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) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

42–675 PDF 2008

S. HRG. 109–1014

BANKRUPTCY REFORM

HEARING

BEFORE THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

FEBRUARY 10, 2005

Serial No. J–109–3

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 

HERB KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

DAVID BROG, Staff Director 

MICHAEL O’NEILL, Chief Counsel 

BRUCE A. COHEN, Democratic Chief Counsel and Staff Director 

(III)

C O N T E N T S 

STATEMENTS OF COMMITTEE MEMBERS 

Page

Biden, Hon. Joseph R., Jr., a U.S. Senator from the State of Delaware, 

prepared statement .............................................................................................. 75

Cornyn, Hon. John, a U.S. Senator from the State of Texas, prepared statements ..................................................................................................................... 83

Durbin, Hon. Richard J., a U.S. Senator from the State of Illinois, prepared 

statement .............................................................................................................. 93

Feingold, Hon. Russell D., a U.S. Senator from the State of Wisconsin, prepared statement ................................................................................................... 96

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

statement .............................................................................................................. 98

Kennedy, Hon. Edward M., a U.S. Senator from the State of Massachusetts ... 3

prepared statement .......................................................................................... 107

Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont .................... 3

prepared statement .......................................................................................... 110

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

prepared statement .............................................................................................. 2

Specter, Hon. Arlen, a U.S. Senator from the State of Pennsylvania ................. 1

WITNESSES 

Beine, Kenneth H., President, Shoreline Credit Union, Two Rivers, Wisconsin .................................................................................................................... 5

Bennett, Malcolm, President, International Realty Investments, Inc., Los Angeles, California .................................................................................................... 14

McCall, David, Director, District 1, United Steel Workers of America, AFL–

CIO, Columbus, Ohio ........................................................................................... 18

Menzies, R. Michael, President and Chief Executive Officer, Easton Bank 

and Trust Company, Easton, Maryland, on behalf of the the Independent 

Bankers Association ............................................................................................. 20

Strauss, Philip L., Retired Attorney, Family Support Bureau, Office of the 

District Attorney, San Francisco County, California, on behalf of the National Child Support Enforcement Association .................................................. 16

Vullo, Maria T., Paul, Weiss, Rifkind, Wharton and Garrison LLP, New 

York, New York .................................................................................................... 7

Warren, Elizabeth, Leo Gottlieb Professor of Law, Harvard Law School, Cambridge, Massachusetts .......................................................................................... 10

Zywicki, Todd J., Visiting Professor of Law, Georgetown University Law 

Center, Washington, D.C. .................................................................................... 12

QUESTIONS AND ANSWERS 

Responses of Maria T. Vullo to questions submitted by Senator Specter ........... 43

Responses of Todd J. Zywicki to questions submitted by Senators Sessions 

and Coburn ........................................................................................................... 48

SUBMISSIONS FOR THE RECORD 

Abbott, Greg, Attorney General of Texas, Austin, Texas, letter .......................... 52

American Bar Association, Robert D. Evans, Director, Government Affairs 

Office, Washington, D.C., letter .......................................................................... 53

American Land Title Association, Ann vom Eigen, Legislative and Regulatory 

Counsel, Washington, D.C., letter ...................................................................... 59

Page

IV

Beine, Kenneth H., President, Shoreline Credit Union, Two Rivers, Wisconsin, 

prepared statement .............................................................................................. 61

Bennett, Malcolm, President, International Realty Investments, Inc., Los Angeles, California .................................................................................................... 69

Clements, Richard R., Law Offices of Richard R. Clements, Long Beach, 

California, letter ................................................................................................... 79

Commercial Law League of America, Mary K. Whitmer, President, Jay L. 

Welford, Co-Chair, National Governmental Affairs Committee, Peter C. 

Califano, Chair, Legislative Committee Bankruptcy Section, Alan I. 

Nahamias, Chair, Bankruptcy Section, Judith Greenstone Miller, Co-Chair, 

National Governmental Affairs Committee, Chicago, Illinois, letter ............... 81

Cooper, Corinne, Tucson, Arizona, letter ............................................................... 88

Creel, L.E., III, Creel & Moore, L.L.P., Dallas, Texas, letter .............................. 90

Danner, Dan, Senior Vice President, Public Policy, National Federation of 

Independent Business, Washington, D.C. .......................................................... 92

Greendyke, William, Partner, Fulbright & Jaworski L.L.P., Houston, Texas, 

letter ...................................................................................................................... 104

Harshbarger, Scott, Murphy, Hesse, Toomey & Lehane, LLP, Boston, Massachusetts, letter ...................................................................................................... 105

LoPucki, Lynn M., Security Pacific Bank Professor of Law, University of 

California, Los Angeles, School of Law, Los Angeles, California, letter .......... 113

McCall, David, Director, District 1, United Steel Workers of America, AFL–

CIO, Columbus, Ohio, statement ........................................................................ 114

Manney, Mark, McClain, Leppert & Maney, Houston, Texas, letter .................. 116

Menzies, R. Michael, President and Chief Executive Officer, Easton Bank 

and Trust Company, Easton, Maryland, statement and attachment .............. 117

Moschella, William E., Assistant Attorney General, Office of Legislative Affairs, Department of Justice, Washington, D.C., letter and attachment ......... 139

Munsch, Russell L., Munsch Hardt Kopf & Harr PC, Dallas, Texas, letter ....... 142

National Association of Credit Management, Robin Schausell, CAE, President, 

Columbia, Maryland, letter ................................................................................. 143

National Association of Federal Credit Unions, Arlington, Virginia, statement 145

National Association of Realtors and the Institute of Real Estate Management, Washington, D.C., joint statement ........................................................... 153

Pelofsky, Joel, Spencer Fane Britt & Browne LLP, Kansas City, Missouri, 

letter ...................................................................................................................... 155

Small, A. Thomas, Bankruptcy Judge, Eastern District of the North Carolina, 

and Eugene R. Wedoff, Chief Bankruptcy Judge, Northern District of Illinois, proposal ........................................................................................................ 157

Spears, Berry D., Winstead Sechrest & Minick, Austin, Texas, letter ............... 193

Strauss, Philip L., retired Attorney, Family Support Bureau, Office of the 

District Attorney, San Francisco County, California, statement and attachment ...................................................................................................................... 195

Tucker, J. Maxwell, Winstead Sechrest & Minick, Austin, Texas, letter ........... 218

Vullo, Maria T., Partner, Paul, Weiss, Rifkind, Wharton and Garrison LLP, 

New York, New York, statement ........................................................................ 220

Warren, Elizabeth, Leo Gottlieb Professor of Law, Harvard Law School, Cambridge, Massachusetts, prepared statement, attachments and letter .............. 227

Westbrook, Jay L., Benno C. Schmidt Chair of Business Law, University 

of Texas at Austin, Austin, Texas, letter ........................................................... 238

Williamson, Brady C., LaFollette Godfrey & Kahn, Attorneys at Law, Madison, Wisconsin, letter ........................................................................................... 240

Woodward, William J., Jr., Professor of Law, Temple University, James 

Beasley School of Law, Philadelphia, Pennsylvania, letter .............................. 242

Zywicki, Todd J., Visiting Professor of Law, Georgetown University Law 

Center, Washington, D.C., statement ................................................................. 243

(1)

BANKRUPTCY REFORM 

THURSDAY, FEBRUARY 10, 2005 

UNITED STATES SENATE, COMMITTEE ON THE JUDICIARY, Washington, DC. 

The Committee met, pursuant to notice, at 10:15 a.m., in room 

SD–226, Dirksen Senate Office Building, Hon. Arlen Specter, 

Chairman of the Committee, presiding. 

Present: Senators Specter, Grassley, Sessions, Cornyn, 

Brownback, Coburn, Leahy, Kennedy, Biden, Feinstein, Feingold, 

Schumer and Durbin. 

OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. 

SENATOR FROM THE STATE OF PENNSYLVANIA 

Chairman SPECTER. The hour of 10:15 having arrived, we will 

commence this hearing of the Judiciary Committee. 

The bill we will be discussing today, S. 256, seeks to address existing bankruptcy abuses, while implementing appropriate consumer protection. It enjoys strong bipartisan support in the Congress and has come close to enactment into law on more than one 

occasion. 

Bankruptcy reform initiatives have been considered by the Congress since 1998, and today’s hearing will mark the 11th hearing 

convened by the Judiciary Committee on this or similar bills. Our 

counterparts in the House of Representatives have also held numerous hearings on this legislation. The Committee is holding 

hearings today to give an opportunity for renewed consideration to 

the pending legislation, even though there have been very many 

hearings in the past. This legislation has been one of the priority 

items of the Majority Leader and it is our hope to bring it up on 

the Judiciary Committee executive session a week from today. 

We are starting this hearing just a little later than we customarily do because we have had a meeting among Republicans on asbestos litigation. This has been a very busy time for our Committee, after having the hearings on Attorney General Gonzales 

and then moving last week to the class action bill, which we were 

able to report out of an executive session in a morning, which was 

prompt action for the Committee. 

The class action bill is on the floor today. We will renew the discussion at 11:30 and I will absent myself for a sort time to go over 

to open the hearings. We will open the floor action, but the bankruptcy hearings will continue during my absence and I will return, 

because we want to hear everybody and have an adequate opportunity for questioning by the panel. 

2

We have a very distinguished array of witnesses, and I believe 

that we have two of our colleagues here today to make introductions. Senator Schumer wishes to make an introduction. Senator 

Schumer is entering right on cue. 

I just mentioned you, Senator Schumer, and your interest in 

making an introduction. 

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

FROM THE STATE OF NEW YORK 

Senator SCHUMER. Well, thank you, Mr. Chairman, and I want 

to thank you for this opportunity. Ms. Vullo has come down. There 

are all sorts of things going on. I don’t know; you may not want 

this public, but she is doing a lot of nice things in family and she 

came down because she cares so much about this. I want to welcome her back. She is an accomplished attorney from my State. 

She has spent years fighting pro bono for the victims of violence, 

vandalism and harassment in providing safe and legal health services. 

For those who don’t remember or were not here then, were not 

members of this Committee, Ms. Vullo is here to remind us that 

the Bankruptcy Code should not be used as a safe haven for those 

who practice and are convicted of violence, no matter what their 

views on choice. 

I know it was not easy for Ms. Vullo to get here. I know she has 

to leave early, but she knew how important it was to be here to 

make the case. I remember Senator Biden was very impressed with 

her testimony when she came a few years back. 

Now, Mr. Chairman, since we were here last, the make-up of the 

Senate has changed and the make-up of the Committee has 

changed, but what hasn’t changed is the need for real, honest and 

fair bankruptcy reform. And what hasn’t changed is the need for 

an amendment to the current bill that prevents those who engage 

in violence and intimidation at clinics from hiding behind the 

Bankruptcy Code to escape court-imposed fees. 

The FACE amendment, which passed in the Senate 80 to 17, 

makes clear to those who would terrorize, use violence or threaten 

violence against women and doctors that bankruptcy is no escape 

from accountability. At the same time—and I underline this—it 

will do no harm, no harm, to legitimate protesters who are peaceful 

and who do not engage in violence or threats. 

So I hope now, as we reconsider this bill, that my colleagues will 

not do an about-face and oppose this critical measure. As I have 

said before, it is not pro-choice or pro-life; it is pro-rule of law and 

anti-violence. We are going after abuses of bankruptcy in this law 

and there is no reason why this abuse of bankruptcy shouldn’t be 

included as well. 

I want to thank Ms. Vullo for making this case, and I ask unanimous consent that my entire statement be placed in the record. 

Chairman SPECTER. Without objection, your full statement will 

be made a part of the record. 

Senator SCHUMER. Thank you for your courtesy, Mr. Chairman. 

Chairman SPECTER. Thank you, Senator Schumer. 

[The prepared statement of Senator Schumer appears as a submission for the record.] 

3

Chairman SPECTER. Senator Kennedy, I yield to you for an introduction. 

STATEMENT OF HON. EDWARD M. KENNEDY, A U.S. SENATOR 

FROM THE STATE OF MASSACHUSETTS 

Senator KENNEDY. Thank you very much, Mr. Chairman. It really is a great pleasure for me to introduce Elizabeth Warren, who 

serves as the Leo Gottlieb Professor of Law on the faculty of Harvard Law School and really is one of our Nation’s leading experts 

on bankruptcy law. 

She is often cited for her studies on the economic squeeze on 

middle-class families, as well as the economics of debt, health care 

finance and other economic stresses. She also works on policy 

issues relevant to corporate reorganization and sovereign insolvency. The National Law Journal has named Professor Warren one 

of the 50 most influential women lawyers in America, and her students at Harvard have awarded her the Sachs and Freund Award 

for teaching excellence. 

So we look forward to Professor Warren sharing her expertise 

with us. We thank her very much for being with us today. 

[The prepared statement of Senator Kennedy appears as a submission for the record.] 

Chairman SPECTER. Thank you very much, Senator Kennedy. 

I now yield to my distinguished ranking member, Senator Leahy. 

STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR 

FROM THE STATE OF VERMONT 

Senator LEAHY. Thank you, Mr. Chairman. Thank you for having 

this hearing. This is the first hearing on bankruptcy reform we 

have had in 4 years. It is long overdue. I am delighted you are 

doing it. 

I also would note that the Nation faces a lot different things than 

it did 4 years ago. We endured the terrorist attacks of September 

11th that only deepened the financial woes of this country. We 

have been witness to a parade of financial misdeeds by major U.S. 

corporations. The names of Enron, WorldCom, among others, left a 

bitter taste in the mouths of average Americans. They have damaged investor confidence. They have shaken our capital markets. 

Financially-troubled companies have short-changed their pension 

promises by nearly $100 billion, putting workers, responsible companies and taxpayers at risk. 

Since we last held a hearing on bankruptcy reform, 782,000 private sector jobs have been lost. Far too many Americans are working and barely making ends meet even when they are holding down 

two and three jobs. And we are immersed in wars in Afghanistan 

and Iraq with no end in sight. 

So I think when we discuss bankruptcy reform, we should do it 

in the context of real-life developments since 2001. To be appropriate and fair, the key provisions have to be carefully examined. 

This week, the Majority Leader, Senator Frist, said the following 

about bankruptcy reform legislation, quote, ‘‘It has been several 

Congresses since people have really looked at the bill very carefully. So we thought it was important to have hearings and have 

4

the opportunity to mark it up and modernize it before taking it to 

the floor.’’ 

I agree with Senator Frist. We should modernize the legislation, 

but we should take into account what has happened since 2001. 

For example, we should strengthen the financial safety nets for 

middle-class American families confronting illness or injury. Medical problems, I am told, contribute to about half of all bankruptcies, even though most of those who filed had health insurance 

when they first became sick. 

Many lose their jobs and their insurance because their conditions 

worsen, while others face thousands of dollars in copayments and 

deductibles not covered by their insurance. I am pleased Professor 

Warren is here and she could join us in discussing her recent research and analysis of illness and injury as they relate to bankruptcy. 

We should provide for more disclosure of information so that consumers may better manage their debts and avoid bankruptcy altogether. U.S. consumer debts have reached staggering levels, after 

more than doubling over the past 10 years. Consumer debt hit 

$1.98 trillion in October 2003, up from $1.5 trillion three years ago. 

