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[Senate Hearing 107-195]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 107-195

                   THE BANKRUPTCY REFORM ACT OF 2001

=======================================================================

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            FEBRUARY 8, 2001

                               __________

                           Serial No. J-107-2

                               __________

         Printed for the use of the Committee on the Judiciary

                                _______

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                       COMMITTEE ON THE JUDICIARY

                     ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina       PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania          JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona                     HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio                    DIANNE FEINSTEIN, California
JEFF SESSIONS, Alabama               RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas                CHARLES E. SCHUMER, New York
MITCH McCONNELL, Kentucky            RICHARD J. DURBIN, Illinois
                                     MARIA CANTWELL, Washington
                      Sharon Prost, Chief Counsel
                     Makan Delrahim, Staff Director
         Bruce Cohen, Minority Chief Counsel and Staff Director

                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Durbin, Hon. Richard J., a U.S. Senator from the State of 
  Illinois.......................................................   123
Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa.   120
Hatch, Hon. Orrin, a U.S. Senator from the State of Utah.........     2
Kennedy, Hon. Edward M., a U.S. Senator from the State of 
  Massachusetts..................................................   121
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.     4
Schumer, Hon. Charles E., a U.S. Senator from the State of New 
  York...........................................................   109
Specter, Hon. Arlen, a U.S. Senator from the State of 
  Pennsylvania...................................................     1
Thurmond, Hon. Strom, a U.S. Senator from the State of South 
  Carolina.......................................................   129

                               WITNESSES

Becker, Hon. Edward R., Chief Judge, United States Court of 
  Appeals for the Third Circuit, Philadelphia, PA................     9
Beine, Kenneth H., President, Shoreline Credit Union, Two Rivers, 
  WI.............................................................    49
Manning, Robert D., Senior Research Fellow, Institute for Higher 
  Education, Law, and Governance, University of Houston Law 
  Center, Houston, TX............................................    57
Newsome, Hon. Randall J., Judge, United States Bankruptcy Court, 
  Northern District of California, Oakland, CA...................    19
Sheaffer, Dean, Vice President, Director of Credit, Boscov's 
  Department Stores, Inc., Laureldale, PA........................    76
Strauss, Philip L., Principal Attorney, San Francisco Department 
  of Child Support Services, San Francisco, CA...................    37
Vullo, Maria T., Partner, Paul, Weiss, Rifkind, Wharton and 
  Garrison, New York, NY.........................................    81
Williamson, Brady C., Attorney, LaFollett, Godfry and Kahn, and 
  former Chair, National Bankruptcy Review Commission, Madison, 
  WI.............................................................    43
Zywicki, Todd J., Assistant Professor of Law, George Mason 
  University School of Law, Arlington, VA........................    87

                         QUESTIONS AND ANSWERS

Responses of Philip L. Strauss to Questions from Senator Biden...   130
Responses of K.H. Beine to Questions submitted by Senator 
  Feingold.......................................................   132
Responses of Randall J. Newsome to Questions submitted by Senator 
  Feingold.......................................................   134
Responses of Philip L. Strauss to Questions submitted by Senator 
  Feingold.......................................................   135
Responses of Todd I. Zywicki to Questions submitted by Senator 
  Feingold.......................................................   137
Responses of Dean Sheaffer to Questions submitted by Senator 
  Feingold.......................................................   138
Responses of Brady C. Williamson to Written Questions............   139
Responses of the Administrative Office of the Courts to Questions 
  submitted by Senator Leahy.....................................   140
Responses of Robert D. Manning to Questions submitted by Senator 
  Leahy..........................................................   142
Responses of Todd Zywicki to Questions submitted by Senator Leahy   147

                       SUBMISSIONS FOR THE RECORD

American Bar Association, Governmental Affairs Office, 
  Washington, DC, statement......................................   150
Arnold, Hon. Richard S., U.S. Circuit Judge for the Eighth 
  Circuit, statement.............................................   152
Association of Financial Guaranty Insurors, statement............   153
Block-Lieb, Susan, Professor of Law, Fordham University, New 
  York, NY, statement............................................   155
Bond Market Association, Washington, DC, statement...............   157
Commercial Law League of America, Chicago, IL, statement and 
  attachment.....................................................   163
Consumer Mortgage Coalition, statement...........................   166
International Council of Shopping Centers, Alexandria, VA, 
  statement......................................................   169
Jones, Hon. Edith H., United States Court of Appeals, Fifth 
  Circuit, Houston, TX, statement................................   173
United States Department of Justice, Office of Legislative 
  Affairs, Jon P. Jennings, Acting Assistant Attorney General, 
  statement......................................................   175
Wallace, George J., Eckert Seamans Cherlin & Mellott LLC, 
  Washington, DC, statement......................................   176

 
                   THE BANKRUPTCY REFORM ACT OF 2001

                              ----------                              

                       THURSDAY, FEBRUARY 8, 2001

                                       U.S. Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:10 a.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Orrin G. 
Hatch, Chairman of the Committee, presiding.
    Present: Senators Hatch, Grassley, Specter, Kyl, Sessions, 
Leahy, Kennedy, Biden, Feinstein, Feingold, and Schumer.
    Chairman Hatch. We are happy to welcome you all out to the 
committee this morning. I will give my remarks immediately 
after Senator Specter, who wants to introduce Judge Becker from 
the Third Circuit Court of Appeals, and then we will move on 
from there with the Ranking Member and then to Judge Becker.

STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM THE STATE 
                        OF PENNSYLVANIA

    Senator Specter. Thank you very much, Mr. Chairman, for 
your courtesy in permitting me to start. I have another 
commitment which I have to attend to.
    It is a great pleasure for me to present Chief Judge Edward 
Roy Becker from the Court of Appeals for the Third Circuit to 
this committee. I haven't known Judge Becker very long, only 51 
years. We rode the elevated train from northeast Philadelphia 
to the University of Pennsylvania.
    I am substantially older than Judge Becker. He was a 
freshman when I was a senior. He started at the University of 
Pennsylvania in the fall of 1950, and I had the opportunity to 
coach the University of Pennsylvania debating team when Judge 
Becker was a senior.
    We went to Boston to debate the Norfolk State prisoners, 
Senator Kennedy, and the subject was resolved that the 
communist party should be outlawed. The five chief editors from 
the newspapers--Irwin Cannon was one of the judges of that 
debate, and I am not pleased to tell you that Judge Becker and 
I lost to the Norfolk State prisoners. We had a very large 
audience, about 1,000 inmates.
    Senator Kennedy. Which side were you on, Senator?
    [Laughter.]
    Senator Specter. They had to take the side of law and order 
to urge outlawing the communist party. We had 1,000 people. 
That is what you call a real captive audience, the 
quintessential.
    Judge Becker graduated Phi Beta Kappa from the University 
of Pennsylvania and the Yale Law School, where again we were 
together in the law school. He graduated in the class of 1957 
and he had a very unusual career as an active lawyer, a 
business lawyer, a trial lawyer, and a Republican committeeman.
    I would say that Judge Becker is one of the few, if not the 
only Federal judges to have earned his judgeship both ways, by 
merit and by politics. It was a confluence of factors. He was 
on the United States District Court for the Eastern District of 
Pennsylvania at the age of 37, and he was elevated to the Third 
Circuit in 1970 and he is now the Chief Judge, bringing an 
enormous number of innovative ideas, one of the real leaders of 
the American bar and the American judiciary. If there should 
ever be another vacancy on the Supreme Court of the United 
States, we could start the confirmation hearing this morning.
    As you can tell, Mr. Chairman, it is a long, very intimate 
friendship with Chief Judge Becker, and I know that he has some 
words of wisdom for the committee.
    Thank you very much, Senator Hatch, for permitting me to go 
out of order.
    Chairman Hatch. Thank you for your kind introduction, 
Senator Specter.
    That is high praise Judge Becker, and, of course, I am very 
familiar and aware of you, as well, and have equally high 
esteem for you.

 OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 
                       THE STATE OF UTAH

    Chairman Hatch. I would just say good morning to everybody. 
We welcome you to today's hearing on bankruptcy reform. We 
would first like to thank all of our witnesses for their time 
and cooperation, and I hope that this hearing will serve to 
reinforce for all of us, especially the new members of the 
committee, the pressing need for bankruptcy reform.
    Of course, bankruptcy reform is by no means a new issue to 
this committee or to the Congress. In fact, the Senate 
literally has been engaged in the process of deliberating on 
this issue for years, with numerous hearings, markups, and 
votes. And we should have these real and needed reforms and 
compromises that we have made to this product, one that has 
been supported by both Houses of Congress with overwhelming 
bipartisan and veto-proof margins.
    Following extensive studies by the National Bankruptcy 
Review Commission, the comprehensive bankruptcy reform bill was 
developed by Senators Grassley and Durbin in the Subcommittee 
on Administrative Oversight and the Courts in 1997. We marked 
up and reported that bill out of committee in May 1998.
    In September 1998, the Senate passed bankruptcy reform by a 
vote of 97 to 1. This overwhelming Senate vote in favor of 
bankruptcy reform was followed by the appointment of conferees, 
negotiation with the House and, in October 1998, a 300-125 
House vote for the conference report.
    Although the motion to proceed to consideration of the 
conference report was agreed to in the Senate by a strong vote 
of 94 to 2, the Senate ran out of time for a vote on final 
passage before the end of that Congress. So in February 1999, 
Representative George Gekas, in the House, introduced 
bankruptcy reform again, which passed out of the House in May 
1999 by another overwhelming vote of 313 to 108.
    Meanwhile, in the Senate, Senator Grassley worked together 
with Senator Torricelli, and in March 1999 once again 
introduced bankruptcy reform legislation which was again 
referred to the Judiciary Committee. The Judiciary Committee 
again marked up the bill, and in May 1999 we favorably reported 
it out of the committee to the floor.
    In February of last year, the reform legislation passed the 
Senate by another impressive margin of 83 to 14. The Senate 
requested a conference, but the objection of a single member 
from the other side of the aisle blocked the appointment of 
conferees. As a result, we had to turn to an informal 
conference process with the House of Representatives, but 
fortunately this process was bipartisan. With a great deal of 
dedication of members on both sides of the aisle, we reached a 
compromise agreement on well over 400 pages of bankruptcy 
reform legislation and on all but two issues among the informal 
conferees.
    In October of 2000, the House passed the bankruptcy reform 
conference report, and in December the Senate passed it by yet 
another overwhelming vote of 70 to 28. Later that month, the 
President pocket-vetoed the bankruptcy reform legislation.
    Now, I provide this elaborate procedural history to make 
two points. First, the issue of bankruptcy reform is not a new 
one; it is quite familiar to all of us. Many of our witnesses 
today have testified before Congress on this issue. We have 
studied it, held hearings on it, compromised on it, and come to 
a resolution on it with veto-proof margins in both Houses time 
and again. An elaborate record sets out the issues, documents 
the debate, and makes the compelling case for reform that is 
available to anyone who has an interest in giving it their 
attention.
    This leads me to my second point. Eventually, the process 
of deliberation needs to come to a close and the will of the 
Congress needs to be exercised. As history has demonstrated 
repeatedly, bankruptcy reform is clearly the will of the 
Congress and much needed for all American consumers.
    I would like to take a moment to thank Senators Grassley 
and Sessions for their hard work and dedication to this 
important reform legislation over the past years. I also would 
like to thank the committee's ranking Democrat member, Senator 
Leahy, along with Senators Biden and Durbin, and Senator 
Torricelli, for their leadership in the area of consumer 
bankruptcy reform, as well as other members of the committee, 
both current and former, who have worked so hard on this very 
important set of issues.
    I am feeling somewhat like a broken record, but I feel 
compelled to state once again that we cannot afford to continue 
down the harmful path provided by current law, because abusive 
bankruptcy filings are harmful to all of us. Bankruptcy ends up 
costing all Americans in an amount that has been conservatively 
estimated at anywhere from $400 to $550 per household, per 
year.
    Contrary to what critics of reform would like us to 
believe, when someone files for bankruptcy the negative 
repercussions go far beyond the credit card companies and big 
businesses to whom money is owned but is not paid. The costs 
are passed on to all honest consumers who honor their 
commitments and who pay their bills. This is an issue that 
profoundly impacts the average American. Bankruptcies end up 
hurting people who own or work in small businesses, who are 
members of credit unions, and spouses and children who are 
entitled to child support.
    We should preserve bankruptcy to provide a fresh start, but 
only for those who truly don't have the means to pay some of 
their debts as promised. I look forward to the testimony today 
because I believe it will highlight some of the abuses that the 
current system allows to take place and will address one more 
time the pressing need for this consumer bankruptcy reform 
which more importantly provides many new consumer protections.
    We are fortunate to be hearing testimony from Judge Edward 
Becker, Chief Judge of the United States Court of Appeals for 
the Third Circuit, who has some concerns about the bill, some 
suggestions for us, and who we decided to put on at the last 
minute at the request of other members of the Federal judiciary 
and Judge Becker.
    We are happy to welcome you here, Judge.
    We have Judge Randall Newsome, of the United States 
Bankruptcy Court for the Northern District of California; 
Philip Strauss, Principal Attorney from the San Francisco 
Department of Child Support Services; Brady Williamson, the 
former Chair of the National Bankruptcy Review Commission.
    We are also fortunate to be hearing from Ken Beine, 
President of Shoreline Credit Union, in Two Rivers, Wisconsin; 
Dr. Robert Manning, Senior Research Fellow from the University 
of Houston Law Center; Dean Shaeffer, Vice President and 
Director of Credit for Boscov's Department Stores, in 
Pennsylvania; Maria Vullo, an attorney with the firm of Paul 
Weiss; and Todd Zywicki, Assistant Professor Law at George 
Mason University.
    We appreciate all of you appearing today and we look 
forward to your testimony.
    I will now turn to our Ranking Member, Senator Leahy, for 
his opening statement.

