U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

34–119 PDF 2007

S. HRG. 109–878

OVERSIGHT OF THE IMPLEMENTATION OF THE

BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT

HEARING

BEFORE THE

SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT 

AND THE COURTS

OF THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

DECEMBER 6, 2006

Serial No. J–109–123

Printed for the use of the Committee on the Judiciary

(

(II)

COMMITTEE ON THE JUDICIARY 

ARLEN SPECTER, Pennsylvania, Chairman 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

MIKE DEWINE, Ohio 

JEFF SESSIONS, Alabama 

LINDSEY O. GRAHAM, South Carolina 

JOHN CORNYN, Texas 

SAM BROWNBACK, Kansas 

TOM COBURN, Oklahoma 

PATRICK J. LEAHY, Vermont 

EDWARD M. KENNEDY, Massachusetts 

JOSEPH R. BIDEN, JR., Delaware 

HERBERT KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

MICHAEL O’NEILL, Chief Counsel and Staff Director 

BRUCE A. COHEN, Democratic Chief Counsel and Staff Director 

SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT AND THE COURTS

JEFF SESSIONS, Alabama, Chairman 

ARLEN SPECTER, Pennsylvania 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

CHARLES E. SCHUMER, New York 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

WILLIAM SMITH, Majority Chief Counsel 

PREET BHARARA, Democratic Chief Counsel 

(III)

C O N T E N T S

STATEMENTS OF COMMITTEE MEMBERS

Page

Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa ..................... 6

prepared statement .......................................................................................... 125

Schumer, Hon. Charles E., a U.S. Senator from the State of New York ............ 4

Sessions, Hon. Jeff, a U.S. Senator from the State of Alabama .......................... 1

WITNESSES 

Bartlett, Steve, President and Chief Executive Officer, Financial Services 

Roundtable, Washington, D.C. ............................................................................ 23

Hildebrand, Henry E., III, Chapter 13 Standing Trustee, Middle District 

of Tennessee, Nashville, Tennessee .................................................................... 29

Jones, David C., President, Association of Independent Consumer Credit 

Counseling Agencies, Poinciana, Florida ........................................................... 24

Lawless, Robert, Professor, University of Illinois College of Law, Champaign, 

Illinois ................................................................................................................... 27

Newsome, Randall J., Chief Judge, U.S. Bankruptcy Court for the Northern 

District of California, Oakland, California ......................................................... 26

White, Clifford J., III, Director, Executive Office for United States Trestees, 

Department of Justice, Washington, D.C. .......................................................... 9

Zywicki, Todd J., Professor, George Mason University School of Law, Arlington, Virginia .......................................................................................................... 21

SUBMISSIONS FOR THE RECORD 

Administrative Office of the United States Courts, James C. Duff, Director, 

Washington, D.C., report and attachment ......................................................... 40

American Banker, Steven Sloan, New York, New York, Oct. 17, 2006, article .. 58

American Bankruptcy Institute, Alexandria, Virginia, letter and attachments 61

American Bar Association, Robert D. Evans, Governmental Affairs Office, 

Washington, D.C., letter and attachments ........................................................ 75

American City Business Journals, Kent Hoover, Charlotte, North Carolina, 

Oct. 23, 2006, article ............................................................................................ 85

Bankers and financial services organizations, joint letter ................................... 87

Bartlett, Steve, President and Chief Executive Officer, Financial Services 

Roundtable, Washington, D.C., prepared statement ......................................... 89

Commercial Law League of America, Jerry T. Myers, President, Chicago, 

Illinois, position paper ......................................................................................... 106

Credit Union National Association, Madison, Wisconsin, letter .......................... 121

Hildebrand, Henry E., III, Chapter 13 Standing Trustee, Middle District 

of Tennessee, Nashville, Tennessee, prepared statement ................................. 128

Jones, David C., President, Association of Independent Consumer Credit 

Counseling Agencies, Poinciana, Florida, prepared statement ........................ 138

Judicial Conference of the United States, Thomas S. Zilly, Chair, Advisory 

Committee on Bankruptcy Rules, Washington, D.C., statement and attachment ...................................................................................................................... 145

Keating, Susan C., President and CEO, National Foundation for Credit Counseling, Silver Spring, Maryland, statement ....................................................... 158

Lawless, Robert, Professor, University of Illinois College of Law, Champaign, 

Illinois, prepared statement ................................................................................ 170

Mecham, Leonidas Ralph, Secretary, Judicial Conference of the United States, 

Washington, D.C., letter and attachment .......................................................... 176

Page

IV

National Association of Bankruptcy Trustees, Eugene Crane, President, Columbia, South Carolina, statment ...................................................................... 186

National Bankruptcy Conference, Sally S. Neely and Ralph R. Mabey, CoChairs, Committee on Legislation, Fairfax, Virginia, letter ............................. 190

Newsome, Randall J., Chief Judge, U.S. Bankruptcy Court for the Northern 

District of California, Oakland, California, prepared statement ..................... 194

Wall Street Journal, October 25, 2006, article ...................................................... 203

Washington Post, Kathleen Day, Oct. 17, 2006, article ....................................... 205

White, Clifford J., III, Director, Executive Office for United States Trestees, 

Department of Justice, Washington, D.C., prepared statement ...................... 208

Zywicki, Todd J., Professor, George Mason University School of Law, Arlington, Virginia, prepared statement ...................................................................... 220

(1)

OVERSIGHT OF THE IMPLEMENTATION OF 

THE BANKRUPTCY ABUSE PREVENTION 

AND CONSUMER PROTECTION ACT 

WEDNESDAY, DECEMBER 6, 2006 

U.S. SENATE, 

SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT AND THE

COURTS, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:30 p.m., in room 

SD–226, Dirksen Senate Office Building, Hon. Jeff Sessions, Chairman of the Subcommittee, presiding. 

Present: Senators Sessions, Grassley, and Schumer. 

OPENING STATEMENT OF HON. JEFF SESSIONS, A U.S. 

SENATOR FROM THE STATE OF ALABAMA 

Chairman SESSIONS. Good afternoon. I am glad to see a good 

group here for this hearing. 

Last year, after 8 calendar years and four Congresses of bipartisan cooperation and negotiation, needed reforms to the Bankruptcy Code were finally signed into law. I was proud to be an 

original cosponsor of those reforms, and Senator Grassley, who is 

with me today, was a prime original sponsor of it and led the fight 

for it, and very ably, I might add. 

By the time it became law on April 20, 2005, the Bankruptcy 

Abuse Prevention and Consumer Protection Act of 2005 was no 

stranger to the Judiciary Committee or the Senate. Eleven Senate 

hearings had been held, and the Senate had passed similar bankruptcy reform four times—each time by strong bipartisan votes of 

97–1, 83–14, 70–28, and 82–16. Similarly, the House had held a 

total of 18 hearings and passed bipartisan bankruptcy reform legislation on eight separate occasions. 

Throughout the 8 years of debate, the underlying principles of 

the Act never changed. Fraud and abuse of the bankruptcy system 

were aggressively targeted so that the system could continue to 

provide bankruptcy relief for those truly in need. Individuals who 

were capable of paying back some or all of the money that they had 

borrowed would be asked to do so in exchange for receiving bankruptcy relief and protection. Individuals unable to pay back their 

debts because they ‘‘failed’’ to meet the means test would still be 

able to wipe out all of their debts. Creditors would have to fully 

disclose rates and repayment schedules and negotiate fairly with 

debtors trying to get back on their feet. Attorneys would be reVerDate 0ct 09 2002 14:19 May 07, 2007 Jkt 034119 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34119.TXT SJUD1 PsN: CMORC
2

quired to conduct a reasonable inquiry into their client’s cases and 

would be held accountable for filing statements they knew to be 

false. Actually, that is a basic responsibility of attorneys, in my 

view, all along, to consult with their clients, but too often that has 

not been so in the bankruptcy processes. 

If we had spent another 8 years drafting the Bankruptcy Act before passage, I do not think these underlying principles would have 

changed. 

In short, the Act established a ‘‘means test’’ to effect needs-based 

bankruptcy and to determine whether a debtor should go into 

Chapter 7 bankruptcy, which is the complete discharge of all your 

debts, or Chapter 13 bankruptcy, where you enter into a repayment 

plan, based on the ability of that debtor to repay some or all of his 

debts. Each and every individual debtor has a chance to go before 

a judge to make his or her case and have considered unique or special circumstances that might impact the repayment ability. 

The Act made clear that low-income debtors are not affected by 

the means test. Anyone whose household income is equal to or 

below the State average for a family of their size is exempt totally 

from the means test. 

The Act gave unprecedented protections to women that are owed 

child support or alimony. Family support obligations are raised to 

a top-priority preference over all other debts. Before, they held seventh place in the tier of priorities. That means that child support 

and alimony debts need to be satisfied before other creditors. No 

longer will those who need the most have to wait the longest for 

funds to pay for food, shelter, and medical bills. 

It limited the amount of assets debtors can shield from creditors 

through the purchase of expensive homes by lengthening the residency periods required to qualify for State homestead exemptions. 

We would have liked to have done more, but we made some 

progress, I believe, in that area. 

It required full disclosure from credit card companies. Credit 

card issuers will now have to disclose interest rates and repayment 

terms in a clear and conspicuous way. This will help consumers 

make informed credit decisions. The Act also created new penalties 

against creditors who act in bad faith and gives debtors the ability 

to reduce the amount of debt owed to credit card companies if the 

credit card company refuses to negotiate an out-of-court settlement. 

It required credit counseling for consumers in financial trouble 

who are considering bankruptcy. Additional financial education is 

required after filing for bankruptcy as a condition for discharging 

debts through the bankruptcy process. These provisions are extremely important, and I believe that if they are applied as intended, they will help significant numbers of people either avoid 

bankruptcy altogether and/or save their credit ratings. 

It made Chapter 12 bankruptcy protections for small family 

farmers permanent. I know Senator Grassley was proud to see that 

finally occur. No longer will these great Americans have to wonder 

if the special protections which enable them to keep family farm 

that they have lived on for generations will be there when the 

crops do not come in. 

3

Today’s hearing will be one of general oversight—examining how 

the Act has been implemented since its general effective date of October 17, 2005, and examining how well the Act is working to date. 

As a whole, it is probably too early to draw hard conclusions 

about all of the Act’s effects, for we are still in the initial implementation phase. In fact, some of the Act’s provisions, such as the 

provision requiring the Executive Office for U.S. Trustees to perform random audits on consumer bankruptcy petitions, became effective just a few months ago, October 20th. 

Though it is still early, we do have some limited statistics indicating that the Act is working as intended: deterring fraud and 

abuse while preserving bankruptcy relief for those who truly need 

it. Today, among other things, we will learn the following: 

Filings: Overall, consumer bankruptcy filings fell dramatically in 

the first few months following the passage of the Act, falling 65 to 

70 percent, and are now trending only slightly upward. Recent filing levels are reaching a mere 40 percent of the pre-Act rates. Of 

course, we know some of that was the surge of filings that occurred 

before the new Act took place, but we do appear to be seeing some 

reducing in filings. 

Chapter 13 filings: Early evidence suggests that Chapter 13 filings have risen, becoming a larger percentage of the total bankruptcy filings, from approximately 30 percent to 40 percent. This 

suggests that larger numbers of debtors able to pay back all or part 

of their debts are voluntarily filing under Chapter 13 rather than 

Chapter 7. I would just note that in my home State of Alabama, 

for reasons that lawyers tell me are quite justified, in the Northern 

District of Alabama, I believe it is 65 percent or more file under 

Chapter 13 and were doing that before this Act. Chapter 13 has 

some real advantages for the debtors, and so I think an increase 

in Chapter 13 filings has always been needed. 

On the means testing question, conversions or dismissals from 

Chapter 7, the numbers collected by the U.S. Trustees now indicate 

that means testing is directly affecting less than 1 out of 100 files. 

A remarkable number. 

Credit counseling: Preliminary estimates by the Department of 

Justice indicate that 10 percent of pre-filing counseling certificates 

are not being used immediately to file for bankruptcy, and they are 

good for 6 months. This indicates that people may be reconsidering 

their options. 

So, in conclusion, my strong belief is that bankruptcy is entirely 

a Federal court responsibility and one that has a far larger impact 

on individuals and our economy than most people realize. I also believe that we, therefore, must monitor this Federal court system on 

a regular basis in order to stop abuses and eliminate unfairness. 

So I will pledge to work with my colleagues, Senator Schumer, who 

pretty soon I will be able to call ‘‘Chairman Schumer’’— 

Senator SCHUMER. It will not be the first time. 

[Laughter.] 

Chairman SESSIONS. It will not be the first time. We have played 

a little musical chairs, and you deserve some credit for achieving 

that, Mr. Chairman. 

Senator GRASSLEY. Don’t encourage him. 

4

Chairman SESSIONS. Don’t encourage him, Senator Grassley 

says. 

[Laughter.] 

Senator SCHUMER. I will say this: One of your colleagues on 

about October 1st offered me a free paid vacation to Hawaii for a 

month and a half. 

Chairman SESSIONS. It would have been a bargain. 

[Laughter.] 

Chairman SESSIONS. Senator Schumer, it is great to serve with 

you. You are an excellent lawyer. You understand this issue, and 

I would recognize you at this time. And, Senator Grassley, I will 

recognize him because I know he has a 3 o’clock. You know, he 

chairs the Finance Committee and is one of the masters— 

Senator GRASSLEY. No more because of him. 

Chairman SESSIONS. You still do at this moment. And as one of 

the masters of the universe, he is going to have to go to a meeting 

to work out some last-minute issues. 

STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR 

FROM THE STATE OF NEW YORK 

Senator SCHUMER. Well, thank you. And I first want to thank 

you, Mr. Chairman, for being a gracious, courteous, and fair Chairman, very much appreciated, as I do Senator Grassley as a member 

of the Finance Committee as well. And at least as far as I am concerned, that fairness and courtesy will be reciprocated, so I thank 

both of you for that. 

