[Congressional Record (Bound Edition), Volume 152 (2006), Part 16]
[Senate]
[Pages 21527-21528]
[From the U.S. Government Publishing Office, www.gpo.gov]




                           BANKRUPTCY REFORM

  Mr. GRASSLEY. Mr. President, I rise today to discuss the impact of 
Public Law 109-8, the bankruptcy reform legislation of which I was the 
lead sponsor here in the U.S. Senate. On October 17, 2006, we will see 
the one-year anniversary of the new law. This law was the result of 
many years of comprehensive study and intense debate in Congress. There 
was much give and take among all interested parties over several 
Congresses, and the final bill that was signed into law was the result 
of compromise, upon compromise, upon compromise. In fact, people tend 
to forget that this law passed both the House and Senate by wide 
bipartisan margins. It is a law that was sorely needed. It is a law 
whose central premise--if an individual wants to file for bankruptcy 
and can repay some of his debt, he should do just that, repay some of 
that debt--is supported by almost everyone. The law's central premise 
is about fairness. It is about good old common sense.
  The bankruptcy reform legislation was driven by a desire to restore 
balance to a system that had become too easy: a system where clever 
lawyers gamed the integrity of the bankruptcy system for the benefit of 
those who wanted to get out of their debts scott-free and to the 
detriment of those who played by the rules. In fact, bankruptcy rates 
in the 1990s and early 2000 timeframe exceeded bankruptcy rates during 
the Great Depression, despite the fact that the economy was going 
strong during much of this time. So with this law we closed some 
loopholes, made upper-income Americans repay more of their debts if 
they were going to seek bankruptcy, and enacted important consumer 
protection provisions so people could be more knowledgeable about their 
finances. The law retained bankruptcy for those who truly are in need 
of that relief, while injecting more integrity and fairness in the 
bankruptcy system.
  So how has the new bankruptcy law worked? So far, I think it is too 
soon to make firm judgments. But early reports indicate the new law has 
been working very well. We have seen bankruptcy rates fall dramatically 
from about 2 million bankruptcies in 2005 to the point where I doubt 
there will be over 1 million bankruptcies in 2006, if current trends 
continue. In my mind, this is bound to help the American economy. Fewer 
bankruptcy filings lead me to believe that only those individuals who 
truly are in need of a fresh start are filing for relief. Furthermore, 
a natural outgrowth of fewer bankruptcy filings is a much lower cost to 
the American consumer and the U.S. economy.
  As my colleagues may recall, the Clinton administration's Treasury 
Secretary, Larry Summers, told Congress that high levels of 
bankruptcies tend to push up interest rates. I have called that the 
``bankruptcy drag'' on the economy. It is just common sense. When a 
business loses money because a customer files for bankruptcy instead of 
paying his bill, that business has a couple of options: Either the 
business can absorb the loss and spend less on growth and expansion or 
the business can increase what it charges other customers to offset the 
loss, imposing what many of us in Congress called a bankruptcy tax. It 
follows that businesses can weather the storm when the occasions where 
customers don't pay their bills are relatively rare, but when you have 
a scenario where filing bankruptcy is easy and customers are filing 
bankruptcy on a regular basis--whether they really need it or not, no 
questions asked--and they aren't paying their bills, well, then 
businesses get into trouble. Unfortunately, businesses that don't get 
paid aren't the only ones impacted by this.
  The reality is, either way, u1timately it is the consumers and the 
economy that suffer the most when bankruptcies spiral out of control. 
People who play by the rules and pay their way are the ones who end up 
picking up the tab. I would rather see the ``bankruptcy drag'' reduced, 
freeing up businesses to grow, add jobs, and contribute to the Nation's 
economy and the people's prosperity. I would rather see the $400 
``bankruptcy tax'' burdening American families each year reduced so 
they can spend their money in a more productive way. And based merely 
on the bankruptcy filing numbers available

