 
     Depression.
       It wasn't always this way. The so-called ``bankruptcy of 
     convenience'' is a new phenomenon, borne out of the loss of 
     stigma the word ``bankruptcy'' once, but no longer, carried. 
     It used to be a sense of responsibility, or perhaps more 
     appropriately, a sense of disgrace and embarrassment that 
     discouraged Americans from declaring bankruptcy. Deals were 
     cut to make sure that creditors would at least eventually see 
     their money and that debtors paid off, rather than legally 
     erased, their debt.
       Harry S. Truman, the 33rd President of the United States, 
     spent the better part of the 1920s in debt due to the 
     collapse of his clothing business in 1922. Truman was both a 
     man and a President of the highest moral character with a 
     tremendous sense of responsibility, which was reflected in 
     the motto that sat on his desk in the Oval office-- ``The 
     buck stops here.'' Truman eventually paid off all of his 
     creditors by working out deals and payment schedules, thereby 
     keeping himself out of bankruptcy court and ensuring that he 
     lived up to bills he amassed.
       As an attorney in practice, I can remember negotiating such 
     a repayment arrangement for a client in the late '60s. With 
     just a few phone calls I was able to appease my client's 
     creditors and arrange for payments to be made on a regular 
     basis until my client's debt could be discharged. While my 
     client's creditors were demanding their pound of flesh, they 
     know all too well that a deal was in their best interests. 
     The creditors would get paid, albeit not immediately. The 
     other option was for my client to declare bankruptcy, which 
     would have erased his debt and left his creditors high and 
     dry. Both parties agreed that an arrangement based on 
     responsibility and good faith was the better alternative.
       Today's situation is tremendously difficult to comprehend, 
     because times are good. The only reasonable explanation is 
     that the stigma of bankruptcy is all but dead. How do we 
     know? Other than the last two decades, we only see ``spikes'' 
     in the number of bankruptcy filings during times of 
     recession--which makes sense. During difficult economic 
     times it is always tougher to make ends meet. But the past 
     six years have been a period of unparalleled economic 
     growth--as any Wall Street broker would be happy to tell 
     us. So obviously the growth in the personal bankruptcy 
     market is not a response to the economy.
       Nor can we justifiably point an accusing finger at the 
     credit card industry. The popular myth is that the credit 
     card industry is flooding consumers with credit they can't 
     afford thereby causing a surge in filings. However, those 
     accusations are misdirected. Credit card debt accounts for 
     only 16% of all bankruptcy debt. With some quick calculations 
     you can see that leaves $33.6 billion of some $40 billion in 
     debt still unaccounted for--so it is not likely nor is it 
     fair to blame the credit card industry for the rapid increase 
     in bankruptcy filings.
       The lack of stigma has become a weed infesting the 
     bankruptcy landscape. And the seed that sprouted this 
     condition was Congress, or more correctly our predecessors in 
     Congress. The Bankruptcy Reform Act of 1978 changed the code 
     dramatically, making the system decidedly pro-debtor. The 
     1978 reforms were appropriate for the times. But the times 
     have changed. In the twenty years since, filings have gone 
     from 200,000 to 1.3 million.
       In his 1997 Economic Report, President Clinton also 
     acknowledged that the Bankruptcy Reform Act of 1978 is the 
     primary culprit for the increased filings of the past two 
     decades. The report states that ``recent rises in nonbusiness 
     bankruptcies is probably the result of changes in the 
     bankruptcy law and a number of broader social changes . . . 
     researchers generally attribute much to the increase in 
     bankruptcies since the late 1970s to effects of the 
     Bankruptcy Reform Act of 1978.''
       The weed has spread as bankruptcy became viewed more as a 
     financial planning tool, government debt forgiveness program, 
     and a first choice, rather than a last resort. Bankruptcy has 
     even become fashionable--the Hollywood trend setters do it. 
     People Magazine recently ran a cover story to illustrate the 
     problem. Willie Nelson, Burt Reynolds, Kim Basinger, M.C. 
     Hammer, former Baseball Commissioner Bowie Kuhn, Arizona 
     Governor Fife Symington, former Philadelphia Eagles owner and 
     Pennsylvania trucking magnate Leonard Tose are just a few of 
     the high profile filers lending their help, albeit 
     unconsciously, to make bankruptcy en vogue. Just last week, 
     Grammy Award winning singer Toni Braxton, who has sold more 
     than 15 million records in the past 5 years, declared 
     bankruptcy.
       It is simply too easy to file. I sent my bankruptcy 
     counsel, Dina Ellis, to Bankruptcy court a few weeks back and 
     what she reported to me was mind boggling. Lawyers who have 
     never met their clients looking like limousine drivers at the 
     airport as they try to identify their clients and get them in 
     front of the judge. Scores of cases decided over the course 
     of a few hours, spending an average of 1 to 5 minutes to 
     decide each case. Can you imagine? Spend a couple of hours 
     filling out forms and a couple of minutes before a judge and 
     you can kiss your debts goodbye. You want to put that in 
     perspective? By the time this press conference is finished 20 
     people will have had their debts discharged.
       Of course, any remnants of the bankruptcy stigma are easily 