OPENING STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM 
                      THE STATE OF VERMONT

    Senator Leahy. Thank you, Mr. Chairman. I know others 
perhaps have things to say, but I am pleased that we are having 
this.
    There are so many competing public policy interests between 
debtors and creditors and among competing creditors. Judge 
Becker has seen those competing interests probably more than 
any one of us around this panel. But we also have a number of 
Senators around this committee who have developed expertise in 
this area and I do want to hear from them, too, because they 
are going to have to help us develop a consensus.
    We have tried for 4 years to pass bankruptcy reform 
legislation. We all agree that we need some changes in the 
bankruptcy laws, but it has failed, I think, each time in the 
last two Congresses when we went from bipartisanship to 
partisanship.
    In the last two Congresses, the final decisions were made 
by the Republican majority behind closed doors and did not get 
too much of a say in it. There are complex and competing 
interests in this that say we have to work in a bipartisan 
fashion throughout this process.
    I would think that what we should do is look at some of the 
mistakes in the past and why we didn't get legislation through. 
I think we can avoid those mistakes. Mr. Chairman, I think you 
and I can work very closely together with other members of the 
committee to have both sides heard.
    I think the last two times, we saw that there is a great 
deal of bipartisan consensus, and we can follow up on that. So 
I hope we do this and craft a balanced and fair bankruptcy 
reform law, one that addresses and corrects abuses by both 
debtors and creditors. For example, we should provide for more 
disclosure of information so that consumers may better manager 
their debts and avoid bankruptcy altogether.
    I know that Senator Grassley and Senator Durbin, who is 
unable to be here today because of a death in the family, and 
Senator 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 the past few years have contributed to the rise in 
consumer debt and bankruptcies. When we see people who work 
here, their 3-year-old and 4-year-old children getting credit 
card solicitations, you know that something is wrong.
    In addition, many of the most controversial proposals for 
change are to benefit the credit card industry and to use 
taxpayer-supported bankruptcy courts and the authority of 
Federal law to augment and support the credit card industry's 
debt collection. Well, if we are going to have the taxpayers 
help with their debt collection, it is only fair that the 
credit card industry be involved in bankruptcy reform and that 
they be asked to show how those changes they seek are going to 
benefit consumers through lower interest rates or lower fees. 
If we are going to help them collect their debt, if we are 
going to have the taxpayers pay to help them collect their 
debts, what are they going to do to help the users of their 
cards?
    President Bush underlined the importance of examining 
credit industry practices. He said this week, to quote 
President Bush, ``The debt I am most concerned about, however, 
is the consumer debt, credit card debt, the debt that burdens 
thousands of Americans. And we'd better be really careful about 
not recognizing the combination of an economic slow-down, high 
energy prices, and debt overhang--what that means to working 
people.'' As usual, I agree with President Bush.
    I am pleased that Professor Robert Manning is here today to 
discuss his recent research and analysis of credit industry 
practices and consumer debt. We should also talk about wealthy 
debtors who use the overly broad homestead exemption to shield 
assets from their creditors. Senator Kohl has been a leader on 
this issue and on closing this loophole.
    In some States, wealthy debtors have used their State laws 
to protect million-dollar mansions from creditors, and it has 
been a major problem. In the last Congress, by a vote of 76 to 
22, the Senate adopted a bipartisan amendment offered by 
Senator Sessions and Senator Kohl to cap any homestead 
exemption at $100,000. But, of course, in the final bill that 
was gutted. Brady Williamson, the former Chair of the National 
Bankruptcy Review Commission, is here to tell us about this 
consensus reform and others like it that the Bankruptcy Review 
Commission recommended to Congress.
    A year ago, the Senate passed the Schumer-Leahy amendment 
to prevent the abuse of the bankruptcy system whereby you could 
discharge penalties for violence against family planning 
clinics.
    As I recall, Senator Schumer, that was a vote of 80 to 17, 
overwhelming. It was given support this past month by Senator 
Ashcroft, who had voted in favor of the amendment. He said he 
supported this. Yet, even though it was an overwhelmingly 
bipartisan endorsement, in the so-called conference report at 
the end of the year there wasn't a single word of it. As a 
result, perpetrators of clinic violence can continue to seek 
shelter in the Nation's bankruptcy courts. That would be wrong.
    Attorney General Ashcroft pledged his support for the 
Schumer-Leahy amendment during his confirmation hearing. As 
usual, I agree with Attorney General Ashcroft.
    I want you to notice my close agreement with President Bush 
and Attorney General Ashcroft in these matters, Senator Hatch, 
and I hope you will follow the example of the leaders of your 
party.
    Maria Vullo, a top-rated attorney, will testify about the 
need to amend the Bankruptcy Code to stop wasteful litigation 
and abuse of bankruptcy filings used to avoid the legal 
consequences of violence and vandalism and harassment and to 
deny access to legal health services. So we should remember 
those things we passed in the past and look back at them.
    We should also remember those who use bankruptcy are 
usually the most vulnerable of the American class. They are 
older Americans who have lost their jobs or are unable to pay 
their medical debts. They are women attempting to raise their 
families or secure alimony and child support after a divorce. 
They are individuals struggling to recover from unemployment. 
We need to remember that people use the system, both the debtor 
and the creditor.
    Judge Becker and Judge Newsome are here today to testify 
about how reform legislation will impact on the real people who 
use our courts each day, and I think that is very helpful to 
us. We need to balance the interests of creditors with those of 
middle-class Americans who need the opportunity to resolve 
overwhelming financial burdens.
    Even though this was put together on very, very short 
notice, the minimum notice, I am glad that the witnesses were 
able to come here today. I know the House is going to hold 2 
days of meetings and amendments. I hope that we will work as 
hard as they do, but I would also hope that we would look at 
those things that were developed through bipartisan consensus 
in the last couple of years and go back to those things as a 
beginning point.
    Thank you, Mr. Chairman.
    Chairman Hatch. Thank you, Senator Leahy.
    [The prepared statement of Senator Leahy follows:]