Credit card debt is at $735 billion. The average household has a 

balance of a little over $1,200. 

I know that Senators Grassley, Durbin, Schumer and others 

share a commitment to include credit industry reforms in a fair 

and balanced bankruptcy bill. The millions of credit card solicitations made to American consumers over the past years have contributed to the rise of consumer debt. 

It doesn’t give me a huge amount of confidence as a Senator 

when I have a neighbor whose dog gets a credit card with a line 

of credit already on it. It makes me wonder sometimes when I hear 

the crocodile tears of some, if this may have something to do with 

it. Or when you try, as I did the other day, just as an experiment 

to get my frequent-flyers numbers back and they put you on hold 

for 34 or 38 minutes, hoping that you will hang up and they don’t 

have to actually come through with something, I lose a little bit of 

confidence. 

Additional disclosure is needed to ensure that consumers completely understand what is in there. When you get the credit card, 

you want to know just what you are getting. We have to be careful 

that our efforts to ensure accountability don’t inadvertently create 

problems for privacy and security. We are in an age where personal 

information can be easily digitized and shared. If it falls into the 

wrong hands, it is abused. Identity theft is one danger, as is tracking and harassing a battered spouse. We ought to look at how we 

can cut down on that. 

And then look at the economic hardships faced by service members’ families. That warrants our attention. Calls to serve their 

country in Iraq, Afghanistan or elsewhere can cause loss of family 

income, the closing of a family business, or additional expenses. 

Senators Durbin, Graham and others have taken an interest in this 

issue, and I will look forward to working with them. 

Now, there is one thing that has not changed. The campaign of 

violence, vandalism and intimidation continues to curtail the availability of family services and endangers providers and patients. 

5

The perpetrators of such violence continue to escape judgment 

through bankruptcy abuse. I want to applaud the senior Senator 

from New York for his work in this area. 

The 501-page bankruptcy reform bill introduced a few days ago 

has been stripped of the consensus clinic violence language. It fails 

to address the discharge of penalties for violence against family 

planning clinics. Such people can commit violence and escape. We 

should look at that, and I am looking forward to hearing from Ms. 

Vullo, who, as Senator Schumer has mentioned, has done a huge 

amount of pro bono work in this area. 

The rest of my statement, Mr. Chairman, I will put in the record. 

We have a lot of work ahead of us. I think this is an important 

hearing and I compliment you again for holding it. 

Chairman SPECTER. Thank you very much, Senator Leahy, and 

without objection, your full statement will be made a part of the 

record. 

[The prepared statement of Senator Leahy appears as a submission for the record.] 

Chairman SPECTER. Our practice at the Judiciary Committee is 

to have 5 minutes for the witnesses to testify, and I would appreciate it if you would observe the large timing lights in front of you: 

green, continue; amber, one minute left; and the red, stop. 

Senator BIDEN. Mr. Chairman, can you yield to me for five seconds? I have a hearing in the Foreign Relations Committee on the 

tsunami and the President’s request for about $1 billion, which I 

think is appropriate. 

I want to make clear to the witnesses that my coming in and out 

of this hearing is not a lack of respect. Senator Grassley and I have 

been working on this for 8 years. I am anxious to get it resolved. 

So my failure to be here is not a lack of interest, but I will be in 

and out. 

Chairman SPECTER. Well, thank you, Senator Biden, for those 

comments. That applies to other Senators, as well. There are hearings going on all the time and there is floor action, so it is no disrespect or lack of interest if Senators move in and out of the hearing. 

Our first witness is Mr. Kenneth Beine, who appears today on 

behalf of the Credit Union National Association. He is president of 

Shoreline Credit Union, a Wisconsin native, a graduate of the University of Wisconsin in 1974, with a master’s in finance from the 

University of Wisconsin in 1984. 

Thank you for joining us, Mr. Beine, and we look forward to your 

testimony. 

STATEMENT OF KENNETH H. BEINE, PRESIDENT, SHORELINE 

CREDIT UNION, TWO RIVERS, WISCONSIN, ON BEHALF OF 

THE CREDIT UNION NATIONAL ASSOCIATION 

Mr. Beine. Thank you. Good morning, Chairman Specter and 

other members of the Committee. I am Kenneth Beine, President 

of Shoreline Credit Union, in Two Rivers, Wisconsin. We are a $64 

million State-chartered, federally-insured credit union. I appreciate 

the opportunity to be here to tell you about our concerns with 

bankruptcies and how they are impacting credit unions, and my 

credit union in particular. 

6

I am speaking on behalf of the Credit Union National Association, which represents about 90 percent of the 9,100 State and Federal credit unions nationwide. We are very pleased that the Committee is holding today’s hearing on S. 256, the Bankruptcy Abuse 

Prevention and Consumer Protection Act of 2005. 

I sat in front of this Committee nearly 4 years ago today with 

a message from America’s credit unions. That message is the same 

today as it was then. Credit unions recognize that many people legitimately need the option to declare bankruptcy. What concerns 

us, however, are the cases of abuse by those who file Chapter 7 and 

totally walk away from their debt even though they clearly have 

the ability to pay part or all of that debt. 

Credit unions have consistently had three top priorities for bankruptcy reform legislation: a needs-based formula, mandatory financial education, and maintenance of the ability of credit union members to voluntarily reaffirm their debts. The bill before you today, 

while a product of compromise, does a good job of balancing these 

issues. We strongly urge the Senate to pass this compromise bill 

as soon as possible. 

CUNA strongly supports the provision in S. 256 that requires a 

person contemplating bankruptcy to receive a briefing about available credit counseling and assistance in performing a budget analysis. We also strongly support the provision in this legislation that 

would prohibit the Chapter 7 or 13 debtor from receiving a discharge if the debtor does not complete a course in personal financial management. 

Any sensible bankruptcy reform should include education requirements to give debtors the tools they need to make wise decisions about filing for bankruptcy and, more importantly, to succeed 

financially after bankruptcy. In anticipation of this, CUNA plans to 

develop face-to-face and/or online courses to fulfill this aspect of the 

legislation. 

I am confident that early financial education would have helped 

some young adult members of Shoreline Credit Union to make different decisions than they did. In one case, a couple in their mid20’s decided they wanted a clean slate prior to getting married. 

They ran up credit card purchases. One prepaid on auto loan with 

us to have the cosigner, their parent, removed. Both were employed 

full-time. They both then filed Chapter 7. My credit union’s share 

of their version of financial planning was a write-off of almost 

$3,000 in credit card balances, plus several hundred dollars on disposal of the automobile. 

Credit unions strongly believe that reaffirmations are of benefit 

both to the credit union which would avoid a loss and to the member debtor who, by reaffirming with their credit union, continues 

to have access to financial services and to reasonably-priced credit. 

Let me digress for a moment. We do not remove members who 

have a loss. We encourage them to continue to have a relationship 

with us and continue to have savings accounts. We also offer checking to those people so they can continue to conduct business. We 

do not want to contribute anybody to the unbanked. As not-forprofit financial cooperatives, losses to the credit unions have a direct impact on the entire membership due to a potential increase 

in loan rates or a decrease in interest on savings accounts. 

7

Perhaps the best demonstration of the credit union movement’s 

position that reaffirmation benefits both the member and the credit 

union comes from another real-life example. We had a middle-aged 

couple file for Chapter 7 due to several medical problems and loss 

of employment. They reaffirmed their automobile loans with Shoreline. Although not required to repay their credit card loans, they 

were adamant about doing so and did so quite voluntarily after discharge. Needless to say, they are members today in good standing 

and they only ask to be granted a loan. 

Credit unions are very anxious to see Congress enact meaningful 

bankruptcy reform and believe that needs-based bankruptcy presents the best opportunity to achieve these important public policy 

goals. Credit unions believe that consumers who have the ability 

to repay all or part of their debt should be required to file a Chapter 13 rather than have all their debt erased in Chapter 7. Therefore, CUNA supports the needs-based provision that is contained in 

S. 256. 

We hope that today’s hearing shows that the Senate is moving 

toward passage of bankruptcy abuse reform legislation, and we 

hope that bankruptcy reform will become law in the coming weeks. 

As I said earlier, I was here 4 years ago. It is an honor to be called 

back. 

Thank you. I will be happy to answer any questions. 

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

for the record.] 

Chairman SPECTER. Thank you very much, Mr. Beine. 

We now turn to Ms. Maria Vullo, partner in the law firm of Paul, 

Weiss, Rifkind, Wharton & Garrison LLP. She received her law degree from the New York University School of Law in 1987 and 

holds a bachelor of arts degree in political science from the College 

of Mt. Saint Vincent. She clerked for Judge MacKenzie in the district court in the Eastern District of Virginia. 

Thank you for joining us today, Ms. Vullo, and the floor is yours. 

STATEMENT OF MARIA T. VULLO, PAUL, WEISS, RIFKIND, 

WHARTON AND GARRISON LLP, NEW YORK, NEW YORK 

Ms. Vullo. Thank you, and good morning, Mr. Chairman and 

Senator Leahy and the rest of the Committee. Thank you, Senator 

Schumer, for your kind words. 

As the Chairman mentioned, my name is Maria Vullo and I am 

a partner at the law firm of Paul, Weiss, Rifkind, Wharton and 

Garrison, based in New York. And I appear again before this Committee. I was here, I think it was, in February of 2001, and I am 

testifying from my personal experience regarding a present loophole in the United States Bankruptcy Code that I very strongly believe needs to be fixed to prevent further abuse of the bankruptcy 

process by persons who are seeking to evade judgments that have 

been obtained through extensive litigation under the Freedom of 

Access to Clinic Entrances Act, also known as the FACE statute. 

I have been for almost ten years now—time goes by quite quickly—lead counsel for the plaintiffs in a case that was pending in 

Portland, Oregon, called Planned Parenthood of the Columbia 

Williamette v. The American Coalition of Life Activists. It is known 

as the Nuremberg Files case in many other forums. 

8

In February of 1999, after more than 4 years of litigation, and 

after a one-month trial, we obtained on behalf of our clients a $109 

million judgment under the FACE statute to compensate the plaintiffs for out-of-pocket security costs that they were required to 

incur because of threats of violence by certain extreme members of 

the anti-choice movement. The jury also awarded punitive damages 

in large sums against each of the 14 defendants. 

Since I appeared before this Committee, the Ninth Circuit, sitting en banc, affirmed the judgment and the injunction that had 

been issued by the district court. And the United States Supreme 

Court has denied the defendant’s petition for a writ of certiorari, 

and in the course of those proceedings the Solicitor General, Ted 

Olson’s office, filed a brief in support of my clients’ legal positions 

and the Ninth Circuit’s judgment. So there is no question here that 

the case has been fully litigated. The judgment is valid and the defendants are required to pay it. 

That being said, we have experienced, my law firm has experienced, over the past five years since the judgment was first rendered, some very significant obstacles in collecting on the judgment. This experience has led to the proposed amendment to the 

Bankruptcy Code that I urgently ask this Committee to pass. 

Just as a little bit of background, my clients are physicians and 

family planning clinics who were subjected to threats of violence, 

including the Nuremberg Files website which had dripping blood 

and cross-outs of names of physicians who had been murdered, 

grayed-out names of physicians who had been shot at and wounded, and those who were still working and living were not grayed 

yet or not crossed out yet. That was a threat of violence that all 

the courts have said is sanctionable under our country’s laws, as 

it should be. 

My clients live and work in relatively safe communities across 

the country, but have been forced, because of the defendants’ actions, to live under a constant threat of imminent attack. They 

have purchased and regularly have worn, and still wear, bulletproof vests. They have installed extensive security systems, including bullet-proof glass and reinforced steel in their homes and offices. They have warned their children’s teachers of the dangers 

that they face. 

They have developed emergency plans, should they come under 

attack, including instructing young children to hide in the bathtub 

when shots are fired. They vary their routes to and from work to 

protect themselves from assailants. They have installed window 

coverings to thwart snipers. They have purchased and wear disguises to avoid being recognized by extremists. And, of course, they 

are ever-vigilant in public. They are not secure in their homes or 

in their offices. They don’t live their lives like we do, and that is 

un-American and the defendants’ conduct is un-American. 

The passage of the FACE statute, however, has had a significant 

impact on the lives and safety of family planning clinic workers. 

We need the statute and its continued enforcement to save lives, 

but the statute cannot be fully enforceable if those who are found 

liable under the statute after years of litigation can simply go into 

a bankruptcy court or multiple bankruptcy courts, file a Chapter 

9

7 petition, trigger the automatic stay and cause relitigation and relitigation of the same issue. 

I experienced this personally in six different bankruptcy courts 

across the country after the verdict. I was in Jackson, Mississippi; 

Chattanooga, Tennessee; Norfolk, Virginia; Roanoke, Virginia; Baltimore, Maryland; and Greenbelt, Maryland—quite a list for a girl 

from Brooklyn. 

Following the jury’s verdict, the defendants announced that they 

intended to pay not a cent of the amount awarded by the jury. 

These are not honest but disfortunate debtors who find themselves 

unable to pay their credit card debts or mortgage. These are people 

who do not follow the laws of our country and believe that they can 

just abuse the bankruptcy process in order to avoid judgments that 

have been lawfully obtained against them. 

My firm has committed enormous research— 

Chairman SPECTER. Ms. Vullo, your red light is on. Could you 

summarize, please? 

Ms. VULLO. Sure, sure. 

The critics of the amendment that is being proposed may ask 

why it is needed, given that I won the issue ultimately after three 

or 4 years of litigation in the bankruptcy courts. And to this, I have 

two quick responses. 

First, an amendment that will make clear what the law already 

provides should not be controversial. Secondly, the amendment is 

needed most importantly because with it debtors will not be able 

to abuse the Bankruptcy Code by invoking the automatic stay, 

causing relitigation. It is very simple to make it unambiguous in 

the Bankruptcy Code that you cannot abuse the bankruptcy process and the automatic stay provision by filing for bankruptcy and 

causing relitigation. Just state in the statute that FACE judgments 

are non-dischargeable. 

Chairman SPECTER. Thank you. 

Ms. Vullo. Let me just— 

Senator SCHUMER. Mr. Chairman, this is important. It is the 

only witness on this controversial amendment. The witness came 

at great trouble to herself. Could she just be given another two 

minutes to make the end of her statement? I know that is asking 

a good deal with the amount of witnesses. 

Chairman SPECTER. There will be time for— 

Senator SCHUMER. She has to leave, Mr. Chairman. She flew 

down this morning and has to leave right after she speaks. 

Chairman SPECTER. When do you have to leave, Ms. Vullo? 

Ms. VULLO. I have to be in court this afternoon in the Southern 

District of New York. I am caught between United States Senators 

and a United States Federal judge. 

Chairman SPECTER. When do you have to leave, Ms. Vullo? 

Ms. VULLO. I have to leave no later than getting on the one 

o’clock shuttle, so I have to leave by noon. 

Chairman SPECTER. How much more time would you like, Ms. 

Vullo? 

Ms. VULLO. I just need a couple of minutes. 