It is sort of interesting to note both my colleagues—and I do not 

agree with them on a whole lot of issues, but you respect people 

when they stick to their principles even if they are pushed the 

other way. And one of the issues that was before us in the Judiciary Committee was whether to fill up the Washington, D.C. circuit 

fully with 12 lawyers. And the position had been when Clinton was 

President that only 10 were needed, and both Senator Grassley and 

Senator Sessions, in particular, had advocated that. And then when 

the wheel turned, they stuck with that position, and that is something I will not forget and that I have great respect for. So, anyway, I thank both of you, and I suppose this happens. When I was 

in the House, Jim Sensenbrenner and I kept switching as Chair of 

the Crime Subcommittee, so I am sort of used to that. 

Anyway, I want to thank you, and I thank you for holding this 

hearing. It comes at a time when many Americans are concerned 

about the high levels of personal debt in the country. Every holiday 

season, countless people, even those who typically pay off their 

credit card bills each month, borrow a little more and spend a little 

more. It is the holiday season, Christmas. Everybody wants to be 

nice to everyone in their family, and that is a great thing. 

Just over a year ago, Congress passed the Bankruptcy Abuse 

Prevention and Consumer Protection Act with the hope that it 

would eliminate fraudulent bankruptcy petitions. And as I often 

said while the bill was being debated, I share concerns with the 

bill’s biggest supporters, especially with regard to abuse of our 

bankruptcy system by gamblers, hustlers, cheaters, and people who 

go into it simply with the idea of not paying their debts and sort 

of shirking them off. And that is not American and that is bad. 

5

But I believe the bill that passed did not go far enough to ensure 

that those who have really suffered ruinous losses, often through 

no fault of their own and not any of the motivations mentioned in 

the previous paragraph, are able to try and get a new start. The 

so-called reform must distinguish between the reckless high roller 

and the single working mother or the hard-working breadwinner of 

the family who just becomes ill and loses his or her job. 

All provisions apply to all debtors regardless of how they ended 

up bankrupt in the first place, and the immediate aftereffect of the 

passage of this bill was a rush to file that resulted in a record number of bankruptcy petitions last year. Since then, the number appears to have leveled off, but it is still too early to assess the actual 

success the bill has had in fulfilling its stated goals. 

Here is what we do know. A number of studies have shown that 

the vast majority of individuals who filed for bankruptcy are in the 

second category. They file because of factors beyond their control: 

catastrophic medical problems, job loss, the death of a spouse, business failure. And in many cases, the petitioners actually experience 

multiple personal tragedies. 

We also know that 60 percent of all credit card users—that is 

about 85 million Americans—carry a balance month to month and 

that the credit card companies are eager to go out of their way to 

target those who have recently emerged from bankruptcy. That I 

really do not like. There is too much preying, unscrupulous preying 

on those who are the most vulnerable consumers. 

We know that at least three Federal courts have struck down 

certain provisions of the bill—or a single provision of the bill as unconstitutional. And we know from the testimony here and studies 

done that there is still a lot of unfairness in the system. So we need 

to make sure the bill is targeted at the Nation’s cheats and not its 

cheated. And we did not do that as well as we might have in the 

previous bill. 

For example, among the cheated are too many single- parent 

families in my home State and across the country who are worse 

off financially because a deadbeat mom or a deadbeat dad won’t 

pay the child support. Those single parents are some of our hardest 

workers and some of our greatest heroes. I have met some of them. 

Boy, do they struggle. And we should have been trying to help 

them, not make their lives more difficult. New provisions, credit 

card counseling requirement, increased fees, complicated paperwork, have steered many deserving people away from filing, and 

even though who cannot afford to pay for credit counseling are required to undergo financial literacy training before they can file a 

petition to erase their debt. 

By some accounts, at least, this is an ineffective bureaucratic 

hurdle. The survey results from credit counseling firms have shown 

that fewer than 1 out of 20 consumers were actually candidates for 

paying off their debt under a debt management plan; 96.7 percent 

still needed to file for bankruptcy as they would have even prior 

to the passage of this bill. 

So the bottom line here is that in an attempt to rewrite the fraud 

and abuse out of our bankruptcy laws, we may have written in 

some complications and confusion. It may well be—and this is 

6

something I guess we will continue to examine—that this Act was 

too blunt an instrument, however noble its goals. 

The one-size-fits-all approach doesn’t take into account the majority of people whose only crime is a catastrophic illness, the death 

of a loved one, or some other similar tragedy. It imposes fee increases on people who cannot afford them, mandates counseling requirements that may be ineffective and counterproductive. 

So let me say, in conclusion, this is a complicated and important 

issue. There are many points of view. I am glad we have such a 

distinguished panel of experts, judges, trustees, and professors to 

help us sort out some of the complexities. And, again, Mr. Chairman, I thank you for holding this hearing. 

Chairman SESSIONS. Thank you, Senator Schumer. 

Senator Grassley, do you want to make some opening comments? 

Senator GRASSLEY. I think I will just put it in the record because 

I have to go. 

Chairman SESSIONS. You have to go this very minute. 

Senator GRASSLEY. I think so. My staff is out there. 

Chairman SESSIONS. I thought they worked for you, not you 

working for them. 

[Laughter.] 

STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR 

FROM THE STATE OF IOWA 

Senator GRASSLEY. I just got the signal that I have got a little 

bit of time, and I am going to take advantage of it. 

Chairman SESSIONS. You are absolutely entitled to it. You have 

worked this issue for many years, and I know you are proud to see 

it come to fruition. 

Senator GRASSLEY. Everything that has been said on this subject 

has probably been said, but I haven’t said it, and, by golly, I am 

going to say it. 

[Laughter.] 

Senator GRASSLEY. First of all, congratulations to you, Mr. Chairman, for your help in getting this bill passed in the first place, and 

I thank you for these continued efforts, as demonstrated by this 

hearing, to make sure that our new bankruptcy system law works. 

As you well know, this law was a result of more than a decade 

of comprehensive study and intense debate in Congress, and whatever criticism one may do about this legislation, I think there are 

some essentials that you have to remember about it. It was spread 

out over so many Congresses, the debate, that it was surely well 

vetted, and there was a lot of compromise on both sides. And in the 

end, the large bipartisan majorities, Republicans and Democrats 

voting together, to enact it showed a very serious need for the reform and that this reform was the way to do it; otherwise, you do 

not get those kinds of votes of 75–25 and one time 97–2. 

Why so much support for bankruptcy? Well, the majority of 

Americans knew that the bankruptcy system was broken and needed to be improved. The central premise of bankruptcy reform is 

that if an individual who wants to file for bankruptcy can repay 

some of his debt, then he ought to pay some of his debt and not 

get off scot free. As I have said many times before, we needed to 

restore balance to the bankruptcy process, that it had become too 

7

easy where clever lawyers gamed the integrity of the bankruptcy 

system for the benefit of individuals who wanted to get out of their 

debts entirely and to the detriment of people who played by the 

rules. That is why bankruptcy rates of the 1990s soared, and despite the fact that the economy was so strong during that period 

of time. 

With the new bankruptcy laws, Congress closed some of these 

loopholes and enacted some important consumer protections. The 

new bankruptcy law created a means test. The law injected more 

integrity and fairness into the bankruptcy system. 

So how has the new bankruptcy law worked? Well, that is the 

purpose of this hearing. But early reports indicate that it is working very well by the number of bankruptcies that have gone down 

that the Chairman has already referred to, and I am not going to 

repeat those numbers. 

So in my mind, fewer bankruptcy filings are bound to boost the 

American economy. When considering the effects of bankruptcy on 

the economy, I often recall Clinton administration Treasury Secretary Larry Summers saying that the high levels of bankruptcy 

tended to push up interest rates. So lowering bankruptcy rates 

would reduce upward pressure on our economy based merely on 

these decreased filing rates. I think it is fair to say that bankruptcy 

reform has been a success for our economy. 

Earlier this year, I stated on the Senate floor that the numbers indicated that bankruptcy reform has saved our economy $60 billion. That is a substantial savings. That is around $60 billion that 

would have been lost, that would have been a drag on our economy, 

and I am confident that at least some of that money has been or 

will be directed toward economic growth and the creating of American jobs. 

It is also important to remember that there were a number of 

consumer protections included in the new bankruptcy law. People 

considering filing for bankruptcy 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 not get caught up in a bankruptcy recycling. After all, better 

educated consumers are a benefit to everyone. The law even encourages education of young people how to handle their finances, 

and credit card companies are required by the new law to warn 

consumers about the dangers of making only minimum payments. 

But there are challenges. The power special interest groups here 

in Washington that opposed bankruptcy reform in the first place 

have not gone away. They are still trying to undermine the common-sense reforms by filing lawsuits challenging these reforms and 

by supporting regulations to water down the law. 

The Federal courts produced a bankruptcy form that is supposed 

to measure repayment ability, but it is my understanding that this 

form actually directs consumers to claim deductions for expenses a 

debtor may not even have. That certainly was not the intent of the 

law. The form legitimizes gaming of the law, reduces the integrity 

of the system, and ultimately undermines reforms. 

Moreover, everyone who has followed this issue for any length of 

time will recall how the Federal Trade Commission had to issue a 

public warning over sleazy business practices in the bankruptcy 

8

mills. Congress responded to this by enacting some dramatic consumer protections. But how has the bankruptcy bar responded? 

You would think by cleaning up their act and by increasing professionalism. Unfortunately, that does not seem to be the case. The 

bar has responded to our attempts to help consumer by seeking to 

declare these consumer protections unconstitutional. In fact, right 

now in a Connecticut court, consumer bankruptcy lawyers are trying to convince a Federal judge that they have a right to advise 

people to commit fraud by telling consumers to run up debt that 

they have no intention of ever repaying. Right now these lawyers 

are trying to get out of disclosing to their clients what their fees 

are. 

No wonder even the American Bar Association has acknowledged 

that there is a real need for special disciplinary rules of consumer 

bankruptcy lawyers, and there is growing evidence that consumer 

bankruptcy lawyers are trying to deny consumers access to valuable credit counseling by trying to buy off the counselors. 

Just recently I joined Chairman Sessions in a letter to the Justice Department asking about one counseling agency that actually 

solicited business by promising not to advise consumers about alternatives to bankruptcy. The Department of Justice has done an 

admirable job in defending the law, but they shouldn’t have to use 

precious time and resources defending needed consumer protections. They should be free to use their resources to protect the consumers directly. 

I have seen even more than one instance of bankruptcy judges 

criticizing the new law in very inappropriate ways, and that is extremely disappointing. Of course, any judge should be free to exercise his or her judgment about how to interpret a law, and I certainly would never infringe on that core work. But when judges 

give press interviews and call the new law ‘‘garbage’’ or question 

Congress’ motives for passing bankruptcy reform during a court 

hearing, I think that clear line has been passed. Congress writes 

the laws. Judges are supposed to interpret and apply the law impartially. 

The bottom line is Congress passed bankruptcy reform by a wide 

margin with both Republicans and Democrats supporting it. That 

is how the American legal system is supposed to work. We have a 

democracy. Unelected Federal judges do not get to substitute their 

own personal policy preferences for the considered judgment of the 

elected branches. But that does not appear to matter to some bankruptcy judges who have decided they know better than everyone 

else how this country ought to be run. 

That is why I intend to write a letter to Chief Justice Roberts 

asking him whether this conduct violates ethical rules for judges. 

Judges are supposed to be neutral. They are supposed to understand their role in our legal system. I hope that Chairman Sessions 

will join me in looking into this matter and will sign onto that letter to the Chief Justice. 

All in all, Mr. Chairman, I think the new law is working well. 

We need to be vigilant here in Congress as the law is implemented 

and to make sure that people who do not want to follow the law’s 

mandates and good reforms are not undermining the law and the 

9

integrity of the bankruptcy system or shirking their responsibilities 

to enforce the law. 

So this hearing and others I am sure you will have will help up 

keep a watchful eye on the developments in the evolvement of this 

legislation in the future. 

Senator SCHUMER. Mr. Chairman? 

Chairman SESSIONS. Yes, sir? 

Senator SCHUMER. Could I just ask unanimous consent to put the 

American Bar Association’s entire statement in the record? 

Chairman SESSIONS. We would be pleased to make that a part 

of the record. 

Our first witness on this first panel is Mr. Cliff White. He serves 

as the Director of the Executive Office for U.S. Trustees here in 

Washington, D.C. He has served in the Federal Government for 26 

years, including previously as Assistant United States Trustee and 

Deputy Assistant Attorney General within the Department of Justice and as Assistant General Counsel at the U.S. Office of Personnel Management. He is an honors graduate of George Washington University and the George Washington University Law 

School. He has been recognized with a Presidential Rank Award for 

Meritorious Executive Service in 2006 and with the Attorney General’s Award for Distinguished Service in 2003. 

They do not give many of those, do they, Mr. White? 

Mr. WHITE. In my case, maybe too many. 

[Laughter.] 

Chairman SESSIONS. No, that is a rare award. I got one one time. 

I cherish it. 

Also, we expected to have on the panel Judge Thomas Zilly of the 

U.S. District Court for the Western District of Washington, who 

currently serves as Chairman of the Judicial Conference Advisory 

Committee on Bankruptcy Rules. He submitted an excellent statement, and we will make that a part of the record. And I think it 

is fair to say that he is supportive of the Act. 

Mr. White, we would be delighted to hear from you at this time. 

STATEMENT OF CLIFFORD J. WHITE III, DIRECTOR, EXECUTIVE OFFICE FOR UNITED STATES TRUSTEES, DEPARTMENT 

OF JUSTICE, WASHINGTON, D.C. 