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

    I am pleased that the Committee is holding this hearing. Bankruptcy 
is a complex area of the law with many competing public policy 
interests between debtors and creditors and among competing creditors. 
I look forward to hearing our witnesses share their insight and 
experience with the current bankruptcy system. We are fortunate to have 
a number of Senators on this Committee who have developed expertise in 
this area, as well. I look forward to hearing from them, to working 
with them and to our developing a consensus of the areas of our federal 
bankruptcy law that need modification and improvement.
    For the past four years, Congress has tried but failed to pass 
bankruptcy reform legislation. I believe the legislative process broke 
down in the each of the last two Congress when partisanship took over. 
Three years ago, as the Senate was considering bankruptcy legislation, 
I received assurances that our conferees would support the Senate bill 
and the Senate position in conference. Unfortunately, that bill, which 
passed with 97 bipartisan votes, and on which Senator Durbin and 
Senator Grassley had worked so hard, was abandoned to a poor substitute 
that was never enacted.
    Last Congress, we again worked for a bipartisan bill. The 
Republican leadership extended Senate consideration of the bill over 
both congressional sessions when it would not allow votes on two 
proposed amendments in 1999. After the new year we returned to see the 
Senate vote overwhelmingly in favor of one of those amendments, the 
Schumer-Leahy amendment. During Senate consideration we also were able 
to improve the bill by adopting the Kohl-Sessions amendment, capping 
the homestead exemption.
    Because of a Republican amendment that added unnecessary tax 
provisions, the House would not conference on the Senate-passed bill 
and no formal conference was conveyed. For a time we worked informally 
to resolve differences on a bipartisan basis, until the Republican 
majority decided to write their own version of a final bill that they 
had been warned would result in a presidential veto. They then used a 
sham conference to substitute their bankruptcy bill for a State 
Department embassy security bill. That bill dropped the Schumer 
amendment, revised the homestead exemption and did not address the oft-
articulated concerns of the President, and the exercise predictably 
resulted in a veto rather than enactment. Unfortunately, at the end of 
each of the last two Congresses, final decisions were made by the 
Republican majority behind closed doors.
    The complex and competing interests involved in achieving fair and 
balanced reforms of our bankruptcy system demand that we work in a 
bipartisan manner throughout the legislative process. That is the 
lesson to learn from the failed attempts of past reform measures, and 
it is all the more relevant as we begin this session with an evenly 
divided Senate and an evenly divided Committee. I hope that the 
partisan mistakes of the past will give way to real and sustained 
cooperation so that this Congress can produce a consensus that can make 
changes that are needed to benefit the American people. There is ample 
evidence from the last two rounds that bipartisan consensus is possible 
on responsible bankruptcy reform.
    I look forward to working with all Members of this Committee in a 
respectful, bipartisan way from beginning to end--from hearings, to 
consideration of legislative ideas, to markup, to Committee report, to 
Senate consideration and finally to having a fair and balanced 
conference report signed into law. For us to succeed this time, we must 
work together from beginning to end.
    I believe we can craft a balanced and fair bankruptcy reform law. 
One that addresses and corrects the abuses by both debtors and 
creditors in the current bankruptcy system.
    For example, we should provide for more disclosure of information 
so that consumers may better manage their debts and avoid bankruptcy 
altogether. I know that Senator Grassley, Senator Durbin, Senator 
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 the past few years have 
contributed to the rise in consumer debt and bankruptcies. In addition, 
many of the most controversial proposals for change are to benefit the 
credit card industry and use taxpayer-supported bankruptcy courts and 
the authority of federal law to augment and support their debt 
collection. As a result, it is only fair that the credit card industry 
be involved in bankruptcy reforms and be asked to show how those 
changes they seek will benefit consumers through lower interest rates 
and lower fees.
    President Bush underlined the importance of examining credit 
industry practices when he said this week: ``The debt I'm most 
concerned about, however, is the consumer debt, credit card debt, the 
debt that burdens thousands of Americans. And we'd better be really 
careful about not recognizing the combination of an economic slowdown, 
high energy prices and debt overhang--what that means to working 
people.'' I agree with President Bush. I am pleased that Professor 
Robert Manning is here today to discuss his recent research and 
analysis of credit industry practices and consumer debt.
    Another improvement we should make is to adequately address the 
problem of wealthy debtors who use overly broad homestead exemptions to 
shield assets from their creditors. Senator Kohl has been a leader on 
this issue and a champion of closing down this loophole for the rich. 
In some states, wealthy debtors have used their State laws to protect 