Chairman SPECTER. Go ahead. 

Senator SCHUMER. Thank you, Mr. Chairman. 

10

Ms. VULLO. After extensive litigation and considerable expense 

over a period of four-plus years, as I mentioned, we won the issue 

in the bankruptcy courts under the current Code which deals with 

willful and malicious injury. But that does not mean that the 

Bankruptcy Code worked, because the relitigation demonstrates 

that it did not work. 

Enactment of an amendment is necessary because we had to relitigate the question of willful and malicious injury over and over 

again. While we won that issue, what we need here is a very unambiguous provision that says judgments under FACE or similar 

statutes are non-dischargeable in bankruptcy, so you don’t have 

lawyers engaging in sanctionable conduct, as I would submit, going 

into the bankruptcy courts, triggering the automatic stay and arguing about interpretation, as we lawyers like to do, of language in 

legislation. This is a loophole that needs to be fixed based upon 

documented abuse. 

I think I have said what I need to say. I strongly urge this Committee to consider an amendment to the Code. It is something that, 

as a private lawyer litigating this issue for many years, I have personal experience with and feel very strongly about because it is a 

problem in the Code that needs to be remedied. 

Again, I apologize that I have to leave to go to court. If there are 

any questions—and I recognize other members of this panel and I 

certainly don’t want to impose on them, but I apologize that I have 

to leave early. 

[The prepared statement of Ms. Vullo appears as a submission 

for the record.] 

Chairman SPECTER. Well, thank you, Ms. Vullo. 

If any of the other witnesses have any extraordinary time constraints, just let us know and we will try to accommodate you. We 

have limited the witnesses’ testimony to give minutes because our 

experience has been that when you get to the question-and-answer 

session, you are responding to matters of greater concern to the 

members which really is of assistance in the legislative process. 

Our next witness is Professor Elizabeth Warren, Leo Gottlieb 

Professor of Law at Harvard; an extraordinary background on writing, 50 book chapters; principal investigator on a number of empirical studies on commercial law. Her works have appeared in major 

national publications—Time and Newsweek. She was the reporter 

for the National Bankruptcy Review Commission and Vice President of the American Law Institute. She has a bachelor’s degree 

from the University of Houston and a law degree from Rutgers. 

Thank you for joining us, Professor Warren, and we look forward 

to your testimony. 

STATEMENT OF ELIZABETH WARREN, LEO GOTTLIEB PROFESSOR OF LAW, HARVARD LAW SCHOOL, CAMBRIDGE, MASSACHUSETTS 

Ms. WARREN. Thank you, Senator. Thank you for having me. 

This bill is 8 years old, and in 8 years bankruptcy has certainly 

been in the news: Enron, WorldCom, Adelphia, United Airlines, 

USAir, TWA, LTV Steel, K–Mart, Polaroid, Global Crossing, just to 

name a few. And many of the companies that have gone into bankruptcy are those associated with scandal. But I notice there is no 

11

response in this bill. There is no response because this bill was 

written before a lot of new problems were on the horizon: companies that file for Chapter 11 that cancel pensions plans and health 

benefits, leaving thousands of families economically devastated; 

companies that continue to pay executives and insiders tens of millions of dollars, while they demand concessions from their creditors; 

military families targeted for payday loans, insurance scams, and 

other forms of financial chicanery; scandals that have rocked the 

so-called nonprofit credit counseling industry; sub-prime mortgage 

companies that have unlawfully taken millions of dollars from 

homeowners, then fled to the bankruptcy courts to protect their insiders and bank lenders. 

In the 8 years since this bill was introduced, there has been a 

revolution in the data available to us. Unlike 8 years ago, we need 

not have a theoretical debate about who uses the bankruptcy system. We now know that 1 million men and women are turning to 

bankruptcy each year in the aftermath of a serous medical problem, and three-quarters of them had health insurance at the onset 

of the illness that ultimately bankrupted them. We know that a 

family with children is nearly 3 times more likely to file for bankruptcy than their counterparts who have no children. And we know 

that now more children every year live through their parents’ 

bankruptcy than live through their parents’ divorce. 

The effects on small business also need not be speculated upon. 

This Congress has the opportunity with this bill to make history. 

This would be the first law in the history of the United States that 

would discriminate against small businesses. It would say that the 

Enrons and WorldComs of the world can go forward with no new 

disclosures, no supervision by the United States—additional supervision by the United States trustee, no fixed deadline. But if you 

are a little business, all of those new restrictions will apply. And 

if you cannot meet them, you are automatically thrown out of 

bankruptcy under this bill. 

Now, we hear a lot about the means test. I remind the Senators 

with respect, it is one section of 217. But the key part of the means 

test to think about and all the other provisions that apply to families is they treat all families alike. It treats every family—it assumes that they are all in bankruptcy for the same reason: that 

they have overspent. This means that a family driven into bankruptcy by the increased costs of caring for an elderly parent with 

Alzheimer’s is treated the same as someone who maxed out his 

credit cards at a casino. A person who had a heart attack is treated 

the same as someone who had a spending spree at the mall. 

If Congress is determined to sort the good debtors from the bad, 

then it is both morally and economically imperative that they distinguish those who have worked hard and played by the rules from 

those who have shirked their responsibilities. 

I understand that bankruptcy losses hurt good people. My brother is a small landlord. My sister-in-law works for the Apartment 

Association. I have another brother who has run a small business. 

I am a member of a credit union. Those losses are real. No one denies that, and they can make a difference in the bottom line—a 1-

percent difference, a 2-percent difference in some cases. 

12

Those creditors are fully entitled to a system that is as free of 

abuse as we can humanly make it. But I want you to think about 

the people who are not here today. Think first about the fact that 

there are no representatives from the credit card industry here 

today, and yet they are the ones who will scoop up most of the benefit from this bill. As bankruptcies have risen in the 8 years that 

this bill has been pending by 17 percent, credit card profits, despite 

not adopting this bill, have gone up by 167 percent. They now top 

$30 billion annually. 

But think of the others who are not here. These are the people 

for whom bankruptcy law matters 100 percent: the Mom working 

two jobs trying to pay her bills; the family with a child battling 

cancer; the reservist who has been called up and lost his small 

business. These are good people who desperately did not want to 

file for bankruptcy. A difference in the bankruptcy laws is a 100-

percent difference to them— 

Chairman SPECTER. Professor Warren, your red light is on. 

Ms. WARREN. I will. Thank you. For these people it will be the 

difference between whether they can save their homes, whether or 

not they can stop the collection calls that come principally in the 

afternoons when the children are home from school, whether they 

can make peace in their lives after a catastrophe has hit them. 

Please don’t change the law without hearing from these people. 

[The prepared statement of Ms. Warren appears as a submission 

for the record.] 

Chairman SPECTER. Thank you very much, Professor Warren. 

I might add that all of the statements which have been submitted will be made a part of the record in full. 

We turn now to Professor Todd Zywicki, Visiting Professor of 

Law at Georgetown, Professor of Law at the James Buchanan Center, an author of some 40 articles in the fields of bankruptcy, commerce, commercial law, a law degree from the University of Virginia where he was executive editor of the Law Review, and a 

bachelor’s degree cum laude from Clemson. 

Thank you for coming today, Professor Zywicki, and we look forward to your testimony. 

STATEMENT OF TODD J. ZYWICKI, VISITING PROFESSOR OF 

LAW, GEORGETOWN UNIVERSITY LAW CENTER, WASHINGTON, D.C. 

Mr. ZYWICKI. Thank you. Distinguished Senators, it is a distinct 

honor to testify before you today on the subject of this bankruptcy 

reform legislation. 

Last year, over 1.5 million people filed bankruptcy in this country. During the past decade, annual bankruptcy filings doubled. In 

the past two decades, bankruptcy rates have quintupled—this during an era of almost uninterrupted prosperity, high economic 

growth, low interest rates, low unemployment rates, and rising 

stock in household real estate markets. More people will file bankruptcy this year alone than during the entire decade of the Great 

Depression. 

Let’s make one thing very clear at the outset, then. Record numbers of Americans are not filing bankruptcy because they have to. 

Many Americans are filing bankruptcy because we have a bankVerDate 0ct 09 2002 12:32 Jun 12, 2008 Jkt 042675 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\42675.TXT SJUD1 PsN: CMORC
13

ruptcy system that is out of control. We have a system riddled with 

fraud and abuse. We have a system where rich debtors use bankruptcy to walk away from debts they could repay but choose not 

to. We have a system where unscrupulous deadbeat fathers hide 

behind the machinery of the Bankruptcy Code to avoid paying alimony and child support, and divorced women actually have to 

stand in line behind bankruptcy lawyers to collect money that they 

are owed in bankruptcy. 

We have a system where debtors can abuse the unlimited homestead exemption by relocating on the eve of bankruptcy, leaving 

creditors in the lurch. We have a system where debtors conceal assets, like about their incomes, and manipulate the system, safe in 

the knowledge that their malfeasance rarely will be caught. We 

have a system where lawyers stampede their clients into bankruptcy while never asking whether a debtor should try to avoid 

bankruptcy through credit counseling. 

Senators, we have a bankruptcy system that is broken and must 

be repaired. It will not fix itself, and in 8 years the problems have 

not disappeared, and in 8 years the critics of this much needed reform still have offered no plan for fixing it. 

Those who turn a blind eye to bankruptcy fraud and abuse ignore its victims. Those victims include the unsuspecting divorcee 

who is sandbagged by the bankruptcy system when she learns that 

her property settlement has been discharged; the small businesses 

that are forced to raise prices, curtail services, or lay off workers 

to compensate for losses resulting from bankruptcy filings. They include hospitals that are unable to buy new equipment or hire another nurse because of unpaid bills discharged in bankruptcy. They 

include young and low-income workers who are unable to buy a car 

because they cannot get a car loan because of out-of-control bankruptcy system. And they include you and me, every American who 

is forced to pay more for credit, goods, and services because others 

file bankruptcy and walk away from debts they could pay but 

choose not to. This is unfair and unnecessary. 

This bill rebalances the consumer bankruptcy system in two 

ways: first, it increases protection against abuse, primarily by institutionalizing a systems of means testing, eligibility for filing Chapter 7; second, it installs important new safeguards against bankruptcy fraud. 

The central debate over this legislation boils down to one simple 

question: Should high-income debtors who can repay a substantial 

portion of their debts without significant financial or other hardship be required to do so? I believe the answer must be yes. 

Bankruptcy is intended as a last resort for those who are poor 

or unemployed, suffering from health problems, or otherwise down 

on their luck. Bankruptcy should not be a first resort for those who 

consciously choose to live beyond their means. Nor should bankruptcy be a mechanism for people to strategically take advantage 

of the system for financial gain. Means testing will improve the administration of the bankruptcy system, increase the recovery from 

high-income debtors, protect low-income debtors, and increase public confidence in the fairness and efficiency of the bankruptcy system. 

14

At the same time, means testing will protect the poor and unfortunate debtors for whom bankruptcy is intended. By definition, 

means testing does not apply at all to the great bulk of bankruptcy 

filers, the roughly 80 percent of Chapter 7 filers whose incomes are 

below the median. Nor will it apply to debtors who can demonstrate special circumstances to rebut the means-testing presumption. No honest unfortunate debtor will be denied the right to file 

bankruptcy under this or any other provision of the legislation. 

Does bankruptcy abuse occur? Every day. In one case, a Miami physician who earned over $245,000 per year tried to discharge 

$265,000 in unsecured debt. In addition to his homestead, he had 

property in Washington, D.C., with over half a million dollars of equity and three vacant lots in Colorado. I could give additional examples, but I think you get the picture. 

This bill would also create numerous new safeguards against the 

rampant fraud in the system today. The FBI estimates that 10 percent of bankruptcy cases contain some degree of fraud, especially 

a failure to fully disclose all assets. This legislation includes numerous, simple cost-effective measures to reduce bankruptcy fraud. 

Are fraud and abuse of bankruptcy filers the majority of individuals in the bankruptcy system? Senator, may I have 30 seconds to 

conclude? 

Chairman SPECTER. You may. 

Mr. ZYWICKI. No. But they are representative of a certain class 

of bankruptcy filers, those who file bankruptcy not as a result of 

financial hardship, as conventionally understood, but merely as a 

convenience to maintain an extravagant lifestyle. This legislation 

rebalances the bankruptcy system by targeting the worst forms of 

fraud and abuse in the system while leaving honest bankruptcy filers unaffected. It rewards old-fashioned virtues of thrift and personal responsibility and ends the shameful subsidization of upperclass profligacy by those who are forced to pick up the bill. I urge 

you to pass it. 

Thank you. 

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

for the record.] 

Chairman SPECTER. Thank you very much, Professor Zywicki. 

We now turn to Mr. Malcolm Bennett, who appears here on behalf of the National Multi Housing Council and the National Apartment Association. He is president and founder of the Minority 

Apartment Owners Association and founder of International Realty 

and Investments, Incorporated. 

Thank you very much for coming from California, Mr. Bennett, 

and the floor is yours. 

STATEMENT OF MALCOLM BENNETT, PRESIDENT AND FOUNDER, INTERNATIONAL REALTY INVESTMENTS, INC., LOS ANGELES, CALIFORNIA 

Mr. BENNETT. Thank you, Chairman Specter and other members 

of the Committee. Thank you for the invitation to be with you here 

today as you consider S. 256, the Bankruptcy Abuse Prevention 

and Consumer Protection Act. As said, my name is Malcolm Bennett. I am from Los Angeles, California, where I am the founder 

and president of International Realty and Investments, one of the 

15

largest minority-owned and -operated firms in the area. And, in addition, I formed the Minority Apartment Owners Association, which 

represents owners throughout Southern California. And today I am 

here representing the National Multi Housing Council and the National Apartment Association, and I would like to share with you 

my views as well as the industry views on the current Bankruptcy 

Code. 

While we are certainly in support of comprehensive and meaningful reform of the Bankruptcy Code, I will limit my comments to 

those that are of most interest to us, and that is the provisions of 

the automatic stay. 

As you are well aware, Section 362 of the Code essentially denies 

creditors the ability of collection effort when a person files for 

bankruptcy protection. For those of us in the rental housing community, this means that we are prohibited from continuing with 

the eviction process. While we certainly realize that the automatic 

stay provision to give debtors breathing room is a worthy one, however the rental housing industry and renters in general are disproportionately disadvantaged by this provision, especially when it 

is manipulated by people for personal gain. And I may explain, I 

have made my work putting people into housing, especially a lot 

of those that would almost be out of that safety net. And in the majority of cases, it has been tremendously rewarding. Unfortunately, 

there does come a time when a resident must be removed from his 

or her rental unit by eviction. Now, understand that as property 

owners we need tenants, and we would not evict a tenant without 

cause. And when we do use the eviction process, it is actually the 

last action that we take. And we do so following strict State laws 

and procedures which we believe to be fair and protective of the 

residents. 

We really cannot go in and change the locks and take possession 

of a unit. There are numerous legal matters that arise in the eviction process. On the whole, the average eviction takes about 3 

months, and during this time several things happen. Number one, 

there is no rent being paid by the tenant, and there is obviously 

the potential for extensive damage because the tenant knows that 

they are going to eventually be evicted, and there is no way to rerent the apartment. In the meantime, we continue to incur legal 

bills, ongoing utilities, and other miscellaneous costs associated 

with a unit that is basically out of service. 

