[Congressional Record Volume 145, Number 128 (Tuesday, September 28, 1999)]
[Senate]
[Pages S11561-S11562]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                       TIME FOR BANKRUPTCY REFORM

  Mr. KYL. Mr. President, the House of Representatives overwhelmingly 
approved a bipartisan bankruptcy-reform bill on May 5 by a vote of 313 
to 108. The Senate Judiciary Committee reported a similar initiative in 
April by a vote of 14 to 4, and my hope is that the full Senate will 
follow suit before the year is out.
  Mr. President, most Americans carefully manage their finances, pay 
their bills, and never face the prospect of bankruptcy, yet we rarely 
hear about them when bankruptcy reform is debated. These are the people 
who ultimately bear the cost when others seek bankruptcy protection. 
They pay in terms of higher interest rates and higher prices on goods 
and services. This bankruptcy tax costs the average household more than 
$400 a year.
  There will always be a limited number of people who unexpectedly 
experience some catastrophe in their lives--maybe a death or divorce, 
or a serious illness--that throws their finances into chaos. That is 
why we accept as a given that society will bear some of the cost of 
bankruptcy, and why we maintain access to bankruptcy relief for those 
who truly need it. No one suggests closing off bankruptcy as an option 
for those who are in truly dire straits.
  A line does need to be drawn, however, when people, particularly 
those with above-average incomes who have the means and ability to 
repay their debts, nevertheless seek to have those debts erased in 
bankruptcy. This is happening more and more often, and unless we get 
the problem in check, it is going to wreak havoc.
  Mr. President, there is nothing fair about forcing a single mother, 
who is already struggling to pay her own family's bills, to pay more 
merely because someone who can repay his or her debts prefers to escape 
them in bankruptcy. There is nothing fair about forcing young families 
or seniors on fixed incomes to pay more so that someone can walk away 
from his or her debts as a matter of convenience or financial planning.
  Few bills so clearly protect the interests of consumers, yet the 
bankruptcy-reform bill does have its critics. Much of the criticism, I 
think, misses the mark. Two professors of law, Todd Zywicki and James 
White, wrote to the Judiciary Committee recently about some of the 
claims that have been made, and what they had to say is worthy of the 
consideration of every member of this body.
  I ask Senators to join me in supporting the bipartisan bankruptcy-
reform bill, and I ask unanimous consent that the professors' letter be 
printed in the Record.
  There being no objection, the letter was ordered to be printed in the 
Record, as follows:

                                           George Mason University


                                                School of Law,

                                Arlington, VA, September 15, 1999.
     Hon. Orrin Hatch,
     Chairman, Committee on the Judiciary, U.S. Senate, 
         Washington, DC
     Hon. Patrick Leahy,
     Ranking Member, Committee on the Judiciary, U.S. Senate, 
         Washington, DC
     Re: The Bankruptcy Reform Act of 1999 (S. 625)
       Dear Senators Hatch and Leahy: We are writing to express 
     our support for the consumer bankruptcy provisions of bill S. 
     625,

[[Page S11562]]