million dollar mansions from creditors. This has been a real abuse of 
bankruptcy's fresh start protection.
    In the last Congress, the Senate overwhelmingly voted to close this 
loophole in the Bankruptcy Code. By a vote of 76 to 22, the Senate 
adopted a bipartisan amendment offered by Senators Kohl and Sessions to 
cap any homestead exemption at $100,000. But last year's final bill 
gutted this key reform. I am pleased that Brady Williamson, the former 
Chair of the National Bankruptcy Reform Commission, is here to tell us 
about this consensus reform and others like it that the Bankruptcy 
Reform Commission recommends to Congress.
    Last year's final bill also failed to address the discharge of 
penalties for violence against family planning clinics. A year ago this 
month, the Senate passed the Schumer-Leahy amendment to prevent this 
abuse of the bankruptcy system by a vote of 80-17. We have been 
reminded of this vote often during the past month given Senator 
Ashcroft's vote in favor of the amendment. Despite this overwhelming 
bipartisan endorsement, last year's so-called conference report 
contained not a single provision to end the abusive practice. As a 
result, perpetrators of clinic violence can continue to seek shelter in 
the nation's bankruptcy courts. That would be wrong.
    Attorney General Ashcroft pledged his support for the Schumer-Leahy 
amendment during his confirmation hearings. Today, Maria Vullo, a top-
rate attorney, will testify about the need to amend the Bankruptcy Code 
to stop wasteful litigation and end abusive bankruptcy filings used to 
avoid the legal consequences of violence, vandalism and harassment to 
deny access to legal health services.
    As we proceed with this legislative process, we should remember the 
purpose bankruptcy serves, which is as a safety net for many Americans. 
Those who use bankruptcy are the most vulnerable of the American middle 
class.
    They are older Americans who have lost their jobs or who are unable 
to pay their medical debts. They are women attempting to raise their 
families or secure alimony and child support after a divorce. They are 
individuals struggling to recover from unemployment.
    As we move forward with reforms that are appropriate to eliminate 
abuses in the system, we need to remember the people who use the 
system, both the debtor and the creditor. Judge Becker and Judge 
Newsome are here today to testify about how reform legislation will 
affect the real people who use our courts every day.
    We need to balance the interests of creditors with those of middle-
income Americans who need the opportunity to resolve overwhelming 
financial burdens. As the last two Congresses proved, there are many 
competing interests in the bankruptcy reform debate that make it 
difficult to enact a balanced and bipartisan bill into law.
    Although this hearing was scheduled unilaterally with the minimum 
notice allowed under Senate rules, I thank our witnesses for responding 
to the call on such short notice to be with us today. We did not 
receive the names of the four witnesses invited by the Republicans 
until Monday afternoon. We did not begin receiving written statements 
from those witnesses until yesterday afternoon. Accordingly, I expect 
that we will have written follow up questions to be forwarded to these 
witnesses within a reasonable time of reviewing their written 
statements and of reviewing their comments here today.
    I note that the House Judiciary Committee has chosen to hold two 
days of hearings on this important topic. I understand that the House 
Judiciary Committee has also indicated that it intends to hold two days 
of meetings for discussion and amendment of the House bill. I look 
forward to working with Chairman Hatch on a schedule that would allow 
our Committee, the Senate Judiciary Committee, likewise to do its work 
and serve the Senate by fully and fairly considering legislation on 
bankruptcy related issues. These are important subjects that can have a 
great impact on the lives of many people who have already suffered from 
illnesses or divorce or job loss or other personal difficulties. We 
ought to take utilize the expertise of the Members of our Committee to 
ensure that what we report to the Senate is fair and balanced and that 
it will not exact an unintended toll on our neighbors.
    I am hopeful that this year, we will work together in a bipartisan 
fashion from the beginning of the legislative process to the end to 
enact reforms that ensure our bankruptcy laws better serve their 
intended goals and corrects abuses by both debtors and creditors in the 
bankruptcy system.

    Senator Biden. Mr. Chairman, nothing on the merits, but may 
I also welcome Chief Judge Becker?
    Chairman Hatch. Sure.
    Senator Biden. I consider him a friend and I just want to 
associate myself with the remarks of Senator Specter. The Third 
Circuit is the circuit in which Delaware resides, and I want to 
thank the judge for all he has done for the circuit and 
accommodating the movement of some judges onto that circuit 
from the State of Delaware. Again, I would like to associate 
myself with the remarks of Senator Specter. I will not take any 
more time.
    Senator Leahy. As do I. I think we are fortunate to have 
Judge Becker. Even though he has to sit here and listen to all 
these speeches, I think we are darn lucky to have him here.
    Chairman Hatch. Judge, we are happy to have you here and we 
will turn the time over to you. We appreciate and respect the 
work you do on the Third Circuit as Chief Judge. We will turn 
the time to you and we want to listen very carefully to what 
you have to say.