Once we have been granted a judgment in a State eviction court, 

then he or she subsequently files a bankruptcy petition. And as you 

know, that automatic stay provision stops our eviction right in its 

tracks. And as a result, residents are allowed to stay in these 

places rent-free, which could be several additional months. And it 

is really most absurd when the situations arise out of illegal drug 

activities when we are mandated to get rid of these people, yet they 

are allowed to remain in because of the automatic stay. And, in addition, we run the possibility of losing good tenants. 

What is even more distressful is there are a lot of unscrupulous 

opportunities which exploit the automatic stay by going out and 

passing out to our tenants flyers saying that they can get them 

extra time by filing all sorts of frivolous motions in the eviction 

proceedings. Then after all of that fails, then they file for bankVerDate 0ct 09 2002 12:32 Jun 12, 2008 Jkt 042675 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\42675.TXT SJUD1 PsN: CMORC
16

ruptcy, stalling, which could take another several months. These 

abuses play out all across the United States, from large multi-family communities to single units. 

I would also like to point out that a recent study shows that 47 

percent of all rental housing is owned by individuals like me, and 

35 percent of all of those are properties with ten units or less. In 

short, when apartment owners, especially small firms, lose our 

ability, it is a great significant burden, and the added cost really 

impacts the low and moderate housing. 

Section 311 is a much-needed reform to the automatic stay. 

While it does not exempt rental housing from the automatic stay, 

it goes a long way to help the abuse. And what it really does, it 

denies an automatic stay if the property owner or manager already 

had a judgment prior to the bankruptcy being filed, and when the 

property is endangered with illegal drugs or controlled substances. 

Both of these will allow the owner to gain possession much faster. 

Also, it provides that needed protection for a tenant that wants to 

reinstate their entire monetary default and remain in the unit. 

At all cost, we try to avoid evictions, and as I move to close, this 

is an important step to reduce the abuse, and this amendment will 

go a long way. And I would like to thank you on behalf of the National Multi Housing Council and the National Apartment Association for the opportunity to present these points to you today, and 

I certainly will entertain any questions. 

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

for the record.] 

Chairman SPECTER. Thank you very much, Mr. Bennett, for your 

testimony. 

Our next witness is Mr. Philip Strauss, here on behalf of the National Child Support Enforcement Association, principal attorney 

for the Legal Division of the Department of Child Support Services 

in San Francisco; a bachelor’s degree in history from the University 

of California at Berkeley and law degree from the University of 

California at Hastings. 

Thank you very much for joining us, Mr. Strauss, and you are 

up. 

STATEMENT OF PHILIP L. STRAUSS, RETIRED ATTORNEY, 

FAMILY SUPPORT BUREAU, OFFICE OF THE DISTRICT ATTORNEY, SAN FRANCISCO COUNTY, CALIFORNIA, ON BEHALF OF THE NATIONAL CHILD SUPPORT ENFORCEMENT 

ASSOCIATION, SAN FRANCISCO, CALIFORNIA 

Mr. STRAUSS. Mr. Chairman, members of the Committee, good 

morning. As you said, I appear on behalf of the National Child 

Support Enforcement Association, whose membership consists of 

professionals at the local, State, and Federal Government levels 

who have the responsibility for administering and implementing 

the Federal child support enforcement program. I welcome the opportunity to discuss the effect that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 will have on the collection of child support and alimony when the debtor has filed a petition for relief under the Bankruptcy Code. 

For the last 31 years I was employed as an attorney for the City 

and County of San Francisco, and the last 28 I spent enforcing 

17

child support obligations. For the last 16 years, I specialized in the 

collection of support during bankruptcy and have taught this subject to attorneys both in California and nationally. I have litigated 

bankruptcy support cases before numerous bankruptcy courts, the 

District Court for the Northern District of California, Bankruptcy 

Appellate Panel of the Ninth Circuit, and the Ninth Circuit Court 

of Appeals. I retired from service in San Francisco in 2004. 

Seven years ago, I proposed amendments to the Bankruptcy Code 

which now appear in S. 256. It is my opinion and the opinion of 

every professional support collector with whom I have discussed 

the issue that the child support amendments contained in Sections 

211 through 219 of S. 256 will revolutionize the enforcement of 

support obligations against debtors in bankruptcy. These enhancements will also result in a more efficient and economical use of attorney and court resources. 

During the past 17 years in which I have taught the subject of 

support enforcement during bankruptcy, I have reviewed virtually 

every court opinion written on the subject since the enactment of 

the Bankruptcy Code in 1978. Based on this experience, I developed, in association with my colleagues, what essentially became a 

wish list of amendments to the Bankruptcy Code aimed at facilitating the collection of support from bankruptcy debtors. This wish 

list is reflected in Sections 211 through 214 and 216 through 217 

of S. 256. 

The most important amendment is found in Section 214 which 

removes several impediments to the collection of support. Of these, 

the most valuable by far is a provision allowing the continued operation of an earnings withholding order for support. Since State 

courts or administrative agencies have already determined the appropriate level of support and arrearage payment, the removal of 

withholding orders from the reach of the automatic stay will require a support debtor to design his or her bankruptcy plan to accommodate support debts—which are, of course, the most serious 

and primary of all financial obligations. Under current bankruptcy 

law the reverse is true. The support creditor is often forced to take 

a back seat to ordinary commercial creditors when a support arrearage payment is sought in a bankruptcy case. 

Under current bankruptcy law, when a debtor files for protection 

under Chapter 12 or 13, the collection of even ongoing support is 

stayed. The economic detriment to the family which is not receiving 

public assistance can be devastating. 

This amendment, therefore, not only ensures that the payment 

of support by wage earners will not be interrupted, but it will also 

avoid the need to entangle the debtor’s family in the bankruptcy 

process. 

In addition to the removal of the earnings withholding process 

from the automatic stay, other federally mandated collection processes would be exempt under Section 214 of the bill. These include 

the interception of the debtor’s tax refunds to pay the support obligation; the revocation of debtors’ professional, driver’s, or recreational licenses for those debtors who are not paying their support; the continued enforcement of medical obligations; and the 

continued reporting of support delinquencies to credit reporting 

agencies. 

18

Perhaps the second most important and useful section of the bill 

is contained in Section 213 which prevents a debtor from obtaining 

confirmation of a bankruptcy plan and a subsequent discharge if 

that debtor has not made full payment of all support first becoming 

due after the petition date. This section is significant for two reasons. It will prevent a support debtor from paying other debts at 

the expense of familial obligations. And, second, the provision is 

self-executing. Neither the support creditor, an attorney for the 

creditor, nor a public attorney will have to seek enforcement of this 

provision in bankruptcy court. 

I know that there has been some criticism that the bill will put 

child support creditors in competition with banks or financial institutions who have debts that have not been discharged because of 

this bill. However, there is no professional child support collector 

who believes that is a serious issue. We have never had a problem 

collecting support simply because a credit card or a financial institution was collecting support. Therefore, on behalf of the National 

Child Support Enforcement Association, we urge you to enact this 

bill so that these amendments can finally be implemented. We 

have waited a decade for them, and every year that goes by means 

support that is not collected for children. 

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

for the record.] 

Chairman SPECTER. Thank you very much, Mr. Strauss. 

Our next witness is Mr. David McCall, here on behalf of the 

United Steel Workers of America, where he is director of District 

1. He has had numerous key positions in the labor movement and 

leads the union’s negotiating committees for Republic Engineered 

Products, attended the labor studies program at Indiana University, Northwest, and graduated from the Harvard University trade 

union program. 

Thank you very much for joining us today, Mr. McCall, and we 

look forward to your testimony. 

STATEMENT OF DAVID MCCALL, DIRECTOR, DISTRICT 1, 

UNITED STEEL WORKERS OF AMERICA, AFL–CIO, COLUMBUS, OHIO 

Mr. MCCALL. Good morning, Mr. Chairman and members of the 

Committee. I am a member of our union’s International Executive 

Board and the USWA district director for the State of Ohio, a State 

that has lost over 200,000 jobs in the last 5 years, a State where 

our union and the workers and the retirees we represent have experienced bankruptcies at such companies as LTV Steel, Ormet 

Aluminum, Warren Consolidated Industries, Republic Engineered 

Steels, and Wheeling-Pittsburgh Steel, which are among the largest. Beyond Ohio, our union of over 1 million active and retired 

steelworkers has experienced bankruptcies at other locations such 

as Bethlehem Steel, National Steel, Kaiser Aluminum, and many 

other companies. Given the importance of bankruptcy law to the 

lives of our workers and our retirees, you can be sure that our 

International President, Leo Gerard, would be here today if he 

were not out of the country. But on his behalf, my own, and our 

union, we certainly thank you for holding these hearings and considering the perspectives that we offer. 

19

By itself, bankruptcy law cannot solve the many problems facing 

the American worker and pensioners today. It cannot roll back a 

flood of illegal imports that may undermine a plant or an industry, 

and it cannot directly challenge the transferring of manufacturing 

jobs to other countries. Nor can it necessarily close the widening 

gap between rich and not-so-rich in our country or solve the problems of our health care and pension systems. When these forces do 

drive companies under, our bankruptcy law should treat workers 

and retirees and their families as fairly and as humanely as possible. 

Most of the bill now before this Committee addresses consumer 

bankruptcies, but over the life of this bill and its predecessors, our 

union and the rest of the AFL–CIO have viewed S. 256 generally 

as rendering wholesale changes in the consumer bankruptcy system that would shift the rules decidedly in favor of creditors and 

to the detriment of individuals. 

Let me offer four points based on the experience of our union 

with manufacturing companies in bankruptcy. And much of this experience comes after and before the waves of bankruptcy in manufacturing. 

First, it is hard to say what is the worst thing about bankruptcies in manufacturing, whether it is the loss of tens of thousands of jobs and the impact on workers and their families; whether it is the extreme economic shock to the affected communities; 

whether it is the loss of hard-earned and promised benefits. But 

surely one of the most tragic injuries is when retirees, their 

spouses, and surviving spouses lose through bankruptcy their 

health insurance, just at a time when it is most needed in their 

life. These are citizens who spent a lifetime working in hard and 

dangerous jobs to earn what was supposed to be a lifetime employer-paid retiree insurance, only to lose it all as a result of the 

bankruptcy. If bankruptcy law is to be seen as legitimate and credible, it must be as humane and fair as possible on this particular 

subject. Therefore, when bankrupt companies sell its assets to a 

buyer, the buyer should fund or support at least a portion of the 

previous health care promises. I know Senators Leahy and Durbin 

and Rockefeller have each developed ideas that would dedicate a 

greater share of the bankruptcy estate to the needs of retirees who 

lost their health care in bankruptcy. 

Second is the subject of pensions. Even with a comprehensive 

Federal pension law such as the PBGC, bankruptcies leave behind 

too many victims. The shock and nightmare of workers and retirees 

losing a substantial amount of a pension benefit because of the termination of the plans in bankruptcy is a tragedy I have witnessed 

all too often. 

Third, the bill before you proposes to raise the priority for wages 

from 90 days before filing up to a maximum of $4,925. A new rule 

would give priority to those items earned in the 180 days prior to 

filing up to a maximum of $10,000. This is progress, but it is not 

a complete solution. For example, courts in most areas of the country view severance pay as being earned over a long period of time, 

often over somebody’s entire career. So even a rule prioritizing 180 

days’ worth of accrual brings very little severance pay to the priVerDate 0ct 09 2002 12:32 Jun 12, 2008 Jkt 042675 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\42675.TXT SJUD1 PsN: CMORC
20

ority category. In short, there are really two problems with the 

wage priority provision, both the amount and accrual period. 

Fourth, a section of this bill which does not appear until page 

495 of a 501-page document is entitled ‘‘Preventing Corporate 

Bankruptcy Abuse.’’ I believe a more comprehensive approach to 

the problem of corporate abuses could be addressed by eliminating 

or restricting key employee retention plans. These golden parachutes are payable to executives of a reorganizing company and rewarding them handsomely often after they have cut workers’ pay, 

reduced or eliminated retiree benefits, shuttered plants, and sold 

them off. A second area of concern is the problem of enormous 

sums of money going to bankruptcy professionals. Congress should 

look at restricting that. 

Finally, let me conclude by saying our union is committed to 

work with anybody in this Committee in particular on any issues 

over bankruptcy, and we thank you for your time today. 

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

for the record.] 

Chairman SPECTER. Thank you very much, Mr. McCall. 

Our final witness on the panel is Mr. Michael Menzies, who appears here today on behalf of the Independent Community Bankers 

of America. He is President and CEO of the Easton Bank of Easton, Maryland, has his bachelor’s degree from Randolph Macon College, master’s degree from Baltimore Loyola College, and moved to 

the Darden School of Banking at UVA. 

Thank you for joining us, Mr. Menzies, and the floor is yours. 

STATEMENT OF R. MICHAEL MENZIES, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, EASTON BANK AND TRUST COMPANY, 

EASTON, MARYLAND, ON BEHALF OF THE INDEPENDENT 

COMMUNITY BANKERS OF AMERICA 

Mr. MENZIES. Mr. Chairman, thank you. It is an honor to be in 

front of you today and to testify on behalf of the ICBA, the Independent Community Bankers of America, and I am especially honored that you waited for my testimony. 

Mr. Chairman, ICBA strongly supports S. 256 and appreciates 

the very hard work of this Committee over the past 8 years. We 

know you have truly been into this subject. 

Before sharing thoughts about the environment of personal bankruptcy and its impact on our communities, allow me to offer a brief 

illustration of the loan risk-taking process. Community banks are 

in the risk-taking business, and the reward for that risk, if properly underwritten, is earnings for all concerned. The customer benefits through financial health. The healthier the customer, the 

healthier the community, the healthier the bank, the healthier our 

overall economy, the healthier our tax base. The underwriting of 

consumer loan risk is a fundamental driver to all local economies. 

Successful consumer lending depends on numbers. Banks must 

make many loans to as many people as possible to diversify exposure and to spread the risk. In some respects, it is almost like 

health insurance without the impediments of health insurance. 

Consumer lending involves spreading risk over an entire portfolio. 

Many small loans are made, so profits from any one loan are small 

and profits come through volume. At the same time losses can be 

21

significant relative to unit profitability. This is especially true 

when the entire principal of a loan is lost all at once. Let me review the simplified consumer loan portfolio example that is attached to my testimony. 

The example consists of two revolving loan portfolios, each containing 100 loans of $1,000 apiece and each paid off within a year. 

One portfolio has an interest rate of 5 percent, the other portfolio 

an interest rate of 18 percent. 

If one loan in the 5-percent portfolio were to immediately default, 

regardless of reason, it would take the interest payments of 41 performing loans to compensate for that default. To put it another 

way, if you are earning 5 percent on a loan and you lose 100 percent of the principal balance of that loan, it takes 20 years of the 

same loan of interest earnings to offset the loss of that one loan. 