     the Bankruptcy Reform Act of 1999 (the ``Bill''). S. 625 
     provides for balanced bipartisan bankruptcy reform that 
     preserves the integrity of the bankruptcy system for those 
     who need it, but reduces abuse by those who do not. In 
     expressing our support for bankruptcy reform, we share the 
     view of 217 Republican Representatives and 96 Democratic 
     Representatives who passed a similar bill earlier this year 
     by an overwhelming 313-108 veto-proof majority.
       In an era of unprecedented economic prosperity, growth, and 
     low unemployment, 1.4 million Americans filed bankruptcy last 
     year, costing creditors approximately $40 billion. Smaller 
     creditors suffer the most from a runaway bankruptcy system, 
     as they tend to have the narrowest margins and the least 
     ability to spread those losses among their customers. Support 
     for the Bill comes from creditors across the full spectrum of 
     creditors, but small creditors, such as small retailers and 
     credit unions, are among the strongest supporters of 
     bankruptcy reform.
       Like all other business expenses, when creditors are unable 
     to collect debts because of bankruptcy, some of those losses 
     are passed on to responsible Americans who live up to their 
     financial obligations. Every phone bill, electric bill, 
     mortgage, furniture purchase, medical bill, and car loan 
     contains an implicit bankruptcy ``tax'' that the rest of us 
     pay to subsidize those who do not pay their bills. We all pay 
     for bankruptcy abuse in higher down payments, higher interest 
     rates, and higher costs for goods and services. It is 
     estimated that by making high-income debtors repay what they 
     can, the Bill will save $3 billion a year, some of which will 
     be passed on to financially-responsible Americans.
       The Bill will also reinforce the lesson that bankruptcy is 
     a moral as well as an economic decision. Filing bankruptcy 
     reflects a decision to break a promise made to reciprocate a 
     benefit bestowed upon you. The moral element of bankruptcy is 
     reflected in the observation that the English word ``credit'' 
     comes from the Latin word for ``trust.'' Parents seek to 
     teach their children values of personal and financial 
     responsibility, and promise-keeping and reciprocity provide 
     the foundation of a free economy and healthy civil society. 
     Regrettably, the personal shame and social stigma that once 
     restrained opportunistic bankruptcy filings has declined 
     substantially in recent years. We have ``defined bankruptcy 
     deviancy downward'' such that it has become a convenient 
     financial planning tool, rather than a decision freighted 
     with moral and social significance. Requiring those who can 
     to repay some of their debts as a condition for bankruptcy 
     relief sends an important signal that bankruptcy is a serious 
     act that has moral as well as economic consequences. 
     Moreover, reducing the number of strategic bankruptcies will 
     reduce the bankruptcy tax paid by every American family on 
     goods and services, giving them more money for groceries, 
     vacations, and educational expenses.
       It has been claimed by some that the Bill would negatively 
     impact the ability of divorced spouses to collect spousal and 
     child support. This claim is based on vague, speculative, and 
     inaccurate accusations about how the nondischargeability of 
     certain debts will impact post-petition efforts to collect 
     these obligations. In contrast to these speculative 
     accusations, the Bill offers concrete assistance to non-
     intact families in several ways. Among its numerous 
     provisions protecting the rights of former spouses and 
     children are the following protections: (1) Extends the scope 
     of nondischargeability of spousal support obligations to make 
     nondischargeable certain property settlement, (2) excepts 
     state child support collection authorities from the reach of 
     the automatic stay, (3) elevates the priority level of child 
     support to first priority, (4) makes exempt property 
     available for the enforcement of domestic and child support 
     obligations. These speculative claims about the negative 
     effects of the bill appear to be simply a concerted effort by 
     the Bill's opponents to distract attention from the real 
     reforms and protections included in the bill.
       Moreover, the Bill's provisions on credit card 
     nondischargeability merely rationalizes some exceptions to 
     discharge and closes loopholes in the current law relating to 
     the misuse of credit cards. Given this modest aim of simply 
     closing loopholes in the already-existing exception to 
     discharge for credit card fraud, it is difficult to see how 
     this reform could have more than a trivial effect on 
     collection of spousal support payments. Nor have the Bill's 
     opponents supplied any details about the size of this 
     purported effect. Assuming the effect is non-trivial, it is 
     also not unique to make certain debts nondischargeable on the 
     basis of public policy. Current law already makes a multiple 
     of exceptions to discharge, including such things as tax 
     obligations, fraudulently incurred debts, student loans, and 
     victims of drunk drivers. As a result, the bill would no more 
     ``pit'' postpetition child support obligations against credit 
     card issuers than current law ``pits'' child support 
     obligations against the victims of drunk drivers, the victims 
     of fraud, student loan obligations, or taxes obligations. 
     Indeed, the burden on a debtor from nondischargeable credit 