Mr. WHITE. Thank you and good afternoon, Mr. Chairman. I 

thank you for the opportunity to appear before you today to discuss 

the progress made by the U.S. Trustee Program to enforce and implement the new bankruptcy reform law. I am pleased to report to 

the Subcommittee that the program has made major progress in 

achieving its goal of making bankruptcy reform work for all stakeholders in the system—debtors, creditors, and the general public. 

And although, as the members said in their opening statements, it 

is still far too early to determine the long-term impact of the reform law, the reforms have been workable, and there are promising 

signs for positive results in the future. 

Chairman SESSIONS. Mr. White, before you go much further, 

would you just basically tell those who do not understand the role 

of the U.S. Trustee what kind of role you play in the bankruptcy 

court system? 

10

Mr. WHITE. We are called, in the words of the legislative history, 

the ‘‘watchdogs’’ of the system. Our basic mission is to enhance the 

efficiency and the integrity of the system. So, for example, we appoint the private trustees who administer 95-plus percent of the 

bankruptcy cases. We also litigate in bankruptcy court, enforcing 

the bankruptcy law on such matters as debtor wrongdoing or attorney wrongdoing, and bring matters to the court. So we have administrative responsibilities in overseeing the trustees, litigation enforcement responsibilities against debtors or others in the system 

going before the court. And we have jurisdiction in all districts of 

the United States except those judicial districts in Alabama and in 

North Carolina. 

Chairman SESSIONS. Those are the trustees remaining under the 

court system, but overwhelmingly they are part of the Department 

of Justice, and you are involved in all the cases that come through 

the bankruptcy courts in the country? 

Mr. WHITE. That is correct. 

Chairman SESSIONS. So you have a unique perspective, and I just 

wanted to get that point in. Go ahead, please. 

Mr. WHITE. Thank you very much for that. 

One of the reasons, I suggest, Mr. Chairman, that we have been 

able to meet the challenges presented by the reform law is that we 

are building on 5 years of progress realized through our civil and 

criminal enforcement initiatives. These enforcement efforts reflected a balanced approach to address both the debtor wrongdoing 

as well as to protect consumer debtors who were victimized by attorneys, petition preparers, or others. 

In the last fiscal year, fiscal year 2006, we estimate that we took 

more than 58,000 civil enforcement and related actions with a monetary impact in the system of more than $878 million in debts not 

discharged, fines, penalties, and other relief. And since we began 

tracking our results in 2003, we have taken more than 220,000 actions with a monetary impact in excess of $2.6 billion. We also— 

Chairman SESSIONS. Could you explain what an enforcement action is, typically? 

Mr. WHITE. Certainly. They come in a variety of modes, but the 

most common ones, for example, would be if a debtor had an ability 

to repay. Even before the statute, there was some ability that we 

would have to bring an action. We have more tools through the 

new statute to bring these actions. But if a debtor was abusing the 

system because the debtor had run up debts and had the ability 

to repay those debts but still sought Chapter 7 relief, we could file 

a motion to dismiss that case in bankruptcy court. So the debtor 

would either have to repay part of those debts in Chapter 13 or 

have the case dismissed, in which case the debts would not be discharged at all. 

In a consumer protection context, which has also been an important part of our civil enforcement efforts, if a debtor was victimized 

by, say, a non-attorney petition preparer, someone who claimed to 

be a credit doctor could fix the credit woes and might, for example, 

file a bankruptcy petition, sometimes even without knowledge of 

the debtor, we would have jurisdiction to go to the bankruptcy 

court to seek relief against the party who had victimized the debtor. 

11

So we have taken those kinds of actions, as well as more serious 

ones. So, for example, if the debtor has actually lied, concealed assets in the bankruptcy papers filed under penalty of perjury in 

bankruptcy court, we can take action which will cause not just a 

dismissal of the case but a denial of discharge of those debts. 

So those are three of the more common examples of the kind of 

cases that we have brought in the past and which the Congress has 

given us now new tools to be able to continue to do in the past year 

since the general effective date of the new law. 

If I may go on, Mr. Chairman, as well, we have also enhanced 

our criminal enforcement efforts. We have a responsibility under 

the statute to make referrals to United States Attorneys where we 

have evidence that a bankruptcy crime has been committed. And 

some of our results in this regard were illustrated as recently as 

just a few weeks ago when the Deputy Attorney General, Paul 

McNulty, announced the conclusion of what we called ‘‘Operation 

Truth of Consequences,’’ which was a nationwide bankruptcy fraud 

sweep, in which United States Attorneys filed criminal charges 

against 78 defendants in 36 judicial districts. 

Now, under the reform law, or BAPCPA in the shorthand, the 

program has taken on, as the Chairman well knows, substantial 

new responsibilities in several key areas which are covered in my 

written statement, and if I may, I would like to highlight just three 

of the consumer provisions and some of our activities in those 

areas. 

The first is means testing. Under the new Section 707(b), the 

former subjective ‘‘substantial abuse’’ standard has been replaced 

by a more transparent and a more objective means test formula to 

determine whether a case is, in the terms of the statute, ‘‘presumed 

abusive.’’ 

While it is still too early to determine the long-term impact of 

means testing, I would like to suggest to the Subcommittee two 

preliminary conclusions. The first is that means testing is a workable system. There is now a system in place by which debtors can 

obtain the necessary IRS and Census Bureau information that is 

needed to complete the means test and to make the required calculations. And there is now a system in place for the U.S. Trustee 

staff to process that information, to make a determination of ‘‘presumed abuse,’’ and then decide in those cases of presumed abuse 

whether the facts warrant bringing a motion to dismiss. 

My second preliminary conclusion on means testing is that the 

early data suggests that means testing provides a promising approach to identifying abuse. Of the individuals debtors with above 

median income—those who are subject to the full means test—the 

U.S. Trustee has determined—and this was reflected, I know, in 

the Chairman’s opening statement. We have determined that 

slightly less than 10 percent of those debtors are presumed abusive. And of the presumed abuse cases that did not voluntarily dismiss or convert, the U.S. Trustee filed motions to dismiss in about 

three-quarters of those cases, meaning we declined to file in about 

one-quarter of the cases. So to us, these data would suggest that 

the means test has been a useful screening device to identify abusive cases, and it also suggests that the statute has indeed provided the U.S. Trustees with sufficient discretion so that decisions 

12

on filing motions can be made on a case-by-case basis and not solely upon a statutory formula. We can take into account special circumstances under the statute. 

Another major aspect of bankruptcy reform is financial education. Individual debtors must receive credit counseling prior to 

filing bankruptcy and receive debtor education prior to receiving a 

discharge. These are potentially among the more far-reaching consumer protection provisions of the new code because these requirements are designed to ensure that debtors enter bankruptcy knowing what their options are and they will exit bankruptcy with more 

tools to avoid future financial catastrophe. 

Among the jobs of the U.S. Trustee in this regard is to approve 

qualified providers to provide those services if they meet certain 

statutory qualifications. 

I would suggest that, as with means testing, there are positive 

signs that the credit counseling and debtor education provisions are 

workable. The credit counseling industry has been a troubled industry, so our first priority in the U.S. Trustee Program was to put 

into place a system so that we could try to screen out those agencies that might seek to defraud debtors. And we developed our approval and our monitoring criteria within enormous assistance 

from the FTC and the IRS. And just this past September, we further strengthened our efforts by commencing a new post-approval, 

onsite review process to better verify an applicant’s qualifications. 

Through the end of last August, we had received about 700 initial applications from providers. About two-thirds were approved, 

but about one-third were either denied or voluntarily withdrawn 

after we asked additional questions and withheld approval. 

In addition, to date there is adequate capacity to serve the debtor 

population. There are currently 155 approved credit counseling 

agencies nationwide and 285 approved debtor education providers. 

Let me add as well that we did exempt debtors from the credit 

counseling and debtor education requirements in those judicial districts that were most heavily affected by Hurricane Katrina. And 

as the number of bankruptcy filings nationwide increases, we are 

going to continue to monitor that 155/285 number to ensure that 

there is adequate capacity. 

Finally, the third and final aspect I would like to highlight are 

debtor audits because, as the Chairman noted in his statement, a 

new regimen for debtor audits commenced with cases filed on October 20 of 2006. We believe that these audits will help us to identify 

cases of fraud and abuse, to enhance deterrence, and also to help 

us better measure the magnitude of fraud, abuse, and errors in the 

system. So in the current fiscal year, in 2007, we will use contractors to conduct up to 7,000 audits of cases filed by individual debtors. 

So the bankruptcy reform law has presented many challenges to 

the U.S. Trustee Program, but we believe that the diligence and 

professionalism of the program staff at all levels have allowed us 

to make some substantial progress, and we look forward to making 

continued progress in the coming year. I would be happy to answer 

any questions from you, Mr. Chairman, or other members of the 

Subcommittee. 

13

[The prepared statement of Mr. White appears as a submission 

for the record.] 

Chairman SESSIONS. Thank you very much, Mr. White. Those are 

impressive remarks, and I can tell that you have taken this seriously and you have the capability of being an effective leader of the 

trustees. 

We have seen a substantial decline in filing rates, 40 percent 

perhaps. What is your view of why that has occurred? 

Mr. WHITE. Well, I do not think that I have a definitive answer, 

so let me suggest several factors that I think there is perhaps even 

consensus in the bankruptcy community, or at least factors that 

are commonly cited by commentators of differing points of view in 

bankruptcy reform. 

One is the surge in filings that occurred just prior to the general 

effective date of the statute. There were 600,000 cases filed in the 

2 weeks prior to the October 17 general effective date. Three-quarters of a million cases were filed in the 1 month prior to the general effective date. So with that number of filings, it is not at all 

surprising you would have a smaller number thereafter. 

Also, the nature of the new bankruptcy reform law or the means 

testing provision is to make the system more transparent, more objective, meaning there can be more self-policing, if you will. Debtors 

and their counsel should know when they file the petition if it is 

going to trigger a finding of presumed abuse. So that may lead 

debtors to file 13 or not to file at all. We cannot measure the direct 

impact of that, but that is certainly a plausible reason. 

A third that I have heard many debtors’ counsel talk about themselves is the learning curve that was involved for debtors’ counsel 

getting used to a new system. 

Another factor I would point to is misinformation. There was a 

great deal of misinformation prior to the effective date and afterwards with regard to the Act, suggesting honest and needy debtors 

no longer had that relief available. And that may have had a deleterious effect on debtors who were entitled to the relief but have 

not sought it because the strident rhetoric suggested it was not 

available to them anymore. 

Others have also referred to additional costs to the system. Debtors’ attorneys fees have gone up. Some of that could be due to, 

among other factors, again, the learning curve of debtors’ counsel, 

retooling their systems, and maybe some of those costs can come 

down as they realize new economies of scale and get further along 

the learning curve. 

So those are five factors commonly cited. I cannot point to empirical evidence that says any one or a combination of those, but those 

are some plausible explanations that are commonly heard. 

Chairman SESSIONS. Thank you. I do not think, do you, that a 

mere decline in number of cases a bankruptcy office may be filing 

would justify increasing fees, do you? 

Mr. WHITE. No. Well— 

Chairman SESSIONS. I have a little suspicion, frankly, that some 

lawyers are raising their fees simply to maintain their current level 

of income even though filings may be down. Do you have a similar 

suspicion? 

14

Mr. WHITE. I really don’t know the reasons. We often do ask 

debtors’ counsel. Their fees must be reasonable. Courts can correct 

excessive fees. And I think that it is a dialog we try to have with 

debtors’ counsel as to if fees are raised, why are the fees raised, 

because I do think that it is an important factor that needs to be 

scrutinized. But I just cannot come before you and say I have a 

strong suspicion or knowledge as to what any single cause of that 

is. 

Chairman SESSIONS. I can understand that. Somebody said recently, ‘‘I don’t know much, but I have a lot of suspicions.’’ 

[Laughter.] 

Chairman SESSIONS. So perhaps we should not even raise suspicions. 

On the means test effectiveness, you said it is workable. Some 

thought it might not be, but I always thought it had enough clarity 

that the system would work pretty well and the largest number of 

people would be unaffected by the change. Since they would be 

making below median income, it would have virtually no impact on 

them. But if they make above the median income, they can be presumed to be an abuser. 

When this happens, the Department of Justice can move to dismiss the case or decline to do so. Do you know the number you 

filed on, the number of objections you filed to Chapter 7? 

Mr. WHITE. Since October 17 of the 707(b), which is mainly the 

means test, not exclusively, the number is relatively modest because the number of filings is so low. About 1,300 cases were actually filed. But that is after we exercised discretion, and one out of 

every four presumed abuse cases we found had special circumstances. 

Chairman SESSIONS. But that would indicate, would it not, that 

99 or whatever percent is filed are filing correctly, and the projections that there would be disaster from this would be overblown. 

Is that correct? Would you say that? 

Mr. WHITE. I would say that the means test has been an effective 

screening device and that we have tried to exercise discretion and 

believe that the statute has given us discretion so that we are not 

filing motions in cases that are not meritorious. 

Chairman SESSIONS. Is it true that less than 1 in 100 filers have 

been challenged by these motions? 

Mr. WHITE. I believe that is the way the ratios finally work out, 

yes. 

Chairman SESSIONS. I am informed that no creditors have filed 

707(b) motions, but that only the trustees have done so. Is that correct? 

Mr. WHITE. I do not have any specific data, but that is my understanding. But I do not have the data that would prove that. We do 

not collect it on the creditor motion. 

Chairman SESSIONS. Senator Grassley had some harsh words 

about the deductions for expenses form, deductions that debtors do 

not actually have. The Judicial Conference, I understand, developed a standardized form for implementing the means test. Is there 

any part of these forms, particularly Form 22, which calculates the 

means tests, which in your judgment permits debtors to claim a deduction for expenses they do not actually have? 

