[Congressional Record Volume 144, Number 18 (Monday, March 2, 1998)]
[Senate]
[Pages S1208-S1210]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                         ADDITIONAL STATEMENTS

                                 ______
                                 

                           BANKRUPTCY REFORM

 Mr. KYL. Mr. President, I want to speak for a few moments 
today on the

[[Page S1209]]

subject of bankruptcy reform. It is an issue that we will be dealing 
with shortly in the Judiciary Committee. The House of Representatives 
could vote on a reform bill as early as next month.
  Mr. President, bankruptcy filings have been skyrocketing. We have 
seen a nearly 60 percent increase in personal filings around the 
country during the last two years, resulting in a discharge of about 
$40 billion in debt. In Arizona alone, Chapter 7 filings have increased 
a staggering 81 percent during the same period.
  The number of bankruptcy cases filed in my home state last year 
exceeded the previous record that was set back in 1990, when our real 
estate market was in serious trouble. What is particularly alarming 
about the number of filings today is that they are occurring in 
relatively good economic times.
  Now let me say at the outset that there are obviously some people who 
legitimately need the relief that Chapter 7 was set up to provide. A 
serious illness or death in the family may have wreaked havoc on the 
family finances. Maybe there has been a fire or flood that has wiped 
out the family business or home. In cases like that, where there is 
extraordinary hardship, there ought to be an opportunity to seek relief 
and a fresh start. No one disputes that. And I suspect that most 
creditors are willing to work with someone when such tragedy strikes.
  The problem is, too many people appear to be abusing the system of 
late. A recent study conducted in Phoenix found that a significant 
number of people who file for relief under Chapter 7 actually have the 
ability to pay back some, or even all, of what they owe. Let me say 
that again: they actually have the ability to repay some or all of 
their debts.
  A study by Michael Staten of the Georgetown School of Business 
suggests that as many as 25 percent of Chapter 7 filers could pay at 
least 30 percent or more of their non-housing debt. But filing under 
Chapter 7 allows them to escape all of such debt, regardless of their 
ability to repay.
  Now I know defenders of the status quo prefer to put the blame on 
creditors, suggesting that they extend credit far too easily, even to 
individuals who may have difficulty repaying their debt. But let us 
keep a few points in mind. First, the vast majority of people--an 
estimated 96 percent--pay their bills on time. So creditors must be 
doing something right. I am sure that if there were a way for creditors 
to weed out more of the riskiest accounts, they would do so.
  Second, no one is forced to open a credit account, take a loan, or 
buy something on credit. In fact, millions of hard-working Americans 
make due without many of the things they would like to have because 
they cannot afford them--even on credit. Many others delay a purchase 
until they are better situated to repay.
  Third, and perhaps this is the most important point I would make: The 
people who need credit most are not the wealthiest Americans, but those 
with moderate or low incomes. If creditors tighten up credit too much, 
it will be the people closer to the margins--those who need it most--
whose access to credit will be impeded.
  In my view, the issue really boils down to this: personal 
responsibility. If someone freely accepts the terms of a credit 
account, he or she ought to abide by those terms when it comes time to 
meet the obligations and pay back what is owed. If extraordinary 
circumstances strike, debtors ought to work in good faith with their 
creditors to establish a reasonable repayment plan, assuming they have 
the means to do so.
  The irresponsible thing is for people to take something on credit 
that they have no intention of paying for. And our laws should not 
sanction that sort of behavior.
  Mr. President, let me turn for a moment to a few different cases that 
illustrate the point I am making here. These are cases that were 
profiled in recent news reports.
  First, there was the case of a New York couple with three children. 
The husband was on disability. They could easily have qualified for a 
Chapter 7 discharge of their debt, but they did not want to walk away 
from their obligations. They chose to repay what they could under a 
Chapter 13 payment plan, and they are now paying $375 of their $2,125 
monthly income to satisfy part of their debt.
  An Arizona teacher ended up with $45,000 worth of credit-card debt, 
but she was determined to find a way to avoid bankruptcy altogether. 
She put it this way: ``When I signed my name, that was my promise.'' 
She found a consumer-credit counseling service to help her through 
tough times, and she is now on her way to paying back her debt and 
restoring her credit.
  Compare the New York couple and the Arizona teacher to debtors who 
reportedly used credit to buy several thousand dollars worth of 
computer equipment, furniture, and an entertainment center. Shortly 
after buying the goods, they sold them, pocketed the proceeds, and 
without applying anything toward their bills, filed for Chapter 7 to 
erase their debts.

  In another case, a couple allegedly ran up more than $2,000 on a 
charge card at the very time they were involved in foreclosure 
proceedings on their home. They apparently knew they could not avoid 
the foreclosure or pay off the credit-card charges they were incurring. 
Yet they went ahead and ran up their charge cards with the expectation 
that they could escape the obligation to repay their debt under Chapter 
7.
  Mr. President, in the first two instances, we had individuals who 
stepped up to the plate and tried to make good on their obligations. In 
the latter two cases, we have individuals who seem to be abusing the 
system, running up debt they had no intention of repaying. And the way 
the law works now, it is the abusers who benefit most. And that abuse 
costs those who responsibly pay their bills as much as $400 per 
household a year.
  What is fair about allowing people who have the ability to pay back 
some of their debt to walk away free and clear, while the vast majority 
of people pay their bills on time? What is fair about letting some 
people avoid their obligations for no good reason, while others who 
experience credit problems make some effort to repay? I want to 
emphasize that we need to find a way to deal with people who have the 
ability to repay their debt, not those who are in such dire straights 
that their lives are totally upended.
  Probably the best thing we could do would be to establish a simple, 
up-front means test to direct bankruptcy filers to the chapter of the 
Bankruptcy Code that best meets their needs. I am talking about setting 
up an objective, administrative test to separate those who are in 
severe financial straits and truly need complete relief under Chapter 7 
from those who are able to repay some or all of their debts.
  Here is how this front-end approach would work. People who have 
annual incomes of less than 75 percent of the national median family 
income could choose between a Chapter 7 discharge and a Chapter 13 
repayment plan, just as they could now. It would be their choice. In 
other words, there would be no change at all for people with modest 
incomes.
  But for people who have higher incomes, a second test would be 
applied: could they repay all of their secured and priority debts and 
at least 20 percent of their unsecured debts over five years? If so, 
they would have to establish a repayment plan. If not, they could still 
get protection under Chapter 7. It is as simple and straightforward as 
that.
  We should also create an incentive for people who have a pretty good 
idea that they are running into financial trouble to avoid running up 
additional debts they will not be able to repay. We could do that by 
making sure that debts run up on the eve of bankruptcy filings--within 
90 days of the filing--are non-dischargeable.
  A longer period of time for higher income debtors to pay off their 
debts is also worth considering, as is a stop to the so-called ``cram 
downs'' of goods to values below which any other American would have to 
pay.
  Mr. President, if someone has the ability to repay, he or she should 
have to do so. Bankruptcy protection ought to be reserved for those who 
truly need it. I intend to work in the Judiciary Committee with 
Senators Hatch and Grassley to craft common sense bankruptcy-reform 
legislation that addresses these and other concerns. I hope my

[[Page S1210]]

colleagues will join this effort to ensure that a reform bill can be 
enacted this year.

                          ____________________