     card debts will be substantially smaller than the financial 
     burden on debtor from the inability to discharge fraud 
     liabilities, tax liabilities, student loan debts, and drunk-
     driving judgments. That opponents of the Bill have instead 
     singled-out credit card issuers for criticism says more about 
     their desire to demonize the credit card industry and less 
     about their commitment to protecting women and children or to 
     real bankruptcy reform.
       The Bill establishes a much-needed system of means-testing 
     to force high-income debtors who can repay a substantial 
     portion of their debts without significant hardship to do so. 
     Under current law, there are few checks on high-income 
     debtors seeking to walk away from their debts and few 
     safeguards to prevent bankruptcy fraud. Current law requires 
     a case-by-case investigation that turns on little more than 
     the personal predilections of the judge. This chaotic system 
     mocks the rule of law, and has resulted in unfairness and 
     inequality for debtors and creditors alike. The arbitrary 
     nature of the process has also undermined public confidence 
     in the fairness and efficiency of the consumer bankruptcy 
     system.
       The Bill narrows the judge's discretion by establishing a 
     presumption of abuse where a high-income debtor has the 
     ability to repay a substantial portion of his debts, as 
     measured by an objective standard. At the same time, the 
     judge will retain discretion to override this presumption in 
     cases of hardship. Means-testing is not a panacea for all of 
     the ills of the bankruptcy system. But by focusing judicial 
     discretion on the existence of real hardship and reducing 
     procedural hurdles to challenging abuse, the Bill's reforms 
     will vindicate the rule of law and reduce abuse.
       The Bill also targets a whole range of other abuses of the 
     bankruptcy system, including such things as the use of 
     ``fractional interests'' to prevent legitimate foreclosures 
     and abuse of the cramdown provisions of the Code by filing 
     bankruptcy simply to strip down the value of a secured 
     creditor's claim. The Bill also eliminated abuse of unlimited 
     homestead exemptions, a reform advocated by even the Bill's 
     critics. Contrary to the selective outrage of its critics, 
     however, the Bill does not limit itself to reducing abuse of 
     the homestead exemption but takes a comprehensive approach to 
     rooting out all forms of bankruptcy abuse.
       In contrast to the broad-based support for the Bill, 
     opposition primarily has come from one isolated corner--
     lawyers. Certainly the opposition of some lawyers is based on 
     sincere, albeit mistaken, beliefs about the content and 
     impact of the legislation. But it is ironic that bankruptcy 
     lawyers have been quick to question the motives of creditors 
     in seeking reform, while remaining slow to acknowledge their 
     own stake in opposing reform. James Shepard, a member of the 
     National Bankruptcy Review Commission, estimates that 
     bankruptcy is now a $5 billion a year industry for lawyers 
     and others. By reducing filings among high-income filers and 
     reducing the cost of bankruptcy cases by making them more 
     predictable and less expensive, means-testing will reduce 
     both the volume and expense of bankruptcy cases. The Bill 
     also will reduce bankruptcy filings by requiring bankruptcy 
     lawyers to inform their clients of availability of non-
     bankruptcy alternatives, such as credit counseling, and by 
     cracking down on bankruptcy ``mills'' that mass-produce 
     bankruptcy petitions with little regard to the welfare of 
     their clients. Put simply, more bankruptcies means more money 
     for bankruptcy lawyers, and fewer bankruptcies means less 
     money for bankruptcy lawyers. Also to the dismay of 
     bankruptcy lawyers, the Bill elevates child support 
     obligations to the first administrative priority--a position 
     currently occupied by attorneys' fees obligations. Efforts in 
     the bankruptcy bar to downplay the importance of this 
     protection for divorced mothers appear to be little more than 
     a cynical effort to hid the self-interest of bankruptcy 
     lawyers behind the skirts of divorced mothers.
       Balanced bankruptcy reform preserves the protection of the 
     bankruptcy system for those who need it, while limiting abuse 
     by those who are preying on that generosity simply to evade 
     their financial responsibilities. This Bill brings balance to 
     a consumer bankruptcy system that has become a tool for rich 
     and savvy debtors to evade their financial responsibilities. 
     America has one of the most charitable and forgiving 
     bankruptcy systems in the world and many of those who file 
     bankruptcy truly need it as a consequence of personal 
     trouble. But too many people today are preying on our charity 
     and using the bankruptcy system not because they need it, but 
     simply to evade their responsibilities or to maintain an 
     unrealistic and extravagant lifestyle at the expense of those 
     who live responsibly. Ignoring rampant abuse undermines 
     public support for the bankruptcy system generally, which 
     will eventually hurt those who legitimately need bankruptcy 
     relief. Now is the time to fix the bankruptcy system before 
     more drastic reforms are needed later.
           Respectfully yours,
     Todd J. Zywicki,
       Assistant Professor of Law, George Mason University School 
     of Law.
     James J. White,
       Robert A. Sullivan, Professor of Law, University of 
     Michigan Law School.

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