15

Mr. WHITE. Let me first say we have been a part of the Advisory 

Committee on Bankruptcy Rules, which is chaired by District 

Judge Zilly, and I believe that Judge Zilly has done a tremendous 

job in guiding that committee. There have been scores of new rules 

and forms that have been issued, and what the Committee is doing 

now—it put out the interim rules for public comment. It is reviewing comments and will at the March meeting review again the 

rules and forms to see if additional modifications are necessary. 

Now, we are litigating one issue related to what you said, Mr. 

Chairman—and it is not a product of the form—having to do with 

whether or not an ownership expense for an automobile may be 

claimed by all debtors even if they do not own an automobile. The 

IRS says if you own an automobile, you get a certain amount that 

is allowed, and the statute allows you also, if you have a higher 

secured debt. But if you do not own an automobile, we argue and 

have argued in court, not always successfully, that you do not get 

that deduction for owning an automobile. So some issues like that 

do arise. And there may be some issues that some have raised with 

regard to the means testing form, but I would have to say that we 

believe that the Rules Committee has acted very responsibly and 

in good faith. 

Chairman SESSIONS. Thank you for those insights. You do feel 

that you represent and have a responsibility to advocate for integrity and forms that actually work to ensure the integrity of the 

process. So you see your role—you do not have any hesitation to 

advocate improvements in the form if you think there are difficulties, do you? 

Mr. WHITE. Not at all. 

Chairman SESSIONS. You understand that is your role and you 

will do so. 

Mr. WHITE. It is a fundamental duty of ours, Mr. Chairman. 

Chairman SESSIONS. I think the question arose from, I guess, 

line 22 in the form, and I would ask you to look at that. 

Mr. WHITE. Certainly. 

Chairman SESSIONS. It says you are entitled to an expense allowance in this category regardless of whether you pay the expenses 

of operating a vehicle or regardless of whether you use public 

transportation. That is the issue you just raised. It strikes me that 

it is almost like saying if you own a home, you can deduct the interest, but if you do not own a home, you can deduct the interest 

anyway. So I do not think that is good legal policy the way that 

is suggested there. 

In both 2006 and 2007, the Senate Committee on Appropriations 

included language in their reports supporting use of data-enabled 

forms. In your presentation to the ABI last month, you argued for 

the same. You said, ‘‘My concern about our long-term ability to efficiently process the forms rises largely out of the fact that courts 

have not yet mandated smart forms with data tags that could allow 

us to automate most of our procedures. We are hopeful that the Judicial Conference will adopt mandatory technical standards for petitions and schedules.’’ 

Can you explain for the non-computer-savvy listener what a 

smart form data tag is? 

16

Mr. WHITE. I will try as a non-computer-savvy person myself. 

The data tags are really a software that embeds codes into forms 

that are filed electronically with the court. Bankruptcy forms largely are filed electronically. And what that allows is for data from 

those forms to be aggregated in an automated way, less person-intensive, to do such things as in means testing, a vital concern to 

us, to be able to segregate cases that are above median income, 

that require the full means test, versus below. 

If we are able to aggregate data through these smart forms, if 

everyone files or most filers file with smart forms embedded per 

the court’s mandate, then we would be able to better achieve the 

Congress’ objective as well with regard to non-random debtor audits where we have to make determinations of whether or not debtors in cases have unusually high expenses in a particular judicial 

district so to best carry out those non-random audits, according to 

the Congressional criteria. 

The GAO has a need for them. Recently, for example, we met 

with the GAO as it commenced a study of domestic support order 

treatment under the new Bankruptcy Code. And one of the issues 

that we discussed was how to identify the cases, and they have to 

do it more through a random, manually intensive way. If there 

were these invisible data tags in the forms, it would be much easier 

for GAO to identify those cases, and it would have great benefit for 

scholars, too. 

We have been working with the courts on that for 19 months. I 

am very hopeful that something will be done very soon, particularly 

as filings go up, because I think it is going to allow us to administer the system more efficiently and will have great benefits for 

policymakers and scholars. 

Chairman SESSIONS. Thank you. 

What is your assessment of the credit counseling provisions? And 

how is that working? That is an entirely new concept, and I would 

be interested in your opinion. 

Mr. WHITE. Well, as with other aspects of bankruptcy reform, no 

definitive conclusions do we believe we can draw at this point, but 

we think there are, again, some positive signs, and let me suggest 

three from the perspective of the U.S. Trustee. 

One of the first challenges, as I noted in the testimony, was to 

put together a screening system—it was a troubled industry—to 

ensure that the applicants, the agencies that are allowed to provide 

these services to debtors met statutory qualifications, were legitimate agencies and not seeking to defraud debtors. And we believe 

that with the help of other agencies we have had an effective 

screening process. We have rejected about one- third of the applicants that have come before us. 

Chairman SESSIONS. These are one-third of the credit counseling 

agencies. 

Mr. WHITE. Credit counseling and debtor education put together. 

Chairman SESSIONS. They want to be approved for the bankruptcy court. You have turned them down for reasons— 

Mr. WHITE. That they did not meet the qualifications, and some 

of the common reasons, for example, if they are under an IRS 

audit; if they failed to provide us with the information that they 

gave to the IRS, which the IRS for good reason statutorily could 

17

not provide us; if the board of directors was not independent; 

among other reasons, if we found that there was a tie-in on credit 

counseling—or the credit counseling agencies which must be notfor-profit, if, in fact, they had a tie-in with a for-profit agency, so 

we looked very much for integrity issues. And we scrutinized these 

applications quite carefully. We think we will get better at it as we 

get more experience. But we do think we have a very useful device, 

and it did screen out one-third. 

Second, we were concerned and there remains a concern about 

capacity, because you have a new market, a lot of potential new 

debtors in the system. The number of filings has been low, so it is 

easier for there to be capacity. Capacity is there. We are going to 

have to continue to watch that somewhat carefully. 

We were pleased that, despite certain issues raised by credit 

counselors in terms of cost and their long-term financial wherewithal, all of the major agencies that were approved for their initial 

6-month period also reapplied for another year. But we are going 

to continue to watch that. 

And the third— 

Chairman SESSIONS. All that were approved reapplied? 

Mr. WHITE. All of the major agencies. There were very few that 

had originally applied and been approved who did not reapply. 

Chairman SESSIONS. So their experience was such that they did 

not feel they needed to drop out of the program. They must have 

felt like it had some workability for them. 

Mr. WHITE. That is correct. But we certainly are sympathetic to 

concerns they have, and we will continue to work with them to see 

if there is any way in a regulatory way—if there is any way we can 

relieve burdens on them but still preserve the integrity of the system, we want to be sure that we do that. 

A third element you referred to, Mr. Chairman, I believe, in your 

statement—although we need time series data, we need more of a 

period of time to reach a conclusion—is that we do track the number of certificates that are issued. A debtor who goes in for credit 

counseling must produce a certificate with the petition. Ten percent 

more certificates were issued by agencies than bankruptcy filings. 

Some of that could be just a delay before there is a filing, or it 

could show that, in fact, the counseling has led some debtors to see 

that they had a better alternative than filing of bankruptcy. 

So those are three positive signs. We need to continue to look at 

all of those things. They are preliminary and no firm conclusions, 

but they do provide some encouraging data. 

Chairman SESSIONS. That was my thought from the beginning, 

that some people—and I have often said, I predicted a 10 percent 

or so—I would say if 10 or 15 percent who go to credit counseling 

might find they have an alternative to bankruptcy, they might 

choose that. I know a friend who went to extraordinary lengths to 

not file bankruptcy and really worked exceedingly hard. He just did 

not want to do that. And credit counseling sometimes can help people to avoid it and give them additional options. 

We did see and heard some concern about counseling agencies 

that advertise as being in virtual partnership with the lawyers who 

might be referring their clients to the credit counseling, virtually 

promising to not dissuade them or suggest anything other than 

18

their filing bankruptcy. Have you seen that information? And does 

it trouble you? 

Mr. WHITE. Yes, to both questions. It is critical for the integrity 

of the process for the counseling to be direct and for it to be unbiased. So anything that interferes with the direct, unbiased nature 

of that counseling would undermine the integrity of the system. 

There was one instance that comes to mind that arose in October, and a website by an agency was changed because it contained 

some language that suggested the lack of that objectivity. Obviously, as you can understand, I cannot comment with regard to any 

additional investigation that may be ongoing. 

We also issued interim rules on credit counseling, and we are 

going to be revisiting them. We are looking at comments we got on 

those rules and are looking at a fuller rulemaking process later in 

the year. And one of the areas that has been raised to us as perhaps we can have more complete regulation is in looking— 

Chairman SESSIONS. You do not need statutory authority to 

change that regulation, do you? 

Mr. WHITE. No. But I would say one of the things we do need 

to look at, Mr. Chairman, is what are the limits, though, for certain 

areas that people suggest we ought to regulate is whether the statute lets us regulate, without reaching a legal conclusion going to 

the issue of receipt of payment of the debtor’s lawyer paying the 

credit counseling fee. Section 110 of the code regulating bankruptcy 

petition preparers, not credit counseling, for example, says that it 

is prohibited for a petition preparer to pay a court filing fee. Section 111 does not have exactly the same language. So we obviously 

need to parse the statute. We have regulatory authority. We are 

going to look at it. But we are obviously going to be very careful 

that we stay within the bounds of what we are authorized to do. 

Chairman SESSIONS. In the letter that Senator Grassley and I 

wrote to you, we noted that, for example, the Hummingbird Agency 

website advertises they directly contract with attorneys, not debtors, that they accept fees from attorneys, and promise that attorneys will not ‘‘lose customers.’’ So that really goes to the very heart 

of what I think the provisions intended, and I hope that you will 

keep an eye on that. 

Mr. WHITE. Yes, sir. 

Chairman SESSIONS. On the next panel, we will hear from David 

Jones, President of the Independent Consumer Credit Counseling 

Agencies. He wants the U.S. Trustees Office—that is you—to issue 

guidance for credit counseling agencies in three areas: ability to 

pay, definition of ‘‘legal advice,’’ and obligation to negotiate a repayment plan with the debtor’s creditors. 

Is the Trustees Office planning on issuing guidance to credit 

counseling agencies in these areas? 

Mr. WHITE. Well, we are looking at that. We have seen the comments from Mr. Jones and others that came in with respect to our 

interim rule. We are looking at those as we fashion a new Notice 

of Proposed Rulemaking. 

Chairman SESSIONS. I think those are legitimate requests, and I 

hope that you can work toward that. 

Anything else you would like to offer to the Committee as we 

evaluate this first year of the bankruptcy law? 

19

Mr. WHITE. No, Mr. Chairman, except that we do think that the 

new law has given us new tools to enhance the integrity and the 

efficiency of the system. We have a lot still to learn, and we will 

continue to try to make more progress in the next year. But we do 

think there are some promising signs from the first year of enforcement and implementation. 

Chairman SESSIONS. Well, I share Senator Grassley’s view that 

bankruptcy is a great American tradition, that people who are in 

debt that they cannot repay are entitled to seek the protections of 

bankruptcy, but it is not a guaranteed right to abuse the system. 

There has been widespread concern throughout the country that 

bankruptcy had been completely out of control, that people were filing bankruptcy when they had other alternatives, that nobody was 

watching the store or monitoring the fraud and abuse. And I do believe this system, the new system, can help restore confidence in 

the system without in any way denying people who legitimately 

have bankruptcy rights those rights. I really feel strongly about 

that, and I appreciate your work on it. 

I also would like to express my appreciation to Mr. McNulty and 

his prosecutions of criminal activities. You mentioned 70, I believe—50-some-odd defendants were charged recently. I would note 

as a lawyer with some sadness, nine of those were attorneys. And 

so that indicates to me that officers of the court in a number larger 

than we would like to admit may not be adhering to the high 

standards of professionalism. I hope that these better forms, the 

clarity of that, the increased ability for the trustee to have oversight over the problems can help end that. 

I thank you for your leadership. 

Mr. WHITE. Thank you, Mr. Chairman. 

Chairman SESSIONS. Thank you. 

[The prepared statement of Mr. White follows:] 

Chairman SESSIONS. Our second panel, if you would step forward. I think you perhaps know our first witness is Todd Zywicki, 

law professor and senior fellow of the James Buchanan Center, 

Program on Politics, Philosophy, and Economics at George Mason 

University. He teaches in the area of bankruptcy, contracts, commercial law, business associations, law and economics, and public 

choice and the law. That is quite a lot. He has testified several 

times before Congress on the issues of consumer bankruptcy law 

and consumer credit, including testifying before this Committee 

last year before the passage of the bankruptcy bill. Prior to this, 

he served as a Director of the Office of Policy Planning at the Federal Trade Commission, was recently named a member of the 

United States Department of Justice Study Group on Identifying 

Fraud, Abuse and Errors in the U.S. Bankruptcy System, and I am 

proud DOJ is working on that. He received his J.D. from the University of Virginia, his M.A. in Economics from Clemson University, and an A.B. cum laude from Dartmouth College. 

Our second witness is Mr. Steve Bartlett, President and CEO of 

Financial Services Roundtable. He previously served as mayor of 

Dallas, Texas. That was a headache, I suspect. 

Mr. BARTLETT. It was one of the more enjoyable and exhilarating 

experiences in my life. 

20

Chairman SESSIONS. Big D. That would be a great challenge, I 

am sure. A Member of the United States Congress—that would be 

easy compared to being mayor, I suppose—and while in Congress, 

he served on the House Banking Committee and was a leader in 

financial modernization. You served as Deputy Whip and was a 

sponsor or principal cosponsor of 18 major pieces of legislation, including the Enhanced Secondary Mortgage Market Pact, FHA regulation, Fair Labor Standard Act reform, and the Disabilities Act. 

You have your B.A. from the University of Texas, Austin, and adjunct professor and lecturer at the LBJ School of Public Affairs. 

And Dr. Gates, who is on the floor now, is still celebrating the 

Texas A&M game. My condolences. 