If one loan in the 18-percent portfolio defaults, it takes the interest from 12 performing loans to compensate for that default. Obviously, if a lender is experiencing greater losses than anticipated, 

they either have to charge more or be more selective in their underwriting process. 

There is not much more to underwriting than that, but it is difficult and lenders expend a tremendous amount of effort and energy to try to get it right. A lender that provides the greatest number of borrowers with the best rate while keeping defaults to a minimum is going to have the most reward and the most customers. 

Anything that enhances this process has obvious consumer benefits. Anything that detracts has obvious downsides. Again, we either have to raise rates or tighten loan standards. 

ICBA believes that bankruptcy is an appropriate solution for individuals who have legitimate reasons to walk away from their obligations. ICBA recognizes that all other borrowers pay for these 

losses created by those who are discharged from their debts. Sometimes these other borrowers are our children who inherit the impact of the cost of our credit system. This tax on the majority of 

individual borrowers should be mitigated wherever possible. 

Healthy consumer borrowers benefit communities, their economies, 

and our overall tax base. Economic disincentives such as unnecessary bankruptcies or the unnecessary discharge of debt hinders the 

wealth formation process that is necessary for social progress. 

Unbalanced bankruptcy policies have significant social implications, whether manifested in the casual avoidance of domestic support obligations, State taxes, or debts owed to lenders. A balanced 

policy will recognize that there are situations where it is appropriate to relieve individuals of all or part of their financial responsibilities, but at the same time will encourage Americans to take 

ownership of their personal financial health. 

ICBA would like again to express our strong support for S. 256 

and appreciate the efforts of this Committee to provide a modern 

legal framework for bankruptcy. We hope that after 8 years of extensive consideration the Committee will move expeditiously to 

enact this much needed legislation. On behalf of community bankers, we stand ready to do everything possible to help you with this 

effort 

Thank you, Mr. Chairman. 

22

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

for the record.] 

Chairman SPECTER. Thank you very much, Mr. Menzies. 

On behalf of Senator Grassley, we will introduce his statement 

into the record in full, and Senator Grassley would also like to submit the testimony of the National Association of Federal Credit 

Unions and a letter from the Department of Justice, all of which 

will be made a part of the record, without objection. 

As I had commented earlier, I am going to be due on the floor 

on the class action bill at 11:30, so I am going to defer my round 

of questioning and absent myself for just a few minutes. I think we 

have time for 7-minute rounds. There is a vote scheduled at 12:30, 

so we will have at least time for one round, and if there are other 

questions, we will give the members full opportunity to question as 

they see fit on into the afternoon. 

At this time I will yield to my colleague, Senator Sessions. 

Senator SESSIONS. Thank you, Mr. Chairman. I appreciate your 

leadership on this issue. I know I have inherited Senator Grassley’s 

Court Subcommittee, and he is the leader on this bill and has 

worked on it I guess for 8 years. It has been a big part of what 

I have done since I have been in the Senate. Former Chairman 

Hatch has worked on it very, very hard, and we have got a lot of 

bipartisan support, really. 

I think there is a real consensus that we can do better, that we 

as a Congress ought to evaluate this Federal court system. This is 

not like a State court system. It is a Federal system, and we have 

the responsibility to examine what is happening with it, see if it 

is working, and where it is not working to fix it. 

We have run into a lot of examples of abuses. Mr. Bennett, I 

think we had a little fuss over the housing matter last time, and 

rentals, but I think we really came up with compromise language 

that made a big step forward, because that bankruptcy law is clearly being abused when it comes to tenants whose leases expire, they 

have no right to be in there, and it just creates a nightmare. 

Mr. BENNETT. Thank you so much. 

Senator SESSIONS. Mr. Strauss, there is no doubt—I am so glad 

you made that passionately clear—that this legislation clearly benefits child support and those who are receiving alimony from the 

courts. That is something that has been handicapped by the bankruptcy laws, and we know we can do better about it. I personally 

believe and I think most Americans believe that if someone is making more than median income and can pay back a part of the debts 

that they owe, why don’t they do so? 

And I believe, Mr. Zywicki, you indicate that 80 percent of the 

filers in bankruptcy court are below median income. Is that correct? 

Mr. ZYWICKI. That is correct, Senator. 

Senator SESSIONS. And so the only people that would be impacted by the means test would be those who make median income 

or above, and many of those have substantial incomes. Is that correct? 

Mr. ZYWICKI. That is correct, Senator, and they have substantial 

expenses that they can deduct, such as medical expenses, for instance. 

23

Senator SESSIONS. Well, explain that. I know there has been 

some concern that somehow the medical expenses invalidate the 

bankruptcy reform bill. I will just put it that way. I see Dr. Tom 

Coburn here. Earlier he had to leave. But maybe someday if you 

can afford to pay the doctor or your hospital, maybe you should pay 

them. It is not as if they are evil entities, your physician or your 

hospital. If a person has a high income, they have got a low medical bill, maybe they can pay all or part of that. If they are below 

median income, they would not be required to pay it in any case, 

I assume. 

But would you comment on the discussion about health care. 

Mr. ZYWICKI. Thank you, Senator. With respect to your specific 

observations, those are exactly right. First, the way the means test 

works, you first have to determine whether a debtor is above the 

median income adjusted for family size. If not, then the means test 

completely does not apply. 

If they are above the median income, you then move to the second step, which is to determine—to establish a budget for the debtor to live on and several categories of expenses that are permissible 

and are subtracted right off the top before you determine these 

sorts of things, one of which is specifically medical expenses. There 

is a specific provision in the legislation on the means test that specifically makes a special allowance for health insurance and health 

care expenses and for caring for other health care expenses that 

arise in the family. 

Senator SESSIONS. In other words, if you moved into Chapter 13 

and the court evaluates how much money you should pay toward 

the debts you lawfully incurred before you filed bankruptcy, they 

would consider what your required health care payments would be 

before they would order you to pay anything. 

Mr. ZYWICKI. That is absolutely correct, Senator. 

Senator SESSIONS. If they are really high, you may not be required to pay anything because the court would give you credit, so 

to speak, for those extraordinary health care expenses. 

Mr. ZYWICKI. That is exactly right, Senator, yes. 

Senator SESSIONS. Well, I think that is important. 

Mr. Beine, you represent credit unions. You have members. You 

are a non-profit. But you heard Mr. Menzies suggest that the problem of raising costs for people who balance their checkbook and pay 

their debts every month when people manipulate the bankruptcy 

system. And you cited a young couple that clearly abused the system. Your credit union took the hit for that, as I understand it. 

Does that, in effect, cause you to raise rates on people who do not 

abuse the system? 

Mr. BEINE. In the end, yes. We have implemented risk-based 

lending, and we apply rates based on people’s credit history. And 

individuals who are in that category end up paying more because 

their fellow consumers have walked away from something. We all 

pay for that. 

Senator SESSIONS. There is no free lunch on it. 

Mr. BEINE. There is no free lunch. 

Senator SESSIONS. [Presiding.] I will just conclude by noting that 

this bill has really had a lot of intensive interest. It has been 

passed four times by both Houses of Congress. That is stunning, 

24

really, four times by both Houses. It had broad bipartisan support. 

In 1998, we passed a bill in the Senate 97–1. March 15th it was 

83–15. I think the need has continued to grow. The problems with 

abuses continue to grow. I believe the means test is a legitimate 

factor that will involve only a small percentage of people who file 

bankruptcy, and those would have the chance to show that they 

cannot pay back anything if they have extraordinary expenses that 

the court could take into consideration. 

We have made some progress, I think, on cram-down. We have 

made some progress on rental difficulties. We have made progress 

on quite a number of issues that have been hotly contested and debated. And generally we have ended up with real strong support 

across the aisle for the final bill. 

So I would now recognize our next member, which would be Senator Kennedy. I will recognize you on behalf of the Chairman. 

Senator KENNEDY. Thank you very much, Mr. Chairman. 

I would ask, Professor Warren, would you care to comment on 

what Professor Zywicki mentioned in terms of the bills in medicine. 

Ms. WARREN. Yes, Senator, I would be glad to. Indeed, I hope 

that what this colloquy means is that this Committee will consider 

adopting a safe harbor so that no family that has an income below 

the median will be required to go through all of the steps and all 

of the expenses in the means test that are currently imposed even 

when it is clear from the first minute of the petition’s being filed 

that this person would not be someone who should be—who would 

ultimately be forced to pay under the means test. 

As I recall, people have asked for that over and over, and it is 

a reminder that it is costs that matter to families whose median 

income is $25,000. Being forced to file the papers, go through and 

run the risk of the traps and tricks are a real problem. 

I also hope that what this means is that there will be an amendment that will say that every family, when going through the 

means test, whether they currently have health insurance or not, 

will be permitted an allowance for health insurance. If that is the 

case, it would go a long way toward ameliorating some of these 

problems. As I understand it, it does not currently do that. 

But I would also point out, Senator, as I said before, this is one 

of 217 sections in the bill, the means test. Every other section in 

this bill applies regardless of income and regardless of the reason 

that you file for bankruptcy. I cannot fathom why a family that has 

high medical bills would not be permitted to file a Chapter 13 repayment plan in a last chance to try to save their homes because 

they could not come up with more money for car lenders, which is 

what is currently required under the bill, or more money for appliance lenders. 

This bill is grinding everyone through, and everyone has gotten 

their nose in for a piece here and a piece there. The only ones who 

are not represented in this conversation are the 3.9 million Americans every year who are affected by this bill, the ones who file, the 

ones who are the children and other dependents of those who file. 

Senator KENNEDY. Yesterday you appeared at a press conference 

where they had three individuals who were all workers and who 

had been devastated by the health bills. And in that conference, 

you referenced a rather detailed study that you had done about 

25

what these people had actually gone through in order to avoid 

bankruptcy. Could you summarize that for us, please? 

Ms. WARREN. Yes, Senator Kennedy. If we could have the chart? 

We asked families, we did both surveys when they first filed for 

bankruptcy, written surveys. We examined their court records, and 

then we did extended telephone interviews with these families 

after bankruptcy. 

These families told us that before they filed for bankruptcy—

these were the medical bankrupts, the people who filed in the 

aftermath of a serious medical problem, a million adults every 

year. Sixty-one percent did not receive needed medical care because 

they didn’t have the money. They were spending their money trying to pay other bills. 

Fifty percent did not have prescriptions filled that their doctors 

had given to them because they did not have the money and they 

were trying to find a way to make ends meet. 

Thirty percent had worked so hard at not paying the electric bill, 

the gas bill, in order to try to meet their medical obligations that 

they suffered utility shut-offs; that is, they had the power turned 

off, they lost their telephones. 

And among a group of people who are middle class, people who 

went to college, got decent jobs, played by the rules, got health insurance, as they spun out of financial control, in trouble, 22 percent went without food because they had not enough money. 

And the last group that we identified here, 7 percent of the 

households who filed for bankruptcy moved an elderly parent to 

cheaper facilities in order to try to be able to meet their bills. 

Professor Zywicki is certain that these people have abused the 

system. All I know to do is to let them speak for themselves, to 

bring their stories here. We have done the research. These families 

have tried their best. Bankruptcy was not their first option. It was 

not their second option. It was not their tenth option. 

They told us stories about crying at the hearing, military people 

who had to be excused from the hearing because they cried so hard 

they could not talk any longer. 

There are people who abuse the system. There is no doubt about 

it. But that is not what is happening to most of the people who file 

for bankruptcy. 

Senator KENNEDY. Why doesn’t the means test protect those? 

Ms. WARREN. Senator, the means test just forces every single 

family, regardless of income, regardless of the reason that they 

filed for bankruptcy, to file new papers, to run new trips, to run 

new traps, ways to get them forced out of the system. It increases 

the cost for the attorney. It forces every attorney to take on new 

liability responsibilities, and that drives up filing fees for these 

families. There are 100 ways to squeeze the people among us who 

have been most desperately hurt by a broken health care system. 

Senator KENNEDY. My time is up. 

Senator SESSIONS. Professor Zywicki, I think I will give you a 

chance to briefly respond to her mention of your name. You did not 

suggest that everybody was abusing, did you? Or what percentage 

did you suggest may be abusing the system? 

Mr. ZYWICKI. Absolutely not, Senator. First, the FBI estimate is 

that roughly 10 percent of bankruptcy petitions contain some sort 

26

of fraud. Empirical evidence tends to suggest that 7 to 10 percent 

of bankruptcy filers would qualify for the means test. And if I could 

add one final footnote, I would refer— 

Senator SESSIONS. Repeat that now. 

Mr. ZYWICKI. Roughly 7 to 10 percent of the highest-income filers 

would be the ones who are affected by the means test. 

Senator SESSIONS. It would be less— 

Senator BIDEN. Could I ask for clarification? Only 7 to 10 percent? 

Mr. ZYWICKI. Yes, Senator. 

Senator BIDEN. Would be affected by this, is that what you are 

saying? 

Mr. ZYWICKI. The estimates are that roughly 7 to 10 percent of 

bankruptcy filers today would qualify for the means test and file 

Chapter 13 rather than Chapter 7. However, because the means 

test captures and targets the highest-income debtors with the 

greatest repayment capacity in the system, the people who are 

making $80,000, $90,000, $100,000, $120,000 a year, it is estimated 

that recoveries from those debtors would be roughly—that they 

could pay roughly 60 to 70 percent of their unsecured debt in bankruptcy. And I think there are two notes to be made about as it relates to this. 

First, with respect to the means test, the allowances, as I said, 

are subtracted. I would also refer the Committee to Section 102(i), 

which is labeled special allowance for health insurance, and I believe Professor Warren said that there should be a special carveout for health insurance payments. Section 102(i) is exactly that. 

Finally, I think that it is worth considering and I think that it 

is worth—the idea of whether or not we truly believe that medical 

providers should be treated as second-class citizens in bankruptcy, 

that just because a doctor delivers a baby or your neighborhood 

drug store sells you prescription drugs, the idea that they should 

not be entitled to the benefit of the means test for people who could 

repay their debts I think is troubling. 

Senator SESSIONS. Well, thank you. We do not want to get too 

far off base. But I think Senator Biden and maybe others would 

like to ask discreetly, just briefly. I had been using the figure that 

only about 20 percent of the people would qualify for the means 

test. Where do you get the numbers that now say 7? 

Mr. ZYWICKI. Certainly, Senator. I apologize for the ambiguity. 

The means test has two steps. At the first step, which is do you 

make above the median income, 80 percent of debtors make below 

the median income. That means 20 percent of filers move on to the 

second step. The estimates are that at the second step, you would 

determine that a number of the people who make above the median 

income would not have substantial repayment capacity after you 

subtract all of the allowances that are allowed by the means test. 

So after you subtract medical expenses, that sort of thing— 

Senator SESSIONS. Well, we better get back to regular order. 

Mr. ZYWICKI. And so roughly 10 percent are left over after you 

jump both of those hurdles. 

Senator SESSIONS. Senator Cornyn? 

Senator CORNYN. Thank you, Mr. Chairman. 

27

I want to express my appreciation to Chairman Specter, but also 

to Senator Biden and Senator Grassley for all the hard work they 

have done on this, long before people like me even came to the Senate. And I know this has been long in the process. 