STATEMENT OF HON. EDWARD R. BECKER, CHIEF JUDGE, UNITED STATES 
     COURT OF APPEALS FOR THE THIRD CIRCUIT, PHILADELPHIA, 
                          PENNSYLVANIA

    Judge Becker. Thank you, Mr. Chairman. For the record, my 
name is Edward Becker. I am the Chief Judge of the United 
States Court of Appeals for the Third Circuit and a member of 
the Executive Committee of the Judicial Conference of the 
United States, on whose behalf I appear here today. Let me 
state, Mr. Chairman, we are very grateful for your making this 
spot available to us, and the other members of the committee.
    Let me state at the outset that I am here not to discuss 
general matters of debtor and creditor, but about some other 
real people in our society, Federal judges, and the institution 
of the Federal judiciary and the impact of one provision of 
this legislation. I am here to talk only about Section 1235, 
that dealing with bankruptcy appellate procedure. That 
provision would effect a radical change in bankruptcy appellate 
procedure by routing virtually all bankruptcy appeals which now 
go to the district courts directly to the courts of appeals.
    Now, if there is one thing I know a little bit about after 
20 years on the courts of appeals, and actually 30 years on the 
Federal bench, it is about the workload of the courts of 
appeals. We are stretched, we are strained, we work all the 
time. We are at our limit, and we simply cannot absorb this new 
load of all of these bankruptcy appeals.
    It may be quite unusual, but I am here not just on behalf 
of the Executive Committee, but I have spoken to every chief 
circuit judge, that is the chief circuit judges of all of the 
regional circuits who hear bankruptcy appeals. Each and every 
chief circuit judge--and they are the ones who are responsible 
for management of litigation in the courts of appeals, and as 
you know, we are basically the court of last resort in this 
Nation because the Supreme Court doesn't hear very many cases. 
Each and every chief judge opposes this provision and has 
authorized me to speak on their behalf.
    Now, we are not sure of the exact numbers. Our best 
estimate is probably 3,000 more appeals a year. The heaviest 
impact would be on a number of circuits. Frankly, it would be 
on the First Circuit, Senator Kennedy's circuit; the Second 
Circuit, Senator Leahy and Senator Schumer's circuit; the Third 
Circuit, Senator Biden's and my circuit; the Sixth Circuit; the 
Tenth Circuit, Senator Hatch's circuit; and the Ninth Circuit, 
Senator Feinstein's circuit. In terms of the numbers, we 
estimate an increase in caseload between 10 and 20 percent.
    Having mentioned the Ninth Circuit, I spoke to Chief Judge 
Schroeder yesterday, who is especially concerned about the 
impact of this legislation on the bankruptcy appellate panels 
which they have so carefully honed, because essentially if 
there is the option to go right to the court of appeals, she is 
fearful that the BAPs, as they call them, will be simply 
bypassed and that that structure will fall into disuse.
    Some say, well, give us more judges to take up these 
additional cases. Well, this committee knows better than 
anybody the history of more judges. The First Circuit hasn't 
had a new judge since 1984, and they have a sizable increase. 
The Second Circuit would have a 40-percent increase. But I 
don't want to go into all of those details.
    Let me get down to the matter that this body is concerned 
about. You are a policymaking body and you deal with costs and 
benefits. Now, I have talked about the cost. In our view, the 
cost would be incalculable in terms of the burdens on the 
courts of appeals and the need for more judges, which we are 
not going to get and we shouldn't get for this purpose.
    Let me talk about the benefits. Now, this proposal which 
was endorsed by the National Bankruptcy Review Commission is 
offered as a simple, neat solution. We say we have a two-tiered 
appeal. We have one appeal to the district court or the 
bankruptcy appellate panel and another to the court of appeals, 
and this is a simple, neat solution.
    I hope that the committee will not feel I am irreverent 
when I say that to every human problem there is a solution that 
is simple, neat and wrong, and this one is wrong. First of all, 
there are legal problems with it. I take no position on this as 
an Article III judge, but the Department of Justice has long 
taken the position that this has constitutional problems. They 
believe that meaningful review in the district court is 
necessary for it to be constitutional and query whether the 30 
days is meaningful review.
    Second, this is offered that we need more precedent; 
bankruptcy opinions are all over the lot. Give it to the court 
of appeals and there will be more precedent. That is the 
theory. The theory is that if we have more precedent, we will 
have less litigation. I can tell you, after 30 years on the 
Federal bench, more precedent only means more litigation, that 
being the nature of the beast in terms of lawyers.
    And precedent isn't the kind of precedent you make in terms 
of broad rules. All precedent is is the decisions are fact-
bound; it is very narrow. All you do is deal particularly with 
the facts of the case, and the facts of the case generally are 
pretty fact-bound and they don't help anybody. Additionally, 
the courts of appeals are so burdened that when we decide 
cases, most of them we decide as non-precedential. So you don't 
get precedent when you get to the court of appeals these days 
because we are so busy.
    I can run through my other points very quickly, with your 
permission, Mr. Chairman. With respect to cost, it is said that 
this would be a cheaper way if you have a unitary appeal 
process. But the fact of the business is that it is much more 
expensive to take a case to the court of appeals because of our 
briefing and all of the requirements. The district court 
procedures are simpler, they are much cheaper, and 80 percent 
of the cases fall out. We talk about two tiers, but 80 percent 
of them are gone at the district court level.
    The district courts are doing a good job, so you are making 
it more expensive if you do this in terms of time. It is 
certainly not easier for the 80 percent because you lengthen 
the period with the additional 30 days that are in the statute.
    I concede that in some complex cases the two tiers will 
take longer. They are basically adversary proceedings. In 
Chapter 11, they are traditional, complex litigation. We don't 
deny that is a problem and we have offered a solution. Instead 
of this broad-based solution which is an over-broad solution, 
we offer a targeted solution. And we don't want to stop this 
bill. The Congress wants to pass a bill.
    All we say is substitute for that bankruptcy appellate 
provision a simple provision which says that if the district 
court or the bankruptcy appellate panel certifies to the court 
of appeals that this is a time-sensitive problem--we have got a 
reorganization that is going to stand or fall, we need a 
decision--or if there is a precedent that has to be 
established, let it be certified to the court of appeals.
    Our proposed bill says that acceptance of the certification 
is up to the court of appeals. We think that is more sound, but 
I am authorized by the Executive Committee to say that the 
committee feels that we are bound by the certification. If the 
district court or the bankruptcy appellate panel says the 
interests of justice require you to take this case, then we 
will take it and then we will establish precedent.
    So we think that is a targeted solution and we think that 
is by far the best solution, and we urge the committee and the 
Congress to jettison 1235, as written, and adopted this 
alternative proposal which is, as I say, approved by the 
Judicial Conference. We think it will really solve the problem.
    My statement talks about filing fees, data collection, 
income tax returns, bankruptcy rules. We think there are some 
other burdens imposed on the court, but I don't want to take 
the time of the committee. I will leave that to my statement.
    We also urge additional bankruptcy judges. I know that is a 
matter Senator Biden is concerned about, and we are because of 
the huge bankruptcy load in Delaware. We need more bankruptcy 
judges, but they need them a lot of places. I will leave those 
matters to the statement.
    I thank you so much, Mr. Chairman, and, of course, if 
anybody has any questions, I would be pleased to answer them.
    Chairman Hatch. Well, thank you, Judge. This Senator is 
sympathetic to what you are saying, and your statement, I 
think, covers this very, very well.
    Unless there are any questions, we appreciate your coming 
very much.
    Judge Becker. Thank you so much.
    Chairman Hatch. And we appreciate your taking time out of, 
we know, a very busy schedule. Thank you for being here.
    Senator Leahy. Mr. Chairman, I would just note I think a 
couple may have some short questions in writing for Judge 
Becker.
    Judge Becker. Of course.
    Chairman Hatch. We will keep the record open, Judge.
    Senator Biden. That is what I was about to ask.
    Senator Leahy. We like having your expertise available to 
us, so thank you very much.
    Judge Becker. Thank you so much.
    Chairman Hatch. Thanks so much.
    We are grateful to have had Judge Becker with us today and 
that we could accommodate his schedule.
    [The prepared statement and an attachment of Judge Becker 
follow:]