Our third witness is David Jones, President of the Association of 

Independent Consumer Credit Counseling Agencies, from Florida. 

He served as President for the last 6 years. In 2003, he retired 

after 6 years as President of a major national credit counseling and 

consumer education agency. You presently concentrate efforts in 

support of the credit counseling industry. 

Our fourth witness is Hon. Randall Newsome, Chief Judge of the 

Bankruptcy Court for the Northern District of California. He has 

been a bankruptcy judge since 1982, beginning in Cincinnati, before appointment in California. Judge Newsome has served as 

President of the National Conference of Bankruptcy Judges from 

1998 to 1999 and is a fellow of the American College of Bankruptcy 

and a member of the American Law Institute. He currently serves 

as a faculty member for the Federal Judicial Center, ALI, ABA, 

and other organizations. He has testified before committees of Congress on bankruptcy reform legislation and is a contributor to ‘‘Collier on Bankruptcy’’ and other writings. 

Our fifth witness is Robert Lawless, a professor at the University 

of Illinois College of Law, where he teaches bankruptcy, consumer 

law, and corporate reorganizations. He has been a law professor at 

the University of Nevada, University of Missouri, Columbia, Washington University, and Ohio State. Professor Lawless has served as 

a panelists and presenter at five different bankruptcy and consumer credit symposia and conferences in the last 6 years. He 

graduated with his J.D. and a bachelor of science in accountancy 

with highest honors from the University of Illinois. 

Our final witness is Henry Hildebrand, Chapter 13 Standing 

Trustee from the Middle District of Tennessee. He administered 

nearly 14,000 active Chapter 13 cases and distributes more than 

$150 million per year to creditors. He is a counsel to the national 

law firm of Lassiter, Tidwell & Hildebrand. He is a fellow of the 

American College of Bankruptcy and on its Education Committee, 

a board-certified consumer bankruptcy lawyer by the American 

Board of Certification, and serves on its board of directors. Mr. 

Hildebrand served as notes editor for the Quarterly, a newsletter 

dealing with consumer bankruptcy issues and Chapter 13 practice, 

and is a regular contributor to the American Bankruptcy Institute 

Journal, a graduate of Vanderbilt University, received his J.D. 

from the National Law Center of George Washington University. 

That is a distinguished panel indeed, and without further ado, 

perhaps, Mr. Zywicki, if you have any thoughts, we would hear 

from you at this time. We will have a 5-minute limit, and if you 

21

feel like you need to exceed that, remember you can place those remarks in the record. 

STATEMENT OF TODD J. ZYWICKI, PROFESSOR, GEORGE 

MASON UNIVERSITY SCHOOL OF LAW, ARLINGTON, VIRGINIA 

Mr. ZYWICKI. Thank you, Mr. Chairman. It is a pleasure to be 

here today. As you noted, the Bankruptcy Abuse Prevention and 

Consumer Protection Act was enacted last year after 8 years of 

study, deliberation, and hearings by this body and Congress and 

passed with bipartisan support. I understand the purpose of today’s 

hearing is to understand and evaluate how the Act is operating in 

practice. 

As has been previously emphasized, everything that we say today 

is going to be tentative, but based on my observations so far, the 

Act seems to be working largely as Congress intended. And so, as 

a result, so far it appears to be successful. 

As I understand, the purpose of BAPCPA was to preserve bankruptcy relief for those who need it and reduce fraud and abuse by 

those who do not. The Act seems to be operating well on both of 

those accounts. 

First, the first question is whether or not it preserved bankruptcy relief for those who need it. Critics argued before the Act 

was passed that it would result in widespread hardship and distress among those who needed to file bankruptcy because of job 

loss, illness, or the like and would be unable to do so; that it might 

harm those who were victims of natural disasters, such as hurricanes; and, third, that it would somehow harm women’s efforts to 

collect alimony and child support in some poorly specified manner 

from deadbeat parents. 

So far, each of these concerns seems to have been unfounded. 

First, there seems to be no evidence of serious lack of access to the 

bankruptcy courts. I have heard no reports of those who needed 

bankruptcy relief and have been unable to get it. The best evidence 

that we may have on whether this is happening is if we expected 

that people were unable to get bankruptcy relief, you would expect 

to see non-bankruptcy delinquencies and charge-offs to be rising, 

and that does not seem to be the case. The numbers seem to be 

basically equivalent to 2004, which suggests that there are not people out there who are struggling to pay their bills who need to file 

bankruptcy and are unable to do so. 

Second, with respect to victims of natural disasters, most notably 

Hurricane Katrina, as Cliff White noted on the last panel, it appears that the system certainly has enough flexibility and discretion to deal with those sorts of situations, and we have not noticed 

any problems with that. 

Third was the question about the notion that somehow this 

would make it more difficult for women to collect alimony and child 

support. That was never a very plausible argument in the first 

place. The legislation quite plainly enacts a number of new protections and powers for women. It was repeatedly testified at the time 

by experts in this area that the biggest obstacle to collecting alimony and child support was often bankruptcy filings, efforts by 

parents, deadbeat fathers to manipulate the system in order to discharge some obligations, to use the automatic stay to prevent colVerDate 0ct 09 2002 14:19 May 07, 2007 Jkt 034119 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34119.TXT SJUD1 PsN: CMORC
22

lection, that sort of thing. There seems to be no evidence of this 

purported harm to women, and on this it seems to have unequivocally increased the ability of women to collect in bankruptcy, just 

as had been predicted. 

The second goal then was to reduce fraud and abuse in the system. As has been noted, filings have dropped dramatically. There 

seems to be no question based on the experience of last fall of what 

many thought, which is that to some extent people’s willingness to 

file bankruptcy is related to the incentives provided by the bankruptcy laws. The fact that 500,000 people managed to find their 

way to the bankruptcy court in the 2 weeks prior to the bankruptcy 

law going into effect shows that people do have some discretion 

over when and whether they file bankruptcy. 

There has been a number of protections in the legislation that 

were designed to weed out fraud and abuse in the system. There 

are myriad forms of fraud and abuse, and as a result, a number 

of different provisions were necessary to address them. It appears 

that most of these have been fairly well targeted and have accomplished their goals. 

First, with respect to fraud, a number of new protections were 

enacted, including tax returns, pay advices, debt audits are coming 

online now. That seems to have weeded out a lot of fraud. 

We have already heard reports on abuse and the role of the 

means test. Repeat filings seem to be down substantially. In particular, repeat filings were designed solely to take advantage of the 

automatic stay and prevent legitimate efforts of creditors to foreclose rather than efforts for real bankruptcy relief. 

As noted, domestic support creditors have substantially had their 

position increased, and it seems to have eliminated some of those 

strategic filings. 

Finally, if I may have 20 seconds to conclude my thoughts. 

Chairman SESSIONS. Please take your time. 

Mr. ZYWICKI. There have been some complaints that there are 

drafting problems in the legislation. Certainly with a piece of legislation this complicated, you would expect some hiccups and drafting problems. But by any reasonable estimation, it seems that 

those drafting glitches are less than one would expect from such a 

provision. 

Second, Congress’ intent was made sufficiently clear, I think, at 

the time that a lot of those drafting glitches have been solved. 

Finally, I think that—or judges have been able to construe the 

statute. Finally, I think comparing this to the 1978 legislation, 

which many veterans will recall was struck down as unconstitutional by the U.S. Supreme Court, I have not seen anything to suggest the major constitutional problems that were raised by the 

1978 code, for instance. We may have some issues that are being 

worked out with this, but nothing like the serious and substantial 

long-lasting problem that arose in efforts to implement the 1978 

code. 

Thank you. 

[The prepared statement of Mr. Zywicki appears as a submission 

for the record.] 

Chairman SESSIONS. Thank you. 

Congressman Bartlett? 

23

STATEMENT OF STEVE BARTLETT, PRESIDENT AND CHIEF EXECUTIVE OFFICER, FINANCIAL SERVICES ROUNDTABLE, 

WASHINGTON, D.C. 

Mr. BARTLETT. Thank you, Mr. Chairman. I am Steve Bartlett, 

President of the Financial Services Roundtable and proud University of Texas alum, as well as mayor of Dallas, Texas. I have submitted my entire statement for the record. 

The Financial Services Roundtable, as you know, consists of a 

membership of 100 of the largest integrated financial services companies in the United States and, thus, the American consumer and 

the health of the American consumer is the lifeblood of our companies, and it is in our best interest to have well-educated consumers 

who manage debt prudently. That is just what Public Law 109–8 

helps to do. The law is just over 1 year old. 

So far, from the perspective of the American consumer and the 

economy, the new bankruptcy reform law is working quite well. 

Bankruptcy filings are down. More Americans than ever are getting credit counseling, and as a result, consumers are better educated about prudent financial management than they have ever 

been. Let me cite some statistics. 

Consumer bankruptcy filing rates have dropped dramatically 

from an annualized rate of about 1.5 million to 600,000 in 1 year. 

More consumers are choosing repayment plans under Chapter 13, 

about 40 percent of filings as opposed to 27 percent prior. And here 

is the deal on the credit counseling. There were 157,000 total credit 

counseling sessions at Justice Department-certified agencies in October of 2006, and that compares to 57,000 a year ago on an 

annualized rate in 2005. Now, that is 157,000 to 57,000. Indeed, 

there were 73,000 in October for traditional credit counseling. So 

not only has the new law introduced the new concept of pre-discharge counseling and pre-bankruptcy counseling, which are good 

in and of themselves, but it has also introduced the concept to a 

lot more consumers and made it safer to seek traditional credit 

counseling, about a 30-percent increase. 

These numbers indicate, Mr. Chairman, that the means testing 

and the pre-bankruptcy credit counseling mandate are working. Recall that the principal policy objective of bankruptcy reform was to 

say that people who can repay some or all of their debts ought to 

do so, and that seems to be happening under the new law. 

Now, one major result of bankruptcy reform is this increased 

credit counseling. We think that is a positive. Is it perfect? Of 

course not. But credit counseling can and does help consumers to 

keep out—helps keep them from getting into financial trouble, and 

for those consumers for whom bankruptcy is the appropriate and 

the last available option, credit counseling helps keep those consumers out of financial trouble into the future. 

The Justice Department has estimated that some 10 percent of 

consumers who get pre-bankruptcy counseling do not file for bankruptcy. And recall there is that much larger number that come in 

for traditional credit counseling and find ways out of their difficulty. Counseling is now widely available from numerous sources 

through multiple channels, and that was the intent of the law: inperson counseling, telephone counseling, and Internet counseling. 

24

I must say, Mr. Chairman, that the nonprofit agencies that are 

members of both AICCA that Mr. Jones represents and NFCC have 

really stepped up to the plate to make this law work. They have 

applied in large numbers to become certified agencies. They have 

sacrificed. They have stepped up to live by ethical requirements as 

established by the Justice Department, as, in fact, they always had. 

We are better off today for the efforts of those agencies and their 

dedicated professionals who work day in and day out to help these 

consumers. It is clear that these agencies are acting as Congress 

had intended. 

It is also important to note that the Justice Department certification itself is a significant enhancement to the law which had not 

existed. I don’t know whether this was an unintended consequence, 

but it is a consequence of great note. For the first time, consumers 

can know who are the good-guy agencies as distinguished from the 

bad-guy agencies and have some reliance on being able to go to certified agencies, agencies certified by the U.S. Justice Department 

that these are agencies that they can rely on. That in and of itself 

improves the system rather dramatically. 

Now, Mr. Chairman, we believe that the counseling system can 

be improved. We have, in fact, submitted some specific suggestions 

to the Justice Department which have been made a part of this 

record. The most important suggestion, it seems to me, is that prebankruptcy certificates could be extended for a year—could be good 

for a year prior to pre-bankruptcy filing as opposed to just the 6 

months. We think that gives consumers a much larger window of 

time to consider their options and try to work themselves out of 

trouble. We think that each of the issues that we have raised and 

others have raised can be corrected in regulatory action. 

So, Mr. Chairman, so far, so good. Bankruptcy reform is working. 

Prior to the enactment of this law, Congress had not reformed 

bankruptcy laws significantly since 1978. We need to let the law 

mature before considering any legislative changes. Congress did 

the right thing for the consumer and the economy in passing this 

bankruptcy reform. It is now time to make sure the legislative success is correctly implemented. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Bartlett appears as a submission 

for the record.] 

Chairman SESSIONS. Thank you. 

Mr. Jones? 

STATEMENT OF DAVID C. JONES, PRESIDENT, ASSOCIATION 

OF INDEPENDENT CONSUMER CREDIT COUNSELING AGENCIES, POINCIANA, FLORIDA 

Mr. JONES. Thank you, Mr. Chairman. I am very happy to address the future viability and progress of the BAPCPA over the last 

year. 

Chairman SESSIONS. Is your microphone on? 

Mr. JONES. Maybe I turned it off. 

Chairman SESSIONS. That is a little better. 

Mr. JONES. I probably did. Well, thank you anyway, and let me 

restate here. I am very happy to address on behalf of our members 

the future viability and the progress that has been made over the 

25

last year since passage of BAPCPA. We provide counseling and 

education to millions of U.S. consumers and annually return over 

$3.2 billion in consumer payments to the Nation’s creditors. We 

deal with a lot of consumers. In addition, we have counseled over 

200,000 consumers entering the bankruptcy system to date, and I 

want to talk about five major areas of concern that we have with 

the administration of the bankruptcy law. 

The first concern I have is the future adequacy of the credit 

counseling resources. The present number of approved agencies is 

more than adequate to satisfy the need for pre- bankruptcy counseling currently. However, we have serious concerns about the adequacy of counseling capacity when those filings significantly increase, which they probably will. A surge of capacity in such circumstances could trigger provisions that provide for suspension of 

the counseling requirement in some judicial districts unnecessarily, 

and we believe strong efforts should be made to avoid such an outcome. 