I support bankruptcy reform because I think we need to restore 

a greater sense of personal responsibility to our financial system 

and prevent the abuses of the bankruptcy law that we have witnessed in recent years. Bankruptcy relief should be available to 

those who are unable to pay, not to those who are simply unwilling 

to pay. 

I would like to focus my comments and questions, though, on 

some new legislation that I filed earlier this week called the Fairness in Bankruptcy Litigation Act of 2005. And just by way of 

background for my colleagues, this arose out of an experience that 

I had in a previous life as Attorney General of Texas during the 

Enron bankruptcy. 

Of course, Enron was headquartered in Houston, Texas, but lo 

and behold, its bankruptcy was handled by a bankruptcy court in 

New York, where apparently they had had a subsidiary with 57 

employees, notwithstanding the fact that 7,500 employees were located in Houston, Texas, along with many of the creditors and witnesses and others, certainly the workers and the pensioners whose 

lives were directly affected by that bankruptcy. 

The purpose of the bill that I filed was to try to prevent judgeshopping in bankruptcy. We know that sometimes the most important determination made as far as the outcome of a lawsuit can be 

the court in which that case is heard. It is just human nature, certainly, that the party who benefits, here the debtor, might try and 

find the most favorable forum. We understand that being part of 

human nature. But it is our job to try to make sure the playing 

field is as level as possible and that nobody gets an unfair advantage going in. 

But I was very concerned because I saw the abuse from my perspective of the venue laws in bankruptcy in the Enron case where 

people in my State, my constituents were denied the opportunity 

for a forum that was close to home where they could actually have 

their claims heard and the case decided. 

As I have gotten into this, I have learned that there are a lot of 

people concerned about the same problem. For example, there is a 

new book written by Professor Lopucki of UCLA, I believe, called 

‘‘Courting Failure: How Competition for Big Cases Is Corrupting 

Bankruptcy Court.’’ And I know that Professor Warren, who we 

have talked to about this, shares some of those concerns. Professor 

J.L. Westbrook of the University of Texas Law School and a lot of 

other people ranging from—well, really on both sides of the aisle; 

my successor, Greg Abbott, as Texas Attorney General, but also 

former Massachusetts Attorney General Scott Harshbarger, a Democrat, who I guess is still head of Common Cause, or maybe just 

immediate past. 

So this is a concern shared by an awful lot of people, and I just 

want to ask—first I want to ask Professor Warren, first to express 

my appreciation for your consulting with my staff on this issue, but 

also then maybe to ask Professor Zywicki what your comments 

28

might be on judge-shopping in bankruptcy and the concerns that 

you may have. First, Professor Warren, would you please respond? 

Ms. WARREN. Yes, Senator. Thank you very much. It has been 

my honor to work with your office on this important issue. I do not 

think this is an issue of Republicans or Democrats, an issue of liberals or conservatives. It is a good government issue. And as I see 

it, the background system makes a promise, and that is that there 

will be full and fair access for everyone, every creditor, everyone 

who has been injured or affected by the process. 

In the case of large corporations that can leave their home 

venue—Enron, who can leave Houston, Texas, where its employees, 

where its pensioners, where its trade creditors reside—and escape 

the obligation to make the process open to the thousands of people 

who are directly affected by the bankruptcy, that affects the bankruptcy system overall. A fair bankruptcy system is one that retains 

access for the employees, for the pensioners, for the small creditors, 

and that means those cases need to stay home, not go to a distant 

location where they think they may get a better deal. 

Senator CORNYN. Well, I have been impressed by the range of 

people that are concerned about this, everyone from the Enron employees committee, which has endorsed this particular bill, the National Federation of Business, and it is really quite a broad range 

of people. But is it your impression, Professor Zywicki, that creditors and employees, pensioners and others who are forced to litigate a bankruptcy in a far-flung forum, that some of them just simply give up or perhaps the costs of litigating in that far-off forum 

simply exceed the value of their claim and so ultimately it benefits 

the debtor rather than the creditor, someone with a valid claim? 

Mr. ZYWICKI. Senator Cornyn, that is probably the case, but I 

have not studied this particular issue closely enough to render an 

opinion on your piece of legislation. 

Senator CORNYN. I appreciate that answer, and let me clarify. I 

am not asking you to endorse the legislation now, anyway. I would 

appreciate it if you would look at it and tell us what you think. 

Mr. ZYWICKI. Certainly. 

Senator CORNYN. But is it a widely recognized problem not just 

among legal scholars, academia, but also practicing bankruptcy 

lawyers, as well as debtors, creditors and others that forum-shopping, judge-shopping, if I may say, is a cancer on our bankruptcy 

system? 

Mr. ZYWICKI. Senator Cornyn, I think there is no doubt that it 

substantially increases the cost to creditors and that there are a 

number of people, including Professor LoPucki and others, who 

have expressed concern for quite some time about this problem. 

There are others who have not seen it as quite a problem, but certainly it is the case that it makes it more difficult for creditors, employees and others to vindicate their rights in a distant forum than 

it would be otherwise. 

Senator CORNYN. Mr. Chairman, before I relinquish the floor, let 

me just ask unanimous consent that letters of endorsement that we 

have received from a variety of scholars, practitioners and people 

who are vitally concerned with this issue be made part of the 

record. 

Senator SESSIONS. They will be made a part of the record. 

29

Senator CORNYN. Thank you very much. 

Senator SESSIONS. I believe Senator Biden is next. Without objection, we will go to Senator Biden. 

Senator BIDEN. Thank you very much. I will refrain from what 

I assure my friend from Texas will be an incredibly long fight over 

this amendment. I find the language that is used kind of fascinating—escape from the obligation to be open. 

Is the colleague suggesting that the Delaware chancery court is 

not open, is somehow an unfair court? I find it outrageous such a 

statement. Maybe you can tell me. Is it not a competent court? Is 

it not an open court? 

Ms. WARREN. Are you asking me, Senator? 

Senator BIDEN. Well, yes. You are the one that said ‘‘escape the 

obligation of making the process open.’’ 

Ms. WARREN. Actually, Senator, bankruptcy cases are not heard 

in Delaware chancery court. 

Senator BIDEN. Excuse me, in Delaware, in Delaware. Bankruptcy courts in Delaware are not open? 

Ms. WARREN. They are not open to employees of companies like 

Enron who cannot afford— 

Senator BIDEN. In what sense do you mean open? 

Ms. WARREN. Excuse me, Senator? 

Senator BIDEN. In what sense do you mean open? The record is 

not open or they can’t conveniently get there? 

Ms. WARREN. Employees of companies like Enron literally cannot 

go to Delaware and hire local counsel, which the Delaware bankruptcy court requires of them before they can make an appearance, 

and that effectively cuts thousands of small employees, pensioners 

and local trade creditors out of the bankruptcy process. If they 

can’t afford it, they are not there. 

Senator BIDEN. Can they afford it in the States in which they reside? 

Ms. WARREN. In the States that they reside in, they have local 

counsel, and local counsel can go down the block and appear on 

their behalf. 

Senator BIDEN. No, but can they afford it in those States? 

Ms. WARREN. Yes, and they do and they appear. 

Senator BIDEN. Well, I only have seven minutes and I should 

talk about the Bankruptcy Act that is before us because this is a 

proposed additional law and there will be plenty of time to debate 

it. 

Let me ask a couple of questions here. By the way, this did start 

8 years ago, this legislation, but there have been numerous 

changes to it in 8 years. Eight years ago, the person who stopped 

its passage was me because it did not have a safe harbor in it, it 

did not put women and children at the front of the line, it did not 

do a whole range of things that subsequently have occurred. We relitigated this 2 years ago, not in this Committee, but on the floor 

of the Senate, in conference, and we did it in great detail. 

I would ask unanimous consent that a statement that I have, Mr. 

Chairman, be entered for the record, if I may, at this point. 

Senator SESSIONS. Without objection. 

[The prepared statement of Senator Biden appears as a submission for the record.] 

30

Senator BIDEN. I think one of the very important amendments 

that should be added to this legislation is the Schumer amendment, which, in fact, was part of the legislation, was part of an 

agreement that was crafted between the House and the Senate, 

and was part of what passed out of here as part of the bill overwhelmingly. The numbers that the Chairman cited—87, 88, 89 

votes, whatever the numbers were the several times it was passed 

out—contain the Schumer amendment. 

I am confused about one thing here. There is no question, coming 

from a family that has been, unfortunately, an excessive consumer 

of medical health care expenses, how someone can be absolutely 

crippled by these medical expenses. There is no question about 

that, in my view. 

What I have difficulty trying to figure out is should the irresponsibility of the Federal Government and the State government be 

thrust upon the creditor. Let me move away from health care for 

just a moment. There are an awful lot of people in the National 

Guard right now who are being sent overseas. They have jobs 

where their combined income of the husband and wife may be $80, 

$90,000 a year, but the male or female who is sent overseas, called 

up by the National Guard or the Reserves, who maybe was making 

$60,000 a year is now, based on their rank, making $24,000 a year. 

They have the same car payments, they have the same house payments, they have the same tuition payments, they have the same 

bills. 

My question is if they cannot pay those bills because of an extended tour, which many are going through, and they have to declare bankruptcy, should the creditors who have lent money to 

them based upon their initial income—should they be the ones that 

pay the cost, in effect, of their inability to pay, or is that a larger 

responsibility of the public at large? 

That is what confuses me about your arguments, Professor Warren. They are very compelling, they are literally true, but in a 

sense they beg the question. It seems to me that the Federal Government should be seeing to it that every American is put in a position where their health care costs are such that if, in fact, they 

have these extraordinary expenses, it is the social responsibility of 

the community to help them, as opposed to the social responsibility 

of the particular doctor or the particular bank that lent the money 

or the particular creditor who has put forward money, assuming 

there was any ability to pay. 

Just a philosophic question: should anyone who has extraordinary medical expenses that unquestionably exist—should they be 

able to say, when there is an inability to pay all other bills, whatever they are—I mean, if they were going to pay those medical expenses, they wouldn’t be able to pay another bill, from the gas company to whoever. Is it a societal requirement we should write into 

the Bankruptcy Code that says that the gas company should subsidize the payment of those medical bills, that the local drugstore 

should subsidize the payment of those medical bills? 

Maybe we should. I am being deadly earnest here, because you 

make a very compelling and mildly demagogic argument that talks 

about what is true. All of these things are true, and so my question 

is, from a philosophic standpoint, is it the responsibility of the gas 

31

company and the drugstore and whoever else you named to make 

sure that these people do not have to make these hard choices, or 

is that a responsibility of the Government or the people at large? 

That is my only question I will ask, and I am asking you, Professor. 

Ms. WARREN. Senator, I think you have put your finger on the 

heart of what the bankruptcy bill—or bankruptcy, in general, not 

this bill— 

Senator BIDEN. No. Forget bankruptcy. I am asking a larger 

question. Forget about bankruptcy. 

Ms. WARREN. But that is what I mean. It is the question of what 

role bankruptcy plays—

Senator BIDEN. That is not my question. I would like you to answer my question. What role is there under what you would consider to be an appropriate form of Government where we legislate? 

Do we say that people who, in good faith, provide a service for an 

individual that the individual is later unable to meet because of a 

legitimately horrific and extraordinary dilemma that was an act of 

God—who should be responsible for taking them out from under 

that crushing burden? 

Should it be the automobile company who lent the money to purchase a car, the drugstore that provided a service and, in effect, 

lent the money because there is a bill, the drug bill, the utility 

company, the guy who has the lawn service company? Whose responsibility is it? That is really the question, because if you buy 

into this argument, which is very compelling, in my view, you are 

saying the creditors should be the ones to buy into that philosophically, enshrined in a piece of legislation obligation. That is my 

question. 

Ms. WARREN. Senator, I think you are exactly right, and that is 

that we need fewer families to need to turn to the bankruptcy system. We have a broken health care finance system in the United 

States, and all I can do is point out that it is bankrupting families. 

Senator BIDEN. Absolutely right. 

Ms. WARREN. Until we fix the broken health care finance system, 

those families have to turn somewhere and that means now they 

turn as a last-ditch effort to the bankruptcy courts. 

Senator BIDEN. And that means they turn to asking the people 

that they borrowed money from to pay for their health care costs, 

right? 

Ms. WARREN. Senator, the costs— 

Senator BIDEN. Isn’t that literally correct? 

Ms. WARREN. It is literally correct that the costs of a broken 

health care system are borne throughout the economy. 

Senator BIDEN. We are asking—and I may be ready to do this. 

We are going to ask the gas company, the drugstore, the automobile dealer to pay for the broken system instead of having the 

nerve to come and say it is a moral obligation of a nation to pay 

for that broken system. Why should it not be someone who sits there, living in a $2 million home, who lent no money to that person—why do they not 

have an obligation to pay for that instead of the guy who owns the 

drugstore at the corner pay for that? That is my only point. Let’s 

just be honest about what we are doing here. It may make sense. 

32

I would like to put in the record a Forbes article, and I would 

like to ask you whether it is an accurate quote, Professor. They 

quote you in an article entitled ‘‘Everybody Knows It’s Credit’’ in 

Forbes magazine saying, quote, ‘‘The lobbyists are going to be the 

only ones who really profit, scoffs Elizabeth Warren, Harvard Law 

professor.’’ I think you are dead right because as you point out in 

here, we have to find new bogeymen. The people who aren’t going 

to benefit under this are the credit card companies, as you point 

out in here. 

I submit this for the record, if I may. 

Chairman SPECTER. Without objection. 

Senator BIDEN. I would invite any response in writing from anyone who would like to respond to the article. We will make it available to you. 

But I just think we should be honest about this thing. Making 

the gas company—and I don’t like the gas company. I don’t like 

many companies, but at any rate, we just ought to acknowledge 

what we are doing here when we make these kinds of assertions. 

Chairman SPECTER. Thank you, Senator Biden. 

Senator KENNEDY. Can Professor Warren just respond to the 

quote? Do you want to just respond to the quote? 

Ms. WARREN. I think the Senator makes an entirely fair point 

about externalizing the costs and I would add only one caveat to 

it. Not only does this bill treat all debtors alike. In many ways, it 

treats all creditors alike. The gas company doesn’t have the capacity to change its pricing to reflect these risks, or has very limited 

capacity. But I remind you of what the credit card companies have 

already—

Senator BIDEN. Should it? That applies they should. 

Ms. WARREN. No. 

Senator BIDEN. Should the gas company be required to change 

their prices to reflect these—

Ms. WARREN. No. Of course, they shouldn’t, Senator. 

Senator BIDEN. The way you stated it, you said they don’t have 

the capacity. The implication is maybe they should have that capacity. 

Ms. WARREN. No. My point is the losses will go to some creditors 

who cannot reflect this in their prices. But look at the cases cited 

in my testimony where credit card companies—I have a specific 

case, In re McCarthy, but nothing unusual about it, a woman who 

borrowed $2,200. She paid back $2,100 over the 2 years preceding 

bankruptcy, and at the end of that period of time she was told she 

still owed $2,600. 

With fees and interest, I submit, Senator, that there are many 

in the credit industry right now who are getting their bankruptcies 

prepaid; that is, they have squeezed enough out of these families 

in interest and fees and payments that never paid down principle. 