Statement of Hon. Edward R. Becker, Chief Judge, United States Court of 
                         Appeals, Third Circuit

    Mr. Chairman and members of the Committee:
    My name is Edward Becker, and I am the Chief Judge of the United 
States Court of Appeals for the Third Circuit. I appear before you as a 
member of the Executive Committee of the Judicial Conference of the 
United States to present the position of the Judicial Conference with 
regard to S. 220, the ``Bankruptcy Reform Act of 2001.'' I thank you 
for the opportunity to appear today and would like to address six areas 
of concern to the judiciary: appeal of bankruptcy court decisions, need 
for new judgeships, re-allocation of revenues generated by filing fees, 
mandatory data collection, filing of tax returns with the bankruptcy 
court, and amendment of bankruptcy rules.

                             Direct Appeals

    The Judicial Conference strongly opposes section 1235 of the bill 
regarding expedited appeal of bankruptcy cases. As proposed, this 
provision would revise the basic structure for appeals from the orders 
of the bankruptcy court by providing that all bankruptcy court orders 
appealed to the district court would become orders of the district 
court 31 days after such appeal is filed, unless the district court 
decides the case within 30 days or extends the time period for 
decision. Functionally, this will result in all appeals from bankruptcy 
courts being routed directly to the United States Court of Appeals, 
depositing some four thousand new cases per year on these courts.
    Turning first to the provisions of section 1235, I note that, as a 
general matter, the Judicial Conference opposes statutory litigation 
priorities, expediting requirements, or time limitation rules in 
specified types of civil cases beyond those few categories of 
proceedings already identified in 28 U.S.C. Sec. 1657 as warranting 
expedited review.\1\ Mandatory priorities and expediting requirements 
run counter to principles of effective civil case management. 
Individual actions within a category of cases inevitably have different 
needs for priority treatment and are best determined on a case-by-case 
basis. In addition, as the number of categories of cases receiving 
priority treatment increases, the ability of a court to expedite review 
of any of these cases is restricted. Because 28 U.S.C. Sec. 1657 
already authorizes the court to expedite a proceeding if ``good cause 
is shown,'' additional restrictions on federal courts are unnecessary.
---------------------------------------------------------------------------
    \1\ Report of the Proceedings of the Judicial Conference of the 
United States, September 1990, p. 80.
---------------------------------------------------------------------------
    Beyond creating general case management problems by imposing such a 
time limit on the district courts, the particularly short time limit 
imposed by the proposed legislation would undermine the administration 
of justice. The district court would be required either to extend the 
30 day period as a matter of routine or to make a determination as to 
whether direct appeal is appropriate or not within the 30 day period. 
The 30 day period running from the date of filing the appeal is 
patently insufficient to allow practitioners the time needed to 
adequately brief the issue, much less to allow the district court 
adequate time for review. It is clear to me that, as a practical 
matter, this provision requires direct review of these cases in the 
court of appeals. The 30 day layover in district court only increases 
costs to the litigants and will prove to be a meaningless step on the 
way to review by the court of appeals.
    The Judicial Conference has concluded that the inevitable result of 
this provision will be to saddle the courts of appeals with thousands 
of new cases. According to a study of the Federal Judicial Center, it 
has the potential to increase bankruptcy appeals by 400%. The circuit 
courts now handle approximately 1,000 bankruptcy appeals each year. 
Under the proposed procedure, the courts may be faced with 4,000 new 
cases annually. Such a precipitous increase in the caseloads of the 
courts of appeals is utterly unprecedented. All of the chief judges of 
the twelve regional circuit courts of appeals strongly oppose this 
provision. Many of these courts maintain incredibly high workloads 
while being chronically shorthanded. A significant increase in the 
volume of bankruptcy appeals exacerbates a grievous problem and 
negatively affects the prompt and effective processing of all appeals.
    The proposal is particularly unfair to parties to a bankruptcy 
appeal. It will most certainly increase the cost of the appeal. 
Practice, including briefing, is more complicated and time consuming in 
appellate courts than in district courts. Attorney fees and other costs 
to the parties will increase in 80% of all appeals, the percentage of 
appeals that currently proceed no further than the district courts. 
Further, appeals are handled far more expeditiously in district courts 
than in courts of appeals. Indeed, the current system is working well; 
the district judges by and large do a good job with these cases. In 
sum, the proposal provides for increased expense and increased delay 
for parties to a bankruptcy appeal, and attempts to fix something that 
``ain't broke.''
    The Judicial Conference recommends a proposal for expedited appeal 
of a targeted number of bankruptcy cases which is attached hereto. This 
proposal redresses the primary complaints regarding the existing 
statutory scheme for bankruptcy appeals: the need for expeditious final 
disposition of appeals in time sensitive cases (where the success of a 