The second point involves the need to clarify filers’ ability to pay. 

Every approved agency provides mandated counseling at a reasonable fee or provides services without regard to ability to pay that 

fee. We applaud that criteria, and it is consistent with our own 

member accreditation standards. However, approved agencies have 

consistently been offering bankruptcy counseling at a significant financial loss. All the information we have seen indicates the cost of 

providing a bankruptcy session, in accord with the EOUST criteria, 

is about 50 bucks while the average payment for such a session 

turns out to be around $32. Currently approved agencies simply 

will not be able to continue participation over the long term if the 

provision of BAPCPA counseling does not become at least a breakeven proposition. Now, that could change if the population changes, 

the bankruptcy population changes and more people select debt repayment plans, or it could change if we got some kind of relief from 

the EOUST on whether somebody who clearly can pay a fee could 

be required to pay that fee. 

The third point involves the question of what constitutes legal 

advice. It would seem obvious that a counselor assisting a financially troubled debtor needs to be able to advise that individual 

that bankruptcy is one available option; that bankruptcy may offer 

either liquidation or partial repayment of debts, depending on circumstances; and that a bankruptcy will remain on the credit report 

for a decade. These factual matters can be readily distinguished 

from the giving of legal advice. 

BAPCPA’s legislative history supports the view that Congress intended to ensure that debtors receive informed and objective advice 

from two separate sources: an approved CCA and an attorney. Assuming that the EOUST addresses the proper pre-bankruptcy roles 

of attorneys and CCAs in the more comprehensive regulations it 

plans to propose, we would urge it to clarify the legal and ethical 

boundaries for interaction between these two professions. 

Fourth, approved agency removal issues. The EOUST has proposed that, in certain circumstances, its decision to revoke an agency’s approved status need not wait upon exhaustion of its opportunity for administrative review but may be effected immediately 

by an interim directive. We hope that this short-circuiting of the 

26

administrative appeals process will be rare and take strong exception to the EOUST’s proposal. 

It is clear that, while nonprofit status is required to become an 

approved CCA, tax-exempt status is not. Because tax-exempt status is not a statutory requirement, the EOUST should not deprive 

an approved CCA of its appeals right simply because it might lose 

or has lost that status. 

My final point involves debt settlement plans, something that 

really has not been broached and is part of the code. Section 502(k) 

allows the court, on a debtor’s motion and after a hearing, to reduce a claim by up to 20 percent if the creditor unreasonably refused to negotiate a reasonable alternative repayment schedule 

proposed in a timely manner. This provision potentially provides 

approved agencies with the ability, and possibly the obligation, to 

negotiate a debt settlement plan on behalf of the debtor who lacks 

the financial resources to complete a 100-percent repayment plan. 

Given the potential of debt settlement plans to provide benefits 

to both debtors and creditors, as well as the new responsibility 

thrust upon agencies by Section 502(k), we believe that the EOUST 

should address this topic in its more comprehensive proposed regulations. 

Overall, we believe that the mandated credit counseling has been 

successful. It is, in my view, a boon to consumers. It is having a 

very beneficial effect on bankruptcy petitioners. They get possible 

alternatives, and their understanding of specific personal financial 

issues is improved. 

Thank you for letting us share these views, and I would be happy 

to answer any questions. 

[The prepared statement of Mr. Jones appears as a submission 

for the record.] 

Chairman SESSIONS. Thank you. 

Judge Newsome? 

STATEMENT OF RANDALL J. NEWSOME, CHIEF JUDGE, U.S. 

BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF 

CALIFORNIA, OAKLAND, CALIFORNIA 

Judge NEWSOME. Good afternoon, Mr. Chairman. The Bankruptcy Abuse Prevention and Consumer Protection Act has now 

been in effect for about a year, and as I understand it, the purpose 

of this hearing is to give the Act its first annual check-up. 

As I said in my written testimony, we really do not have enough 

data from which to draw conclusions about the effects of the bill, 

but I have to say, listening to Professor Zywicki, it sounds like he 

has data that I have not seen and that I would be very interested 

in seeing as to the effect on women and the access to the system 

and so forth. 

Putting all that aside—and, by the way, I should note that in our 

district, in the Northern District of California, we have had probably 7,000 cases filed this calendar year. We have had one motion 

to dismiss under the means test. Just one. And that was withdrawn by the U.S. Trustee. 

Putting all that aside, I still believe very strongly, as I always 

have in this debate, that while Congress can change the law, it 

cannot change the math. And the numbers appear to be dripping 

27

with red ink for millions of consumers in this country. Maybe I just 

scare easily, but I find those numbers shocking. The median household income in the United States has essentially been flat since 

1989, but outstanding consumer debt has tripled in those 17 years. 

Revolving consumer debt has quadrupled during that same period, 

and those numbers don’t include mortgage debt, the median 

amount of which rose some 27 percent between 2001 and 2004. 

Now, it does not matter how fast your house is appreciating, and 

right now they do not appear to be appreciating much at all, if at 

all. If you continue to lean up to the hilt to spend more or to simply 

make ends meet or, worse yet, to pay off the debt you have already 

got so you can spend even more, that is a losing proposition. 

Eventually, after consumers have burned all the furniture, to use 

a bit of bankruptcy jargon—in other words, squeezed every dollar 

out of their houses and out of their other assets and out of their 

credit cards and their home equity lines—the debt bubble will 

burst. And once it does, it will be critical to the health of the economy that those consumers not be trapped underneath all of that 

debt. If the country is to weather what may be a perfect financial 

storm, it will need the most efficient and accessible bankruptcy system we can devise so that consumers can reorganize their finances 

and get back on their feet. The present law should be fine-tuned 

to prepare us for this eventuality, or any other. 

I think I can safely say that all of the bankruptcy judges—for 

whom I am not speaking here today—in this country would be glad 

to assist the Subcommittee in this endeavor in any way you see fit. 

Thank you for this opportunity to be heard. 

[The prepared statement of Judge Newsome appears as a submission for the record.] 

Chairman SESSIONS. Thank you very much. Professor Lawless? 

STATEMENT OF ROBERT LAWLESS, PROFESSOR, UNIVERSITY 

OF ILLINOIS COLLEGE OF LAW, CHAMPAIGN, ILLINOIS 

Mr. LAWLESS. Thank you, Mr. Chairman, and thank you for inviting me to be here today. As you mentioned, I teach and write 

about bankruptcy law at the University of Illinois, and in my scholarly work, I base that on Government data but also on publicly 

available court files, as well as talking to debtors and interviews 

with the debtors and the people who file for bankruptcy. That research had led me to conclude that the abuse that many saw in the 

bankruptcy system before the passage of the law was not there. I 

still think it is not there. Nevertheless, we have got the law, and 

we have got the law to deal with. In the law, there are many new 

provisions that would benefit banks, credit card companies, car 

lenders, landlords—just about anyone that loans consumers money. 

Congress passed the law and the President signed it despite the 

expert advice of those who work in the bankruptcy field—bankruptcy lawyers, bankruptcy professors, and bankruptcy judges. Interest rates have not gone down. According to the Federal Reserve, 

interest rates on personal loans and credit cards are the same 

today as they were just before BAPCPA, to use the term that we 

have been calling it, went into effect. 

What about credit card fees? Credit card fees continue to rise. 

For the 3 months ended September 30th of this year, Citigroup reVerDate 0ct 09 2002 14:19 May 07, 2007 Jkt 034119 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34119.TXT SJUD1 PsN: CMORC
28

ported it made $1.3 billion in fees on credit and bank cards, an 8-

percent increase over the same time period 1 year previous. In October, Wells Fargo announced it was increasing late fees on its 

largest credit card accounts, the majority of its accounts, by 11 percent. 

On the 1-year anniversary of the new bankruptcy law—and we 

have heard a lot of talk about that here today—there has been a 

dramatic decline in bankruptcy filings. And it is certainly true that 

bankruptcy filings have declined. The numbers are still coming in. 

It depends upon what you compare it to, but maybe about one-half 

I think is a rough guess as to where they are from before the law 

passed. 

Some critics of the new law predicted that this dip is going to be 

short-lived and we are going to see bankruptcy filings return to 

their previous levels. Frankly, my expert opinion is that it is just 

too early to tell whether the law has led to a permanent readjustment of the bankruptcy filing rate. 

There is some reason to believe, however, that bankruptcy filings 

may return to their previous levels. Bankruptcy filings are trending 

upwards. But, in any event, I think that we are confusing a treatment here—bankruptcy—for a problem—financial distress. It is 

somewhat like confusing the hospital with the underlying disease. 

What the new law did is it made it more difficult for people to get 

into bankruptcy court and get less effective relief once they get 

there. By shutting off the hospital, nothing has been done, as 

Judge Newsome just referred to, to deal with the pressing needs 

of the American middle class. And what we know from previous 

scholarly research is that bankruptcy is a middle-class phenomenon. 

Of course, bankruptcy filing rates have gone down. The onerous 

new requirements on attorneys who represent consumers have increased their costs. It is not a matter of trying to increase or maintain profits. Attorneys have more to do under the new law. They 

have more investigation to do. They have more responsibilities. It 

is not surprising that costs have gone up. I think based upon some 

preliminary research and looking at court files, attorneys’ fees may 

have risen—and I want to emphasize ‘‘may’’—50 to 100 percent in 

some areas. 

Just as Americans drive less when the cost of gasoline rises, they 

are going to file bankruptcy less when the cost of filing bankruptcy 

rises. And just like rises in the cost of gasoline fall hardest on middle-class working Americans, rises in the cost of bankruptcy fall 

hardest on them as well. 

There is reason to believe consumer financial distress is on the 

rise. Judge Newsome referred to a figure in 2004. According to the 

Federal Reserve, the most recent figures show that home mortgage 

debt today, in 2006, is 75 percent higher than it was 5 years ago; 

300,000 properties entered some stage of foreclosure in the third 

quarter of 2006, an increase of 43 percent compared to the same 

time 1 year ago. 

The Boston Globe and New York Times have run multi-part stories about increasingly harsh debt collection tactics by consumer 

debt collectors. And with consumers owing more and with a less acVerDate 0ct 09 2002 14:19 May 07, 2007 Jkt 034119 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\34119.TXT SJUD1 PsN: CMORC
29

cessible bankruptcy system, it is not surprising that debt collectors 

have turned the screws. 

From bankruptcy courts and petitioners, we are hearing stories 

about the law’s harsh application. A disabled debtor who had not 

worked in years and had not had enough income to file a tax return since the 1970s was faced with a trustee’s demand that he 

produce those 30-year-old tax returns because the law requires the 

debtor to produce the most recently filed return. 

Two judges have interpreted the new law to prohibit filing bankruptcy on the day credit counseling is received. Another judge was 

faced with the situation of a debtor who had received credit counseling within 190 days rather than 180 days before filing bankruptcy. And I would support the extension of the credit counseling 

eligibility to 1 year. In dismissing that case where the credit counseling was received 190 days, just 10 days too long before, the debtors had tried to use that extra time to negotiate with their creditor. 

Nevertheless, the judge felt he had no choice but to dismiss. As the 

judge wrote, ‘‘The Court is obliged to dismiss regardless of the fact 

that debtors ‘almost’ met the requirements of the statute, regardless of the fact that debtors seemed to have satisfied Congressional 

objectives that were enacted as part of the statute, regardless of 

the fact that no one contends that debtors were not in good faith, 

and regardless of the fact that no one contends they did not make 

a zealous effort to accomplish the Congressional objective, and regardless of the fact that no useful purpose will apparently be 

served by dismissal.’’ So there is one example of debtors who needed bankruptcy court and were cutoff from access to it because of 

the new law. 

I thank you again for allowing me to speak to you today. 

[The prepared statement of Mr. Lawless appears as a submission 

for the record.] 

Chairman SESSIONS. I can give them a useful purpose for following the standard rule, which has a utility all of its own. But I 

guess judges can express their opinions and I can express mine. 

Mr. Hildebrand? 

STATEMENT OF HENRY E. HILDEBRAND III, CHAPTER 13 

STANDING TRUSTEE, MIDDLE DISTRICT OF TENNESSEE, 

NASHVILLE, TENNESSEE 

Mr. HILDEBRAND. Thank you, Mr. Chairman. I am a Chapter 13 

trustee in Nashville, Tennessee, and as a Chapter 13 trustee, what 

the trustees essentially are is the drive shaft of the engine that 

moves bankruptcy. We are the boots on the ground in the bankruptcy battles. We take positions, we advocate, but we also preserve the integrity of the system. We believe that is our task. 

As Chapter 13 trustees—and you mentioned this in your opening 

remarks—Chapter 13 does pay debt back. It is the mechanism that 

I heard people from Congress state. We wanted people to be able 

to recognize that Chapter 13 can be a useful tool to repay debt. 

Chairman SESSIONS. Mr. Hildebrand, would you just explain for 

people who may be listening here the difference in Chapter 7 and 

Chapter 13, as simply and as briefly as you can? 

Mr. HILDEBRAND. Simply, Chapter 7 is the liquidation of available non-exempt assets to satisfy debts. It is what you think of in 

30

bankruptcy, take all of the non-exempt assets, sell them at auction, 

and divide the proceeds. And, of course— 

Chairman SESSIONS. And wipe out all your debts. 

Mr. HILDEBRAND. Wipe out most of the debts. There are less 

than there used to be. That is what people think of, and 98 percent 

of the bankruptcies that are filed fall into that category. Chapter 

13 is the alternative. It is proposing a plan to repay the debts as 

best you can over a period of 3 to 5 years under the supervision 

of a court and a trustee. That in essence says what it is. 

Chairman SESSIONS. If the judge finds he can only pay part of 

the debts, then he would pay only part of the debts. 

Mr. HILDEBRAND. That is correct, Mr. Chairman. It is designed 

to be a manageable and adjustable tool to fit what debtors need 

and what families need in order to survive. 