Senator BIDEN. Maybe we should talk about usury rates, then. 

Maybe that is what we should be talking about, not bankruptcy. 

Ms. WARREN. Senator, I will be the first. Invite me. 

Senator BIDEN. I know you will, but let’s call a spade a spade. 

Your problem with credit card companies is usury rates from your 

position. It is not about the bankruptcy bill. 

33

Ms. WARREN. But, Senator, if you are not going to fix that problem, you can’t take away the last shred or protection from these 

families. 

Senator BIDEN. I got it, okay. You are very good, Professor. 

[Laughter.] 

Chairman SPECTER. Thank you very much, Senator Biden. 

I am advised that Senator Kennedy has questioned, so we have 

four more Senators to question. The vote is scheduled at 12:30, 

which is 30 minutes from now, so we have time for 7-minute 

rounds if we observe the limits. I will take my seven minutes now. 

Senator BIDEN. May I be excused, Mr. Chairman? I am going to 

another tsunami hearing. 

Chairman SPECTER. We will miss you. 

Professor Warren, you testified in the opening comments about 

new problems such as the Enron executive problem. What would 

your suggestion be as to how the bill ought to be modified to deal 

with that issue? 

Ms. WARREN. Senator, I think that Senator Durbin had a series 

of amendments proposed, I believe it has been 2 years ago now, 

that tried to address that directly, the notion that the bankruptcy 

courts need to be much more scrupulous about executive compensation and about insiders who take money out during the course of 

a Chapter 11, particularly when the consequence is to leave nothing for their employees, their pensioners, their health care plans. 

I think there is actually already drafted potential legislation here, 

sir. 

Chairman SPECTER. Mr. Strauss, you have emphasized the support orders as being a priority item. Would you have any suggestions as to how this bill might be made stronger to provide for support? 

I think there is a decided public policy in favor of seeing to it 

that those who owe support for children pay it and don’t leave children in the hands of the mothers, absconding. What suggestions, 

if any, would you have to make the bill stronger on that important 

item? 

Mr. STRAUSS. I had actually in the last go-around suggested another exception to the automatic stay. The Federal Government requires that when a debtor is not paying support, his passport be 

taken. That was not included in this, so I would—it is a minor addition, but I think it would be helpful in enforcing child support obligations to remove from the effects of the automatic stay the right 

of the Government to withhold passports. Other ones are so technical it would just really take me too long to explain. 

Chairman SPECTER. Mr. Bennett, I note that you are the founder 

of the Minority Apartment Owners Association. Do you think that 

this bankruptcy bill fairly treats minorities, or would you have any 

suggestions on that line? 

Mr. BENNETT. Well, as the study reports, the majority of small 

properties are owned by individuals, some 47 percent. So it really 

adversely affects not only the minorities, but the smaller property 

owners. Whereas most people have a belief that all apartments are 

owned by big conglomerates and REETs and things like that, the 

study shows that 47 percent are owned by individuals just like myself. So we certainly are adversely affected by bankruptcies. 

34

And not only that, but I pointed out in my testimony that we 

have cases where we have multiple bankruptcy filings where the 

husband will file and then the wife will file, and then we turn 

around and we have an 18-year-old son on their file. We have even 

had to request in some cases that the judge put on their order ‘‘no 

additional bankruptcy filing.’’ So it is a real concern. 

Chairman SPECTER. Mr. McCall, bankruptcies have certainly 

taken a very heavy toll on the economy and a very heavy toll on 

loss of jobs. The steel industry has been beset by quite a number 

of problems. The imports—we have done a little good on that. 

United States Steel Corporation has made profits in the last year 

and I think we are doing better, although more recently we have 

had a surge. 

I would be interested in your thinking on the asbestos problem 

which has caused some 74 bankruptcies and the tremendous loss 

of jobs in America. To what extent has that impacted on the interests of the labor movement? 

Mr. MCCALL. Certainly, it is a very similar situation and related 

to the health care issues that we were talking about earlier. There 

comes a point in time where companies by their creditors are 

loaned money, and whether or not they are doing responsible 

things with that money, whether or not they are investing that 

money responsibly, whether or not there are overpayments to executives, and even then once bankruptcy is initiated, whether there 

is a planned reorganization and the company reemerges paying 

part of that debt or whether they spend a vast majority of that 

money on professional professionals in bankruptcy, or whether they 

spend a great deal of money on, as I said before, KERPs and incentive plans for executives to downsize and downsize and downsize, 

leaving no jobs available, leaving no health care for the workers. 

So I think it is similar and related to the health care issue. 

There are probably other issues that enter into the Bankruptcy 

Code and issues of responsibility and fairness and justice and equity for all of the stakeholders in a company that is entering bankruptcy. 

Chairman SPECTER. Professor Zywicki, would you be able to expand on what Ms. Vullo testified? She had to leave before the question-and-answer session. She testified, as you heard, about going 

through a large series of efforts to enforce judgments. Does your expertise extend to that field to give some guidance to the Committee 

as to what we might do to avoid the kind of a problem she articulated? 

Mr. ZYWICKI. Senator, I have not in the context of preparing for 

today’s hearing studied the specific language which has been proposed in the past because it is not part of this bill. What she reflects is, of course, similar to what all creditors go through in the 

current bankruptcy system, which is the difficulty of trying to collect debts. With respect to the particular amendment that she has 

proposed, I would have to study the language more specifically before I could render a full opinion on it. 

Chairman SPECTER. Well, I am sorry she wasn’t able to stay 

longer. I intend to telephone her to get some more specification as 

to what she had to say. It sounded like a long chase. We have had 

the inability to complete this bill because of the provisions relating 

35

to collection of judgments and avoidance through bankruptcy by 

those who have judgments against them under the abortion laws. 

So we will be pursuing that. 

Well, I have four seconds left and I will terminate on time and 

yield now to Senator Feinstein. 

Senator FEINSTEIN. Thanks very much, Mr. Chairman. I neglected to introduce the two participants from California, and so I 

would like to acknowledge Mr. Bennett and Mr. Strauss’ participation. It is a long way from California, as they say, so we are delighted to have your testimony today. Thank you so much. 

I think Dr. Warren’s op ed piece that says that almost 50 percent 

of bankruptcy petitioners have health care problems is really something that we need to take into consideration. In the last Congress, 

the 107th Congress, I proposed an extreme hardship amendment, 

and essentially what it did was provide a rebuttable presumption. 

I would like to just read to the panel part of this because if you 

take one of Mr. McCall’s, for example, union members, and because 

someone close to me is going through this right now, just to get a 

cancer diagnosis can run over $100,000 in tests. It is possible to 

have a health problem and you are never able to repay the debt. 

Therefore, the question comes whether this kind of debtor really 

should be pushed into Chapter 13 or remain in Chapter 7. So we 

proposed this last time. It went down, but I would like to work on 

it for the markup for this Committee, and let me read it to you. 

‘‘In addition to the other grounds by which presumption of abuse 

may be rebutted under this subparagraph, the debtor may rebut 

the presumption by showing that the debtor’s financial problems 

are the result of extreme hardship and extraordinary circumstances beyond the control or reasonable expectation of the 

debtor for which the debtor should not be held justly accountable. 

If there is another ground by which the presumption may be rebutted, this clause shall not be construed to require a finding of abuse 

if the debtor’s financial troubles arose from circumstances that 

were either within the debtor’s control or for which the debtor 

should be held accountable.’’ 

I don’t know whether this is perfect or not, but it seems to me 

that to push somebody into Chapter 13 and require that they repay 

a debt for which they bear no personal responsibility and have encountered an extraordinary and extreme hardship is not something 

that we should do, particularly as medical costs go up. 

I was told last week that the cost of one use of certain machines 

is $3 to $4,000 for diagnosis. Well, if you are on Social Security or 

if you are one of Mr. McCall’s union members or if you are the average for my State, there are health care costs which you can never 

repay. It is just impossible. 

Now, Senator Biden’s theory is, well, the Government should do 

that. That is not this bill. I don’t really want to get into that, but 

it seems to me that there are some bona fide situations in which 

a debtor facing this kind of unavoidable and extreme hardship 

should not be pushed into Chapter 13. 

I would like the panel’s response. 

Ms. WARREN. Professor Zywicki, would you like to go first? 

Mr. ZYWICKI. Senator, I understand what you are saying. I would 

urge this Committee caution with respect to the premise, which is 

36

with respect to the conclusion that half of bankruptcies are substantially caused by health care. I have reviewed the study on 

which that is based. That number is substantially larger than any 

other study that has ever been done with respect to the relationship. The authors of the study consider a serious health care problem to be anything more than $1,000 in health care expenses over 

some period of time. 

Senator FEINSTEIN. But that is not what I am saying. I mean, 

I am not talking about a study. I am saying we all know that 

health care costs can bankrupt you. 

Mr. ZYWICKI. Absolutely, yes. 

Senator FEINSTEIN. The question is whether you have the possibility in your lifetime of repaying these costs. 

Mr. ZYWICKI. Senator, I believe that it is appropriate that the 

same rules should apply to everybody, which is if you can repay 

some or all of your debt, whatever it is, whether it is 20 percent, 

I think that is appropriate. I think, secondly, the bill as it is written takes account of health care problems, health care expenses 

and that sort of thing. So I think that with respect to the problem 

we are trying to deal with, the bill is adequate as it currently 

stands to deal with the problem. 

Senator FEINSTEIN. Anybody else? Dr. Warren. 

Ms. WARREN. Thank you, Senator. I think, Senator, you have put 

your finger exactly on the key point, and I think, with respect, Professor Zywicki has given exactly the other side. He doesn’t care 

what happened to these families or why it happened. The only 

question is you put them in, you turn the crank, and if it is possible to use public dollars to squeeze some more pennies out of 

them on behalf of their creditors, then do it. 

I think you ask exactly the right question. If we are to inject morality into this system, if we are to make the hard judgments, then 

it is incumbent on us collectively to ask what happened. Why did 

these families get into trouble? 

I think you are exactly right. Provide the escape, provide the safe 

harbor for the family who did everything right—good educations, 

decent jobs, paid for health insurance, got married, bought houses, 

aren’t the abusers, the people who really wanted to play by the 

rules, the people who the last thing they ever wanted to do was end 

up in bankruptcy, but who discovered that in America today one 

medical diagnosis can take a solid, hard-working middle-class family and turn them upside down financially. You are offering them 

a chance to turn rightside up again. 

Senator FEINSTEIN. Well, I would appreciate it if anyone on the 

panel would take a look at the language, at least. I am going to 

move something like this in the markup. It may well go down 

again, but I would appreciate any input that you could give to it. 

Could I make one other point, and that is on credit cards and 

sending these credit cards out to children. One of the things that 

I tried to do in another amendment was put a limit of $2,500 per 

card for a minor. I would like to have your comment on that. 

Mr. BEINE. Number one, we do not send out unsolicited credit 

card mailings. And, number two, our limit is $500 for minors. 

Senator FEINSTEIN. Would you repeat that? 

37

Mr. BEINE. At our credit union, our limit for minors is $500. We 

require the parent’s signature. We do not give out unsolicited—

Senator FEINSTEIN. How about throughout the industry? 

Mr. BEINE. I cannot speak for the industry overall. 

Senator FEINSTEIN. Thank you. That is helpful. 

Ms. WARREN. Senator, I would just point out that the industry 

now refers to minors, those under the age of 18—I was looking for 

the exact language, but as a growing market for them, the last 

group that isn’t already carrying credit cards. They are a new profit center—children. 

Senator FEINSTEIN. I think this is something that we need to 

take a look at, Mr. Chairman, and I need certainly to get updated. 

But I saw where 8- and 9-year-olds are getting solicitations with 

toys through the mail if they pick up a credit card. 

Now, it seems to me that with respect to a minor, there ought 

to be some limit on the amount of credit, without a signature of a 

parent and a guarantee by the parent to repay the debt. 

Chairman SPECTER. If they contract with an 8-year-old or a 9-

year-old or another minor, it is unenforceable. 

Senator Durbin, I believe under the early-bird rule, you were 

here early and you are next. 

Senator DURBIN. Thank you very much, Mr. Chairman, and 

thank all the witnesses. Can I make a general observation, since 

we don’t have any opening statements, about this session of Congress? 

It is curious to me that this is such a high priority, that this 

needs to be fast-tracked, that we need to move on this bill right 

now and get it out, a 500-page bill. We are going to have two 

hours-and-a-half, we are going to discuss it and we are going to 

mark it up next week. That is my understanding. 

As we look at the witnesses at the table, there are so many people not there. Where is the credit card industry? I will you in the 

back rows. Don’t hold up your hands, but you are not at the table. 

Yet, you are the big player and the big push behind this bill for 

a decade. Ten years, you have been begging for this bill to preserve 

credit card debt through bankruptcy. Yet, you won’t come up and 

testify. 

I don’t understand that, Mr. Chairman, why the most important 

industry behind this bill will not have the courage to step forward 

and explain why they want this bill. It tells us a lot. 

I think as you listen to the testimony here from the witnesses, 

you come to understand that the face of bankruptcy is a lot different than the industry describes it. Professor Warren has told 

you what she has found. Professor Zywicki, a visiting professor at 

my Georgetown Law School, may see it otherwise. But I happen to 

believe Professor Warren is closer to the truth because, Mr. McCall, 

I know your steel workers and I know what has happened to them. 

I can tell you in the State of Illinois, in southern Illinois, that 

we have a coal miner with emphysema, worked his whole life in 

the coal mine, did everything right, retired early because of his illness, and then the Horizon Mining Company went into bankruptcy 

and canceled his health care. The man is hoping that he will get 

enough health care to live until he reaches Medicare. If he doesn’t, 

he will be facing bankruptcy. 

38

I don’t think he is morally flawed, Professor Zywicki. I think he 

is a man who, because of misfortune, has no other choice. And I 

hope that as you acknowledge 7 percent of the people guilty of 

fraud and abuse in bankruptcy, if it is that number, that you will 

acknowledge that a much greater number come into bankruptcy 

under the circumstances Professor Warren has described, not because they want to, in the hopes that they don’t have to and want 

to get out of it. 

Professor Warren, on that earlier comment about 7 percent fraud 

and abuse, would you reflect on that? 

Ms. WARREN. As I understand this, it does not come out of any 

study. It is the FBI’s estimate, as I understand it, of how many 

people have mistakes in their forms. People make mistakes. These 

are people whose median income in the year before filing is 

$25,000. These are people for whom two out of three have lost their 

jobs. These are people half of whom have had serious health crises 

and they don’t always get every number right. There is no doubt 

about that. Should they? Yes, sir, but to refer to this as a system 

that has 7 percent abuse in it—there is simply no evidence of that. 

Senator DURBIN. I would just say I think it is nothing short of 

an outrage that we are not looking at the corporate bankruptcies 

that are stripping away health care retiree benefits, pension benefits and contract agreements that people have lived by for a lifetime. We are not even considering that. We are talking about the 

victims of that process and how to make life more difficult for 

them. That is what this hearing is about. That is what this bill is 

about. 