[[Page 21528]]

from the Federal courts, I think that it is fair to say that Public Law 
109-8 has been a success for our economy. Public Law 109-8 has driven a 
stake through the heart of this bankruptcy drag.
  I have struggled with how to put a dollar figure on how much 
bankruptcy reform has saved the economy since it became the law of the 
land. During Congressional debate, we received testimony that the 
average amount discharged in bankruptcy is $41,000 per filing. If one 
does some simple math, taking the total number of consumer bankruptcies 
filed in the first half of this year and doubling that number, it seems 
we could see about 550,000 consumer bankruptcies in 2006--perhaps a 
little more, perhaps a little less.
  As I said, the Federal courts reported that we had just over 2 
million consumer bankruptcies filed in 2005. So using the $41,000 
figure, bankruptcy losses cost our economy $82 billion in 2005. On the 
other hand, it looks as if, because of the new law, bankruptcy losses 
for 2006 will only be about $22.5 billion. Let me repeat: $82 billion 
in 2005 and $22.5 billion in 2006 after the law was put in effect.
  We are not talking peanuts. That is a substantial savings for our 
economy. That is around $60 billion that would have been lost, that 
would have put a drag on our economy. And I am confidant that at least 
some of that money has been or will be redirected to economic growth. 
If this isn't success, I don't know what is.
  It is also important to remember the unprecedented new consumer 
protections included in the new bankruptcy law. Let me mention some of 
them. Retirement savings receive more protections from the reach of 
creditors. Likewise, education savings also receive enhanced 
protections under the new law. And lenders who won't compromise with 
financially-troubled borrowers can be penalized for not negotiating 
out-of-court settlements.
  People considering filing for bankruptcy now have access to no-cost 
or low-cost credit counseling and financial education. We want people 
who make bad financial choices to learn how to deal with their finances 
and quit the spending cycle. After all, better educated consumers are a 
benefit to everyone. The law even encourages education of young people 
on how to manage their money. And credit card companies are required by 
the new law to warn consumers about the dangers of making only minimum 
payments and to clearly identify payment amounts.
  Moreover, bankruptcy mills that deceived people into filing for 
bankruptcy when they had other options available are now subject to new 
regulation. People should be aware that bankruptcy is not the only way 
out in times of financial trouble. Even a Federal Trade Commission 
Alert warned against bankruptcy mills and advised the American consumer 
that filing for bankruptcy adversely affects an individual's credit 
rating. Bankruptcy should be a last resort, rather than the first stop 
in regaining one's financial bearings.
  So, all in all, Public Law 109-8 contains some of the most sweeping 
consumer protections enacted by Congress in a long time.
  Of course, as I said earlier, it is too early to gauge the full 
impact of Public Law 109-8. Bankruptcy attorneys so frightened 
consumers by exaggerating the impact of bankruptcy reform that many 
consumers rushed to file prior to enactment of the law. And after the 
law was enacted, many consumers who truly need bankruptcy were scared 
away.
  Some of the consumer protections contained in the law--such as 
minimum-payment warnings for credit cards and the like--have not yet 
been implemented by the Federal Reserve.
  Also, the debtor attorneys who want to operate bankruptcy mills are 
seeking to get out from under the new regulations by claiming in court 
to have a constitutional right to advise consumers to run up debt on 
the eve of bankruptcy and not comply with the new law. I am pleased 
that the Justice Department is aggressively resisting this effort. 
These lawyers just want a license to go back to their old ways of 
making a quick buck by shuffling unsuspecting consumers into bankruptcy 
without advising them of the downsides of bankruptcy or their 
alternatives. These lawyers also are dragging down our economy. 
Bankruptcy should be reserved for those persons who have no other 
options, not for people who use clever legal advice to make big 
purchases on the eve of bankruptcy with no intention of ever repaying 
the debt because they can wipe away their debts clean, no questions 
asked.
  So I will keep a watchful eye on developments in the future. But for 
now, almost one year later, bankruptcy reform seems to have been a 
success.

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