Chairman SESSIONS. And collectors cannot call, they cannot file 

lawsuits, you cannot be harassed about paying debts. 

Mr. HILDEBRAND. We think they are still protected by the automatic stay, although there are some cases that lead that into question because of the new law. But while they are in that, then that 

is correct; they are protected. And we do pay substantial amounts 

back. I mentioned—as you mentioned, I am disbursing—just one 

trustee now out of 210, I am disbursing $150 million a year back 

to the community, back to the hospitals and the doctors and the 

shopkeepers that extended credit, as well as the auto lenders and 

everyone else. 

But we see what is going on. We have been charged with the responsibility of divining what was intended by the law, but all we 

have really to go on is the text—the text that was put into the statute. And we are somewhat mystified by some of the text, and as 

a consequence, we are seeing inconsistent positions and inconsistent decisions coming down from the court. And if there is a 

message I could deliver to this body, it is: Help us. Help us figure 

out what the intent was, and if the words are wrong, then we need 

to fix the words. And I encourage you, if there is an iteration, to 

change the words, that you consult with those of us who are in the 

trenches, those of us who are meeting with debtors. Yesterday I 

met with 50 families. Tomorrow I will meet with 50 more. That is 

my job. If you meet with us, then we should be able to assist you 

in doing that and reaching that goal. 

It is a little bit like—the crafting of this law, we think, is a little 

bit like crafting a health care system and not talking to any doctors. So we encourage you, if you do that, to do that. 

I would like to take just a moment to mention one thing that you 

mentioned and it was the focus of your questions to the Director, 

and that is the means test. Now, the means test in Chapter 7, as 

you pointed out, Senator, is to decide who has the capacity to pay 

and who doesn’t and who ought to be directed into 13. But what 

happened in Chapter 13 was that the means test was grafted in 

to figure out how much a debtor has to pay, not whether they can 

pay but how much. And we are struggling with what that means. 

And courts are 180 degrees diametrically opposed on what that 

means. 

For example, you defined the debtor’s income as the average over 

the 6 months prior to filing. So the debtor that is unemployed for 

31

the 6 months before filing but now has a great job, maybe a neurosurgeon, would pay nothing because Congress has defined his income as nothing. And then the sadder side is where the debtor has 

a great job and now has been laid off. But Congress has said because of the definition of this current monthly income that he can 

afford to pay a lot, when in reality he cannot. 

We are stymied with this. The ability to deduct from what you 

can pay to figure this number the payments you make on secured 

debt would allow an above-median-income debtor to pay for the expensive automobile, the vacation home—all of those things that 

under prior law trustees would challenge, would fight, and would 

bring it to the court. 

If there is one thing that we can ask you to look at, it would be 

to look at the all-disposable-income test; also to encourage you to 

look at providing to us the tools to be able to do that, so to make 

certain that trustees have the resources for staff, for training, and 

to make sure the system does work. 

Thank you for the opportunity to speak. 

[The prepared statement of Mr. Hildebrand appears as a submission for the record.] 

Chairman SESSIONS. Very good. I do absolutely feel that we have 

a responsibility to listen to people who practice it, and things that 

do not make sense resulting in injustices we should listen and fix, 

because this is our Federal court system and Congress is creating 

it and we need to make it work right. 

I would appreciate it if you would share in some detail those 

problems. I know there are some in your written statement, but 

more detail about that and maybe your suggestions for reform. 

Mr. HILDEBRAND. We would be delighted to do that, Senator. 

Chairman SESSIONS. Let’s see. We have a lot of interesting 

issues, and I will not go into them all. But, Mr. Zywicki, I became 

convinced—you made reference to it in your statement—that there 

was a generated system to create bankruptcy filings simply to get 

stays of eviction for people. We had the ads in the newspapers, 

‘‘Call us. Stop your eviction.’’ And when they got there, it was basically file bankruptcy. We took some steps toward ending that 

abuse, which I thought was a real abuse. 

Do you think that is working? You indicated you thought it may 

be. 

Mr. ZYWICKI. Senator, from what I can tell, one of the contributions to decreasing bankruptcy filing rates is a decrease in repeat 

filings generally. That could be from a number of reasons. There 

was an extension of the waiting period for receiving a discharge 

again. There is now a provision for counseling within bankruptcy 

for financial education that will hopefully reduce bankruptcy filings 

in the long run. But I think a substantial reason from what I can 

tell has been a reduction in repeat filings of the kind that you describe, which is the provisions in particular that expedite the process for lifting the automatic stay for somebody who is filing bankruptcy repeatedly just to prevent foreclosure without any purpose 

to actually try to work a repayment plan or discharge their debts. 

That, based on what I understand, has had a substantial increase 

in reducing those sorts of filings. 

32

Chairman SESSIONS. And I will ask you, Mr. Bartlett, you were 

critics of the existing system and supportive of reform. One of the 

things these forms and some of the more intensive review of the 

procedures was designed to do is to help avoid fraud. The person 

would hide assets or maybe feel like they could file bankruptcy and 

beat the system in some fashion and not put all their assets back 

into the pot for creditors that were required to go there. 

Do you think in tightening up some of these provisions that that 

may have led people to choose not to file bankruptcy? Could that 

be a factor in the decline in filing? 

Mr. BARTLETT. Well, Mr. Chairman, I think it was. I think that 

the fraud has clearly been reduced. I was never one to think that 

the excess bankruptcy filings were the result of fraud, but it was 

clearly there. And I think fraud in large part has been driven out 

of the system by the reforms that the law has made. 

But I think equally important has been the awareness by the 

consumer through a number of medium, including reading the 

newspapers, seeing reports of it, the mymoneymanagement.net 

that my organization has put up on the Web, and just simply talking with their bankruptcy attorneys and the counselors, an awareness that bankruptcy is a last resort, not a first resort, that many 

times there are a lot better options and that, in fact, if you can pay 

some or all of your debts, you ought to do so. Not only are you better off, but the overall economy is better off. 

So I think the idea of putting in the whole—the whole law is 

based upon the concept that if you can pay some or all of your 

debts, you ought to do so. And that has been the principal cause, 

I think, of the reduction of bankruptcy filings. 

Chairman SESSIONS. But, in truth, like you said, most people 

filed honestly in bankruptcy. Most people, I know Judge Newsome 

would know and Mr. Hildebrand would know, are justified. They 

have low incomes. They are below median income. And so for them, 

not much has changed, has it, Judge Newsome? 

Judge NEWSOME. A lot has changed. 

Chairman SESSIONS. What has changed? 

Judge NEWSOME. What has changed is they have to file at least 

eight new sets of documents to get any kind of bankruptcy relief 

at all, and that is expensive. When you are a lawyer and you have 

got to get your client to go out and find those documents—these 

people are not in bankruptcy by accident many times. It is not because they are great recordkeepers. They are in bankruptcy because they are very unsophisticated people, they do not keep their 

records very well, and the lawyer has to go out and spend a lot of 

time with these people trying to get them to gather up the documents they need. Regardless of whether they make nothing but Social Security every year, they have got to do it. 

Chairman SESSIONS. Well, they have to produce documents. 

Judge NEWSOME. Absolutely. They have always had to produce 

documents. 

Chairman SESSIONS. But if you want to come in and not pay 

somebody you owe a debt to, shouldn’t you be required to at least 

show you do not have income sufficient to pay them or assets sufficient to pay them? 

33

Judge NEWSOME. Absolutely. And Schedule I of Form 6 has always done, and if we think now— 

Chairman SESSIONS. Well, that is—Congress did not agree. All I 

am saying is Congress thought the tax returns—tax returns and 

what other documents are required? 

Judge NEWSOME. And, Senator, I lost so I am not here to argue 

with you about the law. If we got it, we are going to enforce it. 

That is our job. 

Chairman SESSIONS. Thank you. 

Judge NEWSOME. But you need tax returns, you need pay stubs, 

you need, of course, the credit counseling certificate. You have to 

fill out the first 15 lines of a 58-line form, regardless of whether 

you make just Social Security income, regardless of whether you 

could establish perhaps by one simple document, or there is no reason to believe that you have any other income, you have to do the 

same thing everybody else has to do regardless of what your circumstance. That is the one-size-fits-all problem. 

Chairman SESSIONS. Well, when I was a Federal prosecutor, 

sometimes that ‘‘no false statement to the Government’’ is the 

thing that becomes prosecutable. You ask these multiple questions. 

If the answer is no, you put no. If you do not have it, you put no. 

And then you find out that they lied and they got 40 acres out 

here— 

Judge NEWSOME. Put them in jail, Senator. I have always said 

that is the way to get the system cleaned up. 

Chairman SESSIONS. Well, you cannot prove it sometimes. I am 

just saying there is nothing wrong with asking some questions so 

that when the person goes through the process, they have had to 

adequately disclose their assets, I think. 

Mr. Hildebrand, you have been through that. 

Mr. HILDEBRAND. I agree with what you just said. I believe it is 

appropriate for debtors to disclose when asked, and I have always 

been able to do that. In fact, by providing to me the requirement, 

which I believe I have, to check four different numbers for income—I am looking at the B22 form that you mentioned, the current monthly income; I am looking at what the debtors said on 

Schedule I, which has always been there; I am looking at their pay 

advices that they have to file for the 60 days before they file; and 

I am looking at their tax return. So I have four numbers that I 

have to try and reconcile and ask the debtor: Why is your taxable 

income, gross income of your tax return so much different than 

your last two pay stubs? And why is that different than your current monthly income? And I am not saying that is wrong. 

Chairman SESSIONS. What do you learn when you ask that? 

Mr. HILDEBRAND. Well, I tell you, there is one thing, and you 

probably knew this as a Federal prosecutor. Sometimes you can 

look at somebody and you know when they are lying. You know it. 

And after 25 years of being a trustee, I got pretty good at looking 

and seeing that that is a real Rolex on your wrist. And you instinctively can tell that. I have tools now that can help me, but I do not 

need them in every case. I know the debtor that is 68 years old 

that came before me yesterday, who has Social Security income, 

they cannot find their last tax return, and they have to pay now 

to get some way for somebody to help them dig that out. 

34

Now, I wish that there was a way that it could not be applied 

to them. But it also angers me—and I am glad to have the tools 

to do that—when I see that person in the Chapter 13 trying to save 

their house, but then the next person comes up and they have got 

a third car they do not need and they have got a big screen TV and 

they have got a hot tub that they get to keep and they get to pay 

for because of the way that I mentioned that the disposable income 

test is written. And that makes me angry. I wish I had the tools 

to fix that. 

Chairman SESSIONS. You are right. there is a tension. We do not, 

Judge, want to have more burdens than we need. That is a valid 

concern. But we do need to make sure that the perception that 

bankruptcy is an invitation to fraud, we need to end that perception, and it was not as bad as some people thought before, but 

hopefully this will help. 

Briefly, Mr. Hildebrand, those that make above the median income are often required to go into Chapter 13. Explain to us why 

that is not so bad and why many, many people file Chapter 13 anyway when they could file Chapter 7. 

Mr. HILDEBRAND. Where you come from, where I come from, and 

in Georgia and in North Carolina and in Texas, there are enormous 

numbers of people that are filing Chapter 13, not because they 

have to but because they want to. I believe this is a bar issue, the 

debtor’s bar. The more that the debtor’s bar becomes sophisticated 

and educated, the better tool that Chapter 13 can be. 

Now, you did take away in the law some of the incentives for 

people to file Chapter 13. 

Chairman SESSIONS. The cramdown was one of them. 

Mr. HILDEBRAND. The cramdown. 

Chairman SESSIONS. Some. We did not eliminate it. 

Mr. HILDEBRAND. The 910 days is—you used to have to pay for 

the car more. I look at that as a loss to the medical community and 

the other creditors who are getting less as a result of that benefit 

to the car. But in the long run, Chapter 13 allows you to keep your 

house, restructure your debts, pay what you can afford to pay, and 

if it does not work, if for some reason you cannot do it, you can 

convert to Chapter 7, at which point you can demonstrate to the 

United States Trustee, ‘‘I really tried, and this is why I could not 

do the Chapter 13.’’ 

Chairman SESSIONS. I could not agree more about that. 

Judge Newsome and Professor Lawless, you expressed concern 

that continually arose in the debate over bankruptcy that I would 

like for you to address, although I think you do not—I mean, my 

view is firm that you do not fix too much borrowing, you do not fix 

too much mortgage on your home by making it easier to defraud 

your creditors or not pay your creditors. But tell me, how could 

we—what concerns do you have and what are some steps Congress 

might consider to avoid people who are financially illiterate from 

being sucked into too much debt? And I would just say this: I do 

not know that—you know, if they were not being offered credit 

cards, we would be suing these banks and all for not offering credit 

to people who have a realistic chance to pay back. We would say 

you are not doing enough. But how could we improve that? We did 

some steps in this bill that required disclosure, but it is not—let 

35

me just say this to you: This is a Banking Committee issue. Credit, 

lending, is not to be solved in a court procedure bankruptcy bill, 

in my view. 

Judge NEWSOME. I do not think you are going to like what I am 

going to say, and I may have to have an escort out of the building, 

given who is in the room. But one of the things that aggravates me 

greatly is when I look at a set of bankruptcy schedules and I see 

five credit cards or four credit cards or even three credit cards with 

$5,000 or $10,000 limits issued by the same bank. I see 25 or 35 

or—it is nothing anymore. It used to be in 1982 if you saw two or 

three bank cards on the schedule, that was about the max. Very 

rarely did you ever see more than two or three cards. Now, it is 

nothing to see 40 cards on a set of schedules, $200,000 in credit 

card debt. 

If it were up to me, I would say, look, if you issue more than one 

card to anybody with more credit than they should have, it is your 

tough luck. Let’s let the marketplace do its work. If you do not like 

the way the loan came out this time because they defaulted, then 

do not do it again. The same thing goes for when you have got 

three or four—you know, you have got 25—these people can all 

keep track of how much credit outstanding these people have or 

what is available to them. 