Why aren’t we talking about that, and why won’t we spend 5 

minutes talking about health care in America, for goodness sake, 

this looming crisis in America that no one will address? It is hitting 

businesses and families and individuals, and now the victims of 

that crisis that we won’t even talk about are the ones who are 

going to be disadvantaged again. 

Professor Warren, will you try to bring this into a context that 

is very important for this conversation? The argument is that if you 

are below median income, why are you worried about this means 

test? It is not going to affect you. Why is it going to affect you if 

you are below median income? 

Ms. WARREN. Senator, in two principal ways. The first is there 

is no safe harbor; that is, you are not exempt from the forms, the 

requirements of filing, the tricks, the traps, the deadlines, the increased attorneys’ fees in order to have someone tell what they 

could tell on the very first day, and that is you are not part of the 

means test. 

If there were a safe harbor for the 80 percent of the families for 

whom one sheet of paper tells you they don’t belong in the means 

test—if they were safe harbored and taken out, we would be having 

a very different conversation. That is part one. 

But I want to say about part two it is only one section in the bill. 

This bill changes Chapter 13. It changes the number of places 

where credit card companies will get the right to threaten to object 

to someone’s discharge, which means more often that those people 

will agree to pay their debts, notwithstanding bankruptcy. 

39

There is one cut after another, provision after provision. And on 

whom does it fall the hardest? The families in the worst financial 

trouble. Be clear here, Senator. A multi-millionaire can still skate 

through bankruptcy, even if every provision in this bill were adopted. 

Senator DURBIN. And hang on for the most embarrassing amendment on the floor when we talk about homestead exemption and 

tell the story of Bowie Kuhn, the former Commissioner of Baseball, 

who hung on to a multi-million-dollar mansion in Florida that he 

was able to keep through bankruptcy, and Burt Reynolds, the 

actor, who did the same thing. Yet, we are hammering away at 

people who can’t pay for cancer surgery. Does this make sense? 

The second point I want to make: are there as a result of this 

bill going to be more debts that are non-dischargeable in bankruptcy that when it is all over, despite your best efforts, you are 

stuck with for life? 

Ms. WARREN. Yes, Senator, that is what this bill is designed to 

do. That is why every women’s group that has looked at this bill 

has opposed it, because their real concern is that this forces them 

into competition with Citibank and Bank One when they are trying 

to collect from an ex-husband who has been through bankruptcy. 

This is the central concern. 

Every single family who gets pushed out of the system because 

the fees are too much now, every single family who ends up with 

non-dischargeable debts literally will be responsible for those debts 

until they die. It is important to remember that for most of the 

families who file for bankruptcy, they don’t have enough income to 

pay the interest. So what that means is it is like Ms. McCarthy. 

She can pay $2,000 a year for the rest of her life and she will die 

owing Providian as much as she owed them the day she filed for 

bankruptcy. 

Senator DURBIN. And it is our highest priority to make sure we 

pass the bill that says that she will continue to make that payment. 

Thank you. 

Chairman SPECTER. Thank you, Senator Durbin. 

Senator Feingold. 

Senator FEINGOLD. Thank you, Mr. Chairman. I want to welcome 

our witnesses, particularly Ken Beine from Wisconsin. I am always 

glad when I can hear the scholarship of Professor Warren, and I 

also want to commend Senator Durbin’s very powerful remarks. 

Mr. Chairman, I appreciate your holding this hearing rather 

than taking this bill directly to markup this week, as was originally planned. Let me respectfully suggest that the testimony we 

are hearing makes it very clear that a markup of this bill in this 

Committee next week would be premature. 

This bankruptcy bill was essentially written in 1998, seven years 

ago. The last time the Judiciary Committee held hearings or took 

any action on the bill was in early 2001. It is now 2005. It is simply 

inconceivable that this Committee will be ready next week to do 

the job that it needs to do on a bill this complex and a topic this 

important to our economy and the lives of many of our most vulnerable citizens. 

40

The last significant bankruptcy reform legislation in this country 

was passed in 1978. This is not a topic that Congress gets back to 

every few years. We need to get this job done right and we need 

to do it comprehensively. That means addressing the important 

issues raised by the effect of increasing corporate bankruptcies on 

the pensions and health care of employees, rather than saying that 

those issues can wait for another bankruptcy bill sometime in the 

future. These are pressing issues that this Committee must face up 

to now, and it certainly will not be an acceptable answer to those 

who point out real problems with how the current bill will operate 

that we can somehow fix this at a later date. That is not reality. 

So I hope, Mr. Chairman, that this Committee will serve its 

proper role in the Senate to examine legislation carefully and completely before sending it to the floor. I hope that every member of 

this Committee, even those who support this bill, will recognize 

that a real amendment process is appropriate here, in contrast to 

what we have seen on the class action bill over the past few weeks. 

My questions today, although they will be brief, will highlight 

some of the problems with S. 256 that practitioners and academics 

and trustees have identified. We need to listen to those non-partisan experts before we enact this bankruptcy bill or we will do 

grave harm to a system that is a crucial part of the safety net that 

the law offers to our most vulnerable citizens. 

Let me first turn to my friend and constituent, Mr. Beine. I 

wanted to especially thank you for being here. It is always good to 

see somebody from Wisconsin in Washington, and I wanted to say 

to you that I know how tough it is for everyone who has suffered 

from the devastation of our manufacturing sector. I know firsthand 

from my own visits that Two Rivers, or Trivers, as some say, and 

Manitowoc have been hit especially hard by this. 

Wisconsin has lost tens of thousands of manufacturing jobs in 

the last few years, and the biggest sector of the economy by far in 

Two Rivers and Manitowoc is the manufacturing sector. So the 

whole area has been affected dramatically. In a recent study, 37 

percent of businesses in Manitowoc and Two Rivers reported that 

they had to lay off employees in the past year. So it is not surprising for me to hear you say that there has been an increase in 

bankruptcy filings, although it is certainly terrible news. 

There are a number of important steps Congress could be taking 

to help people in Manitowoc and Two Rivers, including changing 

our tax code to help beleaguered domestic manufacturers and rethinking international trade agreements that have been devastating for American businesses. 

The problems you are facing are very real, but I want to make 

sure we don’t pass a bill here that will actually compound the burden on Manitowoc citizens, Two Rivers citizens and Wisconsin citizens. I don’t want to take any action that is going to further harm 

people who I know have borne the brunt of this administration’s 

failed economic policies by undermining a law that stands between 

them and complete destitution. 

I am a big fan of, as you know, and a friend of the credit union 

industry. You are wonderful people and you serve your communities very well. I think this bill is a bad deal for my constituents 

and your customers, so I am afraid we have to part ways on this 

41

issue. This bill hasn’t changed all that much since it was introduced 8 years ago, before the problems with the erosion of our 

manufacturing base became so severe. So it may not really be designed to address your problems. So I would like to give you a 

chance to respond to what I have said, and I would like to ask Professor Warren if she would like to comment as well. 

Mr. Beine. 

Mr. BEINE. First of all, thank you for the kind words. I guess I 

respectfully disagree with some of the statements. We are convinced that the current law hurts financial institutions because 

there are a number of individuals who abuse it. Under no circumstances are we looking to hurt those individuals, the 80 or 90 

percent, or if it turns out to be 95, that still need the ability to be 

able to completely walk away and start over. The bankruptcy law 

is here to enable people to start over, and that is an important 

right in this country. 

Thank you. 

Senator FEINGOLD. Professor Warren. 

Ms. WARREN. I would only add that I too am a big fan of credit 

unions. I was explaining to Mr. Beine earlier I have family members who have really relied on their credit unions to help them get 

past tough times, and I have cosigned more than one loan to the 

credit unions which were paid off in full. I want to be clear, sir. 

But I really want to go back to a key point here. I think credit 

unions are responsible lenders who are very careful about the 

money they put out. I believe the thrust of this bill, by forcing more 

families out of bankruptcy, by driving up the costs, by making 

more debts non-dischargeable, is a reward to irresponsible lenders. 

I believe that what happens is that good people come in, like 

credit unions and like small landlords, who really are affected. 

There are changes we could make to make things better for them. 

But they are here, when it is credit card companies who have behaved irresponsibly and who have already raked billions of dollars 

of profits off these families before they file for bankruptcy that are 

the real problem. If we wanted to make this bill work, part of what 

we would ask is how to sort out the good lenders from the bad. 

Senator FEINGOLD. Thank you, Professor. 

Professor Zywicki, as you know, I have mentioned that the Bankruptcy Act was first introduced 8 years ago, and you have long supported it. However, as Professor Warren has stated, the 8 years 

since this bill was introduced have seen many developments with 

significant implications for bankruptcy law. Furthermore, we now 

have significantly more data about who files for bankruptcy and 

why they do than when the bill was first introduced. 

Given all the things that have changed since the original bill was 

drafted and given all the new information that has emerged since 

that time, is there anything about this bill that you think should 

be changed, or do you endorse S. 256 without any adjustments 

whatsoever? 

Mr. ZYWICKI. Senator, first, let me clarify that I believe that the 

majority of bankruptcy filers are legitimate, honest bankruptcy filers, and I would not endorse this bill if I believed that in trying 

to eliminate fraud and abuse we would be harming people, the honest, innocent people for whom bankruptcy is intended. 

42

Having said that, this bill has been around for 8 years. The problems that this bill attacks have not disappeared during 8 years; 

they have worsened during that 8-year period. There may be additional new abuses that have come on the scene, additional new 

problems that have come on the scene. But that is not, I don’t believe, a reason to ignore the fact that this bill targets real problems. It targets the homestead exemption abuses, it targets fraud 

and those sorts of things. So this bill responds to problems that are 

still endemic in the system. 

Senator FEINGOLD. What about my question? Are there any 

changes to the bill that need to be made at all or is it exactly the 

way it should be? We are marking this thing up next week. The 

train is leaving the station, apparently, and there is probably not 

going to be another bankruptcy bill for a very long time. This is 

it. Should this bill be changed? 

Mr. ZYWICKI. I believe that this bill is fine as it is. 

Senator FEINGOLD. Not one word? 

Mr. ZYWICKI. There is no word that I would change in this particular piece of legislation. 

Senator FEINGOLD. Well, Mr. Chairman, I know my time is up, 

but the idea that after 8 years and all the economic changes in this 

country that there wouldn’t—

Chairman SPECTER. If you need some more time, Senator Feingold, go ahead. 

Senator FEINGOLD. Let me just say that after 8 years, the notion 

that there wouldn’t be anything different about the Bankruptcy 

Code—with all the economic changes and dislocations, that there 

wouldn’t be a word to change is not credible to me and is a further 

reason why I am very concerned about the speed with which this 

bill is moving. 

Thank you for the extra time, Mr. Chairman. 

Chairman SPECTER. Thank you, Senator Feingold. 

The timing on the bill has been set. We are moving ahead. This 

hearing was designed to give us opinions of experts in the field on 

problems in the bill. We will have many communiques from interested citizens in all walks of life, and when the Judiciary Committee meets next Thursday to consider the bill, there will be time 

between that session and the full floor debate. So there is time for 

consideration of any changes that ought to be made. 

We thank you all for coming, ladies and gentlemen. We very 

much appreciate it. Many of you have come from long distances 

and it has been a very productive hearing. That concludes our 

hearing, and thank you. 

[Whereupon, at 12:34 p.m., the Committee was adjourned.] 

[Questions and answers and submissions for the record follow.]

43


42675.001
44


42675.002
45


42675.003
46


42675.004
47


42675.005
48


42675.006
49


42675.007
50


42675.008
51


42675.009
52


42675.010
53


42675.011
54


42675.012
55


42675.013
56


42675.014
57


42675.015
58


42675.016
59


42675.017
60


42675.018
61


42675.019
62


42675.020
63


42675.021
64


42675.022
65


42675.023
66


42675.024
67


42675.025
68


42675.026
69


42675.027
70


42675.028
71


42675.029
72


42675.030
73


42675.031
74


42675.032
75


42675.033
76


42675.034
77


42675.035
78


42675.036
79


42675.037
80


42675.038
81


42675.039
82


42675.040
83


42675.041
84


42675.042
85


42675.043
86


42675.044
87


42675.045
88


42675.046
89


42675.047
90


42675.048
91


42675.049
92


42675.050
93


42675.051
94


42675.052
95


42675.053
96


42675.054
97


42675.055
98


42675.056
99


42675.057
100


42675.058
101


42675.059
102


42675.060
103


42675.061
104


42675.062
105


42675.063
106


42675.064
107


42675.065
108


42675.066
109


42675.067
110


42675.068
111


42675.069
112


42675.070
113


42675.071
114


42675.072
115


42675.073
116


42675.074
117


42675.075
118


42675.076
119


42675.077
120


42675.078
121


42675.079
122


42675.080
123


42675.081
124


42675.082
125


42675.083
126


42675.084
127


42675.085
128


42675.086
129


42675.087
130


42675.088
131


42675.089
132


42675.090
133


42675.091
134


42675.092
135


42675.093
136


42675.094
137


42675.095
138


42675.096
139


42675.097
140


42675.098
141


42675.099
142


42675.100
143


42675.101
144


42675.102
145


42675.103
146


42675.104
147


42675.105
148


42675.106
149


42675.107
150


42675.108
151


42675.109
152


42675.110
153


42675.111
154


42675.112
155


42675.113
156


42675.114
157


42675.115
158


42675.116
159


42675.117
160


42675.118
161


42675.119
162


42675.120
163


42675.121
164


42675.122
165


42675.123
166


42675.124
167


42675.125
168


42675.126
169


42675.127
170


42675.128
171


42675.129
172


42675.130
173


42675.131
174


42675.132
175


42675.133
176


42675.134
177


42675.135
178


42675.136
179


42675.137
180


42675.138
181


42675.139
182


42675.140
183


42675.141
184


42675.142
185


42675.143
186


42675.144
187


42675.145
188


42675.146
189


42675.147
190


42675.148
191


42675.149
192


42675.150
193


42675.151
194


42675.152
195


42675.153
196


42675.154
197


42675.155
198


42675.156
199


42675.157
200


42675.158
201


42675.159
202


42675.160
203


42675.161
204


42675.162
205


42675.163
206


42675.164
207


42675.165
208


42675.166
209


42675.167
210


42675.168
211


42675.169
212


42675.170
213


42675.171
214


42675.172
215


42675.173
216


42675.174
217


42675.175
218


42675.176
219


42675.177
220


42675.178
221


42675.179
222


42675.180
223


42675.181
224


42675.182
225


42675.183
226


42675.184
227


42675.185
228


42675.186
229


42675.187
230


42675.188
231


42675.189
232


42675.190
233


42675.191
234


42675.192
235


42675.193
236


42675.194
237


42675.195
238


42675.196
239


42675.197
240


42675.198
241


42675.199
242


42675.200
243


42675.201
244


42675.202
245


42675.203
246


42675.204
247


42675.205
248


42675.206
249


42675.207
250


42675.208
251


42675.209
252


42675.210
253


42675.211
254


42675.212
255


42675.213
256


42675.214
257


42675.215
258


42675.216
259


42675.217
260


42675.218
261


42675.219
262


42675.220
263


42675.221
264


42675.222
265

Æ


42675.223