     erased by our daily dose of media. Bankruptcy lawyers have 
     taken to advertising on TV, radio and in the papers to tout 
     the benefits of stiffing your creditors or how to restore 
     your credit immediately after declaring bankruptcy. The way 
     they make it sound, you would think that you are crazy to 
     responsibly pay your bills or mortgage. It pays to go into 
     debt.
       The crux of the problem is that too many consumers are 
     choosing convenience rather than responsibility for the debts 
     that they have accrued and can afford to pay. This is why you 
     and I should care about stemming the tidal wave of 
     bankruptcies.
       When irresponsible spenders who can afford to pay all or 
     some of their debt declare bankruptcy, you and I get stuck 
     with the bill. It's a $40 billion bill that we share this 
     year, or $400 per household. I don't know about you but $400 
     dollars is 5 weeks' worth of groceries or 20+ fill-ups at the 
     gas pump to me. It has also been estimated that it takes 15 
     responsible borrowers to cover the cost of one bankruptcy of 
     convenience.
       When consumers file for bankruptcy, retailers pass on the 
     costs in the form of higher prices, layoffs and/or buying 
     less from suppliers. Lenders redistribute bankruptcy debt by 
     charging you and me higher interest rates and insurance 
     premiums.
       Now my colleagues and I have a decision to make: plow new 
     ground or let the weeds grow. Mr. Moran, Mr. McCollum, Mr. 
     Boucher and I have decided to plow. The bill we are 
     introducing here today is a conglomeration of ideas, 
     strategies and solutions that, when enacted, will put an end 
     to the abuse, protect the downtrodden and keep you and I from 
     footing the bill for someone else's irresponsibility.
       The genesis of this reform was the Bankruptcy Reform Act of 
     1994 and its major tenet, the formation of the National 
     Bankruptcy Review Commission. The Commission was charged with 
     the duty of studying the bankruptcy code and submitting a 
     report in two years suggesting proposed reforms. Last 
     October, the Commission released its report and 
     recommendations to Congress. To put it lightly, the report 
     was disappointing (even by several Commissioner's own 
     admissions), for it failed to identify the problem of 
     increased consumer bankruptcies or offer adequate solutions. 
     However, in its defense, it did provide a starting point for 
     our debate.
       Our bill is comprehensive--tackling both consumer and 
     business bankruptcy. Let me highlight some of the fine points 
     of our bill:
       Our bill emphasizes responsibility and cuts down on abuse 
     by implementing a needs-based system. Our plan mirrors 
     previous legislation introduced by Congressmen McCollum and 
     Boucher.
       A unique portion of our legislation is what I call the 
     ``Debtor's Bill of Rights,'' which outlines protection for 
     those who legitimately require bankruptcy's safety net and in 
     particular would save them from becoming victims of the 
     ``bankruptcy mills.''
       There is also language included in the bill that provides a 
     pilot program for consumer education to help debtors better 
     manage their finances.
       We have addressed the exemption issue, making it more 
     difficult for those who are dodging their debts to hide their 
     wealth in exempted assets.
       Our bill also permanently extends Chapter 12 bankruptcy to 
     protect family farmers under the Code.
       What you see before you is a tremendous accomplishment--
     reestablishing the link between bankruptcy and the ability to 
     pay one's debts. Yet it still preserves the foundation of 
     bankruptcy--providing the safety net that supports those who 
     suffer a major life crisis.
       My home state of Pennsylvania passed one of the first 
     bankruptcy laws in our nation's history. The Pennsylvania 
     Bankruptcy Act of 1785, called for consumers convicted of 
     bankruptcy to be nailed to the pillory by the ear and then 
     publicly flogged. After the flogging the ear would be cut 
     off. By no means do we wish to return to those days.
       To paraphrase my former colleague and former Treasury 
     Secretary Lloyd Bentsen: while there is nothing wrong in 
     legitimately

[[Page E89]]

     admitting financial defeat by filing bankruptcy when it 
     becomes impossible to repay one's debts, we must make an 
     effort to restore the justifiable sense of embarrassment 
     Americans once felt asking their neighbors to shoulder their 
     burden.
       Another concern is that the current system--which breeds 
     financial irresponsiblity--is not the cure-all imagined by 
     those who live beyond their means. By allowing people to 
     escape from their financial obligations, we are doing those 
     individuals a disservice by not encouraging them to manage 
     their finances and control their debt. The end result is a 
     citizenry caught in a never-ending cycle of debt. With 
     bankruptcy filings expected to reach historic levels this 
     year, I have grave concerns for the stability--economic and 
     emotional--of the American family.
       The time is now, while our economy is robust, to reform. 
     Waiting until the dawn of the next recession or economic 
     downturn will only allow this outbreak of bankruptcy to run 
     into an uncontrollable epidemic. Historically, bankruptcy was 
     intended as a last resort pursued only under the most dire of 
     situations. We are committed to ensuring that the code will 
     help those in dire circumstances get back onto their feet 
     while protecting responsible consumers who are unfairly 
     bearing the cost.

     

                          ____________________