What if you said that if you issue a credit card into a totally insolvent situation, you cannot object to the dischargeability of that 

debt in the bankruptcy. Now, I know that is going to go over like 

a lead balloon around here, but really, I think that is one way of 

deterring lenders, putting a little more moral hazard into the lending practices of the credit card companies. 

Mr. LAWLESS. I agree with just about everything Judge Newsome 

said, and I would add that I think you have got to think about 

bankruptcy as part of the consumer credit system. We have been 

talking here today like— 

Chairman SESSIONS. I think bankruptcy is a court system that 

allows people to not pay their credit card debts. 

Mr. LAWLESS. Well, I agree— 

Chairman SESSIONS. Or any other debts, if they so qualify. 

Mr. LAWLESS. Well, I agree with that, and what I was going to 

say is that we are talking about bankruptcy like it is some end in 

and of itself as opposed to a means. And I think you asked a very 

good question about what else Congress can do, and I think Congress should look at restrictions on consumer credit lending, more 

regulation along the lines of limits on marketing to college students, limits on marketing to minors, limits on being able to send 

credit card solicitations to people who have just come out of bankruptcy. 

We might want to think about some national usury law. I am 

very reluctant to propose usury caps, but something at a very high 

level because we see things, and Congress just passed and I was 

very happy to see limits on payday lending around military bases, 

and something with very high caps that would—usury caps that 

would address some of the grossest abuses in the consumer lending 

industry. 

There are some other things that I think would work, to look at 

regulating things like universal default clauses, regulating some of 

36

the ability of the credit card companies to change provisions in 

their contracts at will with consumers. It is a one-sided system 

where the credit card companies get to call all the shots and get 

to change the rules pretty much at will. 

Chairman SESSIONS. Thank you. 

Mr. Bartlett, I always felt that it really wasn’t oppressing a person to give them credit cards and let them use them, but how do 

you respond to that? That to me has been one of the things that 

has made it difficult to pass bankruptcy reform, which, as I made 

clear, I think is sort of not part of our—shouldn’t be much a part 

of our discussion. But how would you answer that? 

Mr. BARTLETT. Well, Mr. Chairman, you are correct that bankruptcy is a judicial process that is available for people who are totally insolvent and cannot pay their debts. And bankruptcy should 

not be and under this new law is not available for people who can 

pay, who can repay some or all of their debts. 

Mr. Chairman, so far as the issuance of credit, I would say to the 

professor that proposals for usury limits and for Government-allocated credit and for some Government agency to decide who gets 

credit and who does not has been a system that has been tried in 

other countries. It has been tried from time to time with various 

laws around here. And always it has been an abysmal failure because when the Government starts allocating credit or allocating 

other things, well, then, there becomes a shortage and, in fact, you 

eliminate both fairness and you eliminate economic growth. 

The fact is the competitive marketplace is what issues credit 

today. By and large, the issuers of credit offer credit to people on 

terms that they can repay, and they repay it, and that is one of 

the things that has generated some of the economic prosperity that 

we have. 

The Federal Reserve just did a study on one of the points that 

Judge Newsome raised, and they concluded the opposite. They concluded that since 1970 the level of household debt service has 

stayed relatively flat, that it has risen only by a very small 

amount. Obviously, you can pick up statistics about what has gone 

up and what has gone down. But, by and large, the system works 

quite well. 

The idea of imposing price controls, which is oftentimes trotted 

out in Washington and elsewhere, or usury limits, that is a system 

that is doomed to failure, and it just simply—it is an allocation-ofcredit system in which the Government will decide who gets to buy 

a new car or who gets to buy a new house or who gets to buy anything else. And it is a system that is doomed to failure. 

I think a system in which the companies compete, lenders compete against one another and they compete ferociously brings the 

lowest cost, the highest efficiency, and the best allocation of credit. 

And there is a bankruptcy system, but that should be limited to 

people who otherwise are insolvent and not able to pay their debts. 

Chairman SESSIONS. Mr. Zywicki, do you want to comment on 

that? Any thoughts? 

Mr. ZYWICKI. Sure, I think there are a couple of points. 

First, obviously just by way of background, one of the reasons 

why people end up—sometimes people are issued more than one 

credit card by a lender, typically what has happened over the past 

37

decade or so is that because of mergers between banks and accumulation of credit card portfolios. Basically what happens is a person may have a credit card from two different banks. The two 

banks merge. They have got two credit cards then from the same 

bank. And then the question becomes: Should the bank cancel one 

of them? Which is a very different question from the one that I 

think was posed earlier. That seems to be something that has become more common. 

With respect to overindebtedness, I think in usury regulations 

there is—two observations for here. First, as Mr. Bartlett notes and 

as I have noted in some of my scholarship which is cited in my testimony, the debt service ratio has remained basically constant over 

the past 25 years, the debt service ratio basically being what is 

your ability to pay your bills every month as they come due—your 

credit card payments, your car loan, that sort of thing. 

That number has remained basically constant for 25 years. Why? 

Because interest rates have been very low for the past decade or 

so. If interest rates go down, people borrow more. Their monthly 

payments remain the same. They can pay more for a house. 

It turns out also housing values have gone up much faster than 

mortgage debt has. It turns out that the biggest polarization in 

wealth in America today does not seem to be between rich and poor 

but, rather, between homeowners and non-homeowners. Why is 

that? Basically we have seen this expansion of credit to lower-income borrowers. Homeownership in America is at an all-time high. 

About 69 percent of families own their homes now, an increase of 

5 percent over the past decade. Most of those people paid their 

loans. Most of those people are sitting on an incredibly valuable 

asset that they could not have gotten access to in the past and will 

not get access to in the future if impose wrong-headed limits on 

credit. 

Finally, I think we have to keep in mind that one reason why 

people borrow and one reason why people may borrow too much is 

because of the bankruptcy laws. If the bankruptcy laws give you 

a free pass, people are more willing to borrow more. People may 

be more willing to live beyond their means if the bankruptcy laws 

give you a free pass. If the bankruptcy laws instead ask you to 

repay some of that if you can, people may have a very different attitude toward their borrowing. That is not saying that everybody 

does that. Most people are in bankruptcy because of job loss or 

something like that. But it is certainly the case that people’s behavior will be affected by the bankruptcy laws themselves. 

Chairman SESSIONS. Well, I am glad we just had that discussion 

because it is a concern, it is a national concern that people are 

often getting in too much debt. And I think we have to adhere to 

the ideal that every American, when they take a credit card or sign 

up for a mortgage, is a responsible decisionmaker. And sad to say, 

people are irresponsible. Sad to say, if they can get their hands on 

two credit cards, they may run both to the limit and get so deep 

in debt they cannot get their way out of it. But when they are 

bankrupt, Mr. Bartlett, the bank does not get paid. Isn’t that correct? So you have a self-interest in not allowing the debts to get 

too high, else you take the big hit. You are the one that takes the 

hit. 

38

Mr. BARTLETT. Mr. Chairman, we are the other victims here, the 

victims of the financial loss. We spend a lot of—‘‘we’’ meaning our 

companies and the industry spends a lot, invests a lot of time and 

resources and money to try to educate consumers, to counsel with 

them, to provide resources so that they understand how to manage 

debt. 

We just opened up this new website, as I mentioned a minute 

ago. One of the things that does is to invite consumers to reach out 

to a certified credit counselor. We now have a list of certified, goodguy, Good Housekeeping Seal credit counselors that we can refer 

consumers to, and that helps a lot. That gives us a third party that 

we can send people to at the earliest signs of difficulties so that 

they can work their way out long before bankruptcy. 

I would also just note, Mr. Chairman, one piece of information. 

The other trade association, the companion with Mr. Jones, is 

NFCC. They just did a survey of their incoming customers or consumers that they counsel with in pre-bankruptcy counseling, and 

according to those consumers, 67 percent of them were there because of poor money management decisions. That is self-identified. 

And 29 percent were there as a result of a job loss, and about 2 

percent were there because of a medical loss or a medical difficulty. 

So, Mr. Chairman, in most cases, about two-thirds, it always 

comes down to poor management, poor decisions of money management, about two-thirds, and that is why we offer a lot of counseling 

to try to help people make better decisions. 

Chairman SESSIONS. I think we ought to teach people to be frugal. There is nothing wrong with watching how you spend your 

money. And it is easy today to be tempted and get out of control 

and overspend. 

My own view is that one of the greatest things about America is 

an average working person can get to the end of the month, have 

no money, have a flat tire, has no money and has got a piece of 

plastic and can go get the tire fixed and try to pay it back later. 

That is one of the fabulous things about this country. 

Another fabulous thing about it is that when you go around the 

world, like I have had the opportunity to do in recent years, particularly in some of the underdeveloped countries, houses are halfbuilt. They do not have windows in them. They will have the roof, 

and I asked one time about it, and he said, ‘‘Well, they don’t have 

money to buy the windows yet. They are saving up to get the windows.’’ 

We buy the house and take out a mortgage, and the average guy 

in America can borrow $100,000 and pay it back at 7 percent or 

less interest over 30 years and live in the house. What a fabulous 

thing this is. And I don’t think the banks deserve any moral credit 

for it. They are making money off the loan, or they would not be 

making it. But the system I think fundamentally works. 

And, Mr. Jones, credit counseling—the agency I visited in my 

hometown of Mobile, they bring the family in, they sit around the 

table, they decide what the income is. They help them see where 

they are misspending money, help them figure a way out of it. 

Sometimes the only way is bankruptcy. But I do think credit counseling plays a good role in this country, and I hope that we can 

come through some of the difficulties some of your companies have 

39

had and reach its fullest potential of helping people void unwise 

debt expense and work their way out of debt. 

Mr. JONES. I could not agree with you more. The problem in this 

country is not the availability of credit. It is financial illiteracy. 

And the more we can help people understand how to be good stewards of their family money, the better off we will be. 

Chairman SESSIONS. I think that is the purpose behind the Act. 

Thank you very, very much. This has been a very good panel. We 

will have your full statements in the record, and I will just pledge 

to you that we will continue to look at this. If you have any specific 

matters that you think should be adjusted in the Act, I would be 

glad to receive them. And as time goes by, I feel it is our responsibility to evaluate where we are going and fix the problem. 

If there is nothing else, we will stand adjourned. 

[Whereupon, at 4:37 p.m., the Subcommittee was adjourned.] 

[Submissions for the record follow.] 

[Additional material is being retained in the Subcommittee files.]

40


34119.001
41


34119.002
42


34119.003
43


34119.004
44


34119.005
45


34119.006
46


34119.007
47


34119.008
48


34119.009
49


34119.010
50


34119.011
51


34119.012
52


34119.013
53


34119.014
54


34119.015
55


34119.016
56


34119.017
57


34119.018
58


34119.019
59


34119.020
60


34119.021
61


34119.022
62


34119.023
63


34119.024
64


34119.025
65


34119.026
66


34119.027
67


34119.028
68


34119.029
69


34119.030
70


34119.031
71


34119.032
72


34119.033
73


34119.034
74


34119.035
75


34119.036
76


34119.037
77


34119.038
78


34119.039
79


34119.040
80


34119.041
81


34119.042
82


34119.043
83


34119.044
84


34119.045
85


34119.046
86


34119.047
87


34119.048
88


34119.049
89


34119.050
90


34119.051
91


34119.052
92


34119.053
93


34119.054
94


34119.055
95


34119.056
96


34119.057
97


34119.058
98


34119.059
99


34119.060
100


34119.061
101


34119.062
102


34119.063
103


34119.064
104


34119.065
105


34119.066
106


34119.067
107


34119.068
108


34119.069
109


34119.070
110


34119.071
111


34119.072
112


34119.073
113


34119.074
114


34119.075
115


34119.076
116


34119.077
117


34119.078
118


34119.079
119


34119.080
120


34119.081
121


34119.082
122


34119.083
123


34119.084
124


34119.085
125


34119.086
126


34119.087
127


34119.088
128


34119.089
129


34119.090
130


34119.091
131


34119.092
132


34119.093
133


34119.094
134


34119.095
135


34119.096
136


34119.097
137


34119.098
138


34119.099
139


34119.100
140


34119.101
141


34119.102
142


34119.103
143


34119.104
144


34119.105
145


34119.106
146


34119.107
147


34119.108
148


34119.109
149


34119.110
150


34119.111
151


34119.112
152


34119.113
153


34119.114
154


34119.115
155


34119.116
156


34119.117
157


34119.118
158


34119.119
159


34119.120
160


34119.121
161


34119.122
162


34119.123
163


34119.124
164


34119.125
165


34119.126
166


34119.127
167


34119.128
168


34119.129
169


34119.130
170


34119.131
171


34119.132
172


34119.133
173


34119.134
174


34119.135
175


34119.136
176


34119.137
177


34119.138
178


34119.139
179


34119.140
180


34119.141
181


34119.142
182


34119.143
183


34119.144
184


34119.145
185


34119.146
186


34119.147
187


34119.148
188


34119.149
189


34119.150
190


34119.151
191


34119.152
192


34119.153
193


34119.154
194


34119.155
195


34119.156
196


34119.157
197


34119.158
198


34119.159
199


34119.160
200


34119.161
201


34119.162
202


34119.163
203


34119.164
204


34119.165
205


34119.166
206


34119.167
207


34119.168
208


34119.169
209


34119.170
210


34119.171
211


34119.172
212


34119.173
213


34119.174
214


34119.175
215


34119.176
216


34119.177
217


34119.178
218


34119.179
219


34119.180
220


34119.181
221


34119.182
222


34119.183
223


34119.184
224


34119.185
225


34119.186
226


34119.187
227


34119.188
228


34119.189
229


34119.190
230


34119.191
231


34119.192
232


34119.193
233


34119.194
234

Æ


34119.195