[Congressional Record Volume 144, Number 79 (Wednesday, June 17, 1998)]
[Extensions of Remarks]
[Pages E1153-E1154]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                           BANKRUPTCY REFORM

                                 ______
                                 

                          HON. LEE H. HAMILTON

                               of indiana

                    in the house of representatives

                        Wednesday, June 17, 1998

  Mr. HAMILTON. Mr. Speaker, I insert my Washington Report for 
Wednesday, June 17, 1998 into the Congressional Record.

                           Bankruptcy Reform

       Last week the House approved a major overhaul of the 
     nation's bankruptcy code. The reform measure, which now goes 
     to the Senate for further consideration, would generally make 
     it more difficult for consumers with average or above average 
     incomes to avoid repayment of credit card and other unsecured 
     debts by filing for bankruptcy protection.
       The bill comes in response to the record number of consumer 
     bankruptcy filings in this country. While bankruptcy filings 
     by businesses have remained relatively stable over the past 
     decade, filings by consumers have almost tripled in the last 
     ten years, rising from 473,000 in 1986 to more than 1.4 
     million in 1997. And they are projected to increase further 
     even though the economy is strong and unemployment is at 
     record lows.
       The concern is that the current system is tilted too 
     heavily towards consumers and is easily abused. There have 
     been numerous stories over the years of millionaires and 
     others who exploit bankruptcy provisions to evade their 
     financial obligations. Reformers argue that consumers who 
     rack up large debts should, to the greatest extent possible, 
     be required to pay off some or all of their debts.


                               Background

       Bankruptcy laws, which date back to biblical times, have 
     historically favored creditors and discouraged insolvency. 
     American law, however, takes a more lenient approach toward 
     the bankrupt debtor, reflecting this country's emphasis on 
     giving people a second chance. Our law generally allows an 
     individual or business to discharge most or all of his or her 
     debts and get back on sound footing. Congress established the 
     first comprehensive bankruptcy system in 1898, and has 
     rewritten and revised the code on numerous occasions over the 
     years.
       The average consumer has two basic options when filing for 
     bankruptcy. Most consumers opt to file under Chapter 7, a 
     liquidation procedure under which the individual is excused 
     from paying most debts by allowing a trustee to sell assets 
     that are worth more than legal exemption limits for homes, 
     cars, and other property. Close to one-third of bankrupt 
     debtors, in contrast, choose to hold on to their assets by 
     filing under Chapter 13, under which they are put on a three-
     to-five year plan to repay debts in part or in whole. The 
     downside to filing for bankruptcy is that a debtor can be 
     labeled a credit risk and have difficulty obtaining credit 
     for years.
       There are numerous explanations for why the number of 
     bankruptcies continues to grow, such as legalized gambling, 
     reduced health insurance coverage, and divorce, but most 
     experts agree that the major reason is that more Americans 
     than ever before have access to credit. There has been a 
     revolution in the last 20 years in the way American families 
     borrow and use credit and in the way American businesses 
     finance their growth. The result, over time, has been 
     sustained economic expansion and, for families, unprecedented 
     access to credit to purchase consumer goods and services. 
     Today, four of every five families have at least one credit 
     card, and non-mortgage consumer debt from all sources stands 
     at $1.7 trillion. The downside to this trend is that, for 
     some consumers, easy credit can mean mounting debts and 
     greater risk of bankruptcy.


                               House bill

       The House bill significantly reforms the bankruptcy system 
     by generally barring individuals with average or higher 
     incomes from avoiding their debts under Chapter 7. The 
     measure would establish a strict means test to determine who 
     is eligible for Chapter 7 protection, sending those who do 
     not qualify home or to Chapter 13. Specifically, the bill 
     allows only those with earnings equal to or less than the 
     national median income ($51,405 for a family of four) to file 
     Chapter 7 bankruptcy.
       The bill makes other significant reforms in bankruptcy law. 
     First, it would give higher priority to repayment of credit 
     cards (although child support would take priority over credit 
     card and other types of unsecured debt). Second, it would 
     require tax returns and paycheck stubs to be included in 
     bankruptcy petitions, and allows creditors to challenge the 
     validity of an individual's bankruptcy claim. Third, the bill 
     establishes an educational program to make sure consumers 
     receive information about alternatives to bankruptcy before 
     filing. Fourth, it tries to discourage debtors from repeat 
     filings for bankruptcy protection.


                              Pro and con

       Those who support bankruptcy reform say it is necessary to 
     make consumers personally responsible for the debt, 
     particularly credit card debt, they carry. Reform advocates 
     contend that the current system is too lax, giving consumers, 
     many of whom have the means to pay down their debts, the 
     ability to avoid repayment--to the tune of $40 billion per 
     year. The current system, it is argued, undermines the 
     nation's credit system and increases the cost of borrowing 
     for every American household.
       Opponents of current reform proposals respond that credit 
     card companies, not consumers, are mainly responsible for the 
     bankruptcy crisis. They see the bill as unfair to ordinary 
     households, unduly elevating the rights of creditors. 
     Lenders, in a bid to get more consumer business, are mailing 
     more and more credit card solicitations--close to 3 billion 
     solicitations last year--and targeting lower-income 
     Americans, who present a considerable credit risk. Recent 
     reports suggest that the majority of individuals seeking debt 
     relief are low to moderate income, so forcing those 
     individuals into Chapter 13 bankruptcy may make it harder for 
     them to pay off their debts and get on their feet again.


                               Conclusion

       I supported passage of the bankruptcy reform bill in the 
     House, albeit with some reservations. I recognize that those 
     persons who file for bankruptcy are not all deadbeats, and 
     that many file after suffering a major setback, such as job 
     loss or massive medical bills. I, nonetheless, believe that 
     the current system can be too easily abused. We must restore 
     personal responsibility to our bankruptcy laws, so that those 
     who can afford to repay some of their debts be required to do 
     so.
       The House bill strikes a reasonable balance. It has no 
     effect on lower income families, while making bankruptcy less 
     attractive to others. Wealthier individuals should not use 
     bankruptcy protection as a way to shield their assets. At the 
     same time I believe that credit card companies bear some 
     responsibility for dramatic rise in bankruptcy rates by 
     extending credit too easily. They should not receive a 
     windfall from proposed reforms, and should not, for example, 
     get priority over child support payments.


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