reorganization depends upon a quick decision), and putative 
inefficiency in the development of binding precedential case law.\2\ 
The Judicial Conference proposal will solve these problems without 
creating the aforementioned unnecessary problems for litigants and the 
courts of appeals.
---------------------------------------------------------------------------
    \2\ The argument is made that direct appeals to the court of 
appeals will create more precedent AND that more precedent will lead to 
more certainty in the law and less litigation. My thirty years 
experience on the federal bench tells me that the opposite is true. 
More precedent leads to more litigation.
---------------------------------------------------------------------------
    The Conference position is that bankruptcy court orders should be 
reviewable directly in the courts of appeals if, upon certification 
from the district court or bankruptcy appellate panel, the court of 
appeals determines that (1) a substantial question of law or matter of 
public importance is presented and (2) an immediate appeal to the court 
of appeals is in the interests of justice. This would allow direct 
appeal where necessary to establish precedential case law and meet 
special needs of parties, while leaving intact the basic bankruptcy 
appellate structure. Most bankruptcy appeals are currently resolved 
effectively by the district courts or by the parties, as shown by a 
Federal Judicial Center review reflecting that 73% of bankruptcy 
appeals in the district courts were resolved with little or no judicial 
involvement. By preserving the district court as a forum for meaningful 
review, the Conference proposal satisfies two objectives-it allows for 
timely resolution of appeals at minimal cost to litigants, and it 
facilitates the establishment of precedential case law in bankruptcy 
without placing undue burdens on the courts of appeals.

                               Judgeships

    Section 1225 of the bill would create 23 new temporary bankruptcy 
judgeships and extend the existing temporary judgeships in the northern 
district of Alabama, the district of Puerto Rico, and the eastern 
district of Tennessee for a period of three years, and extend the 
existing temporary judgeship in the district of Delaware for a period 
of five years. The section also contains a provision to extend the 
temporary judgeship in the district of South Carolina for a period of 
three years. Because the term of South Carolina's temporary judgeship 
lapsed on December 31, 2000, however, the bill will no longer have its 
intended effect with regard to that judgeship. The term of a judgeship 
that no longer exists cannot be extended. Therefore, the bill needs to 
``re-authorize'' that judgeship by including it among the new 
judgeships created by the bill.
    The bill falls somewhat short of the needs of the judiciary. The 
Judicial Conference recommends authorization of 23 judgeships provided 
for in the bill, as well as an additional judgeship in the district of 
Maryland and a judgeship in the district of South Carolina to replace 
the lapsed judgeship. In addition, the Conference urges that 13 of 
these judgeships be established on a permanent basis \3\ and the other 
12 on a temporary basis;\4\ that the current temporary judgeships in 
the district of Puerto Rico, the northern district of Alabama and the 
district of Delaware be converted to permanent positions; and, that the 
temporary judgeship in the eastern district of Tennessee be extended 
for a period of five years.
---------------------------------------------------------------------------
    \3\ District of Delaware (1), District of New Jersey (1), District 
of Maryland (3), Eastern District of Virginia (1), Eastern District of 
Michigan (1), Western District of Tennessee (1), Central District of 
California (3), Southern District of Georgia (1) and Southern District 
of Florida (1).
    \4\ District of Puerto Rico (1), Northern District of New York (1), 
Eastern District of New York (1), Southern District of New York (1), 
Eastern District of Pennsylvania (1), Middle District of Pennsylvania 
(1), Eastern District of North Carolina (1), Southern District of 
Mississippi (1), Eastern District of California (1), Central District 
of California (1), Southern District of Florida (1) and District of 
South Carolina (1).
---------------------------------------------------------------------------
    The Judicial Conference is required by law to submit 
recommendations to Congress regarding the number of bankruptcy judges 
needed and the districts in which such judgeships are needed.\5\ This 
requirement has engendered a process whereby the need for additional 
judgeships is assessed on a biennial basis. The bankruptcy and district 
courts provide recommendations to their respective judicial councils. 
The judicial councils' recommendations are then subject to onsite 
surveys of the districts for which judgeships are requested.
---------------------------------------------------------------------------
    \5\ 528 U.S.C. Sec. 152(b)(2).
---------------------------------------------------------------------------
    Under the direction of the Conference Committee on the 
Administration of the Bankruptcy System, the surveys include a thorough 
review of the dockets in each respective court and interviews with the 
chief district judge, the bankruptcy judges, the bankruptcy clerk, the 
United States Trustee, and local bankruptcy attorneys. Suggestions for 
improvements in case management and methods to achieve greater 
efficiencies are solicited by the survey team. The survey team then 
prepares a written report and recommendation regarding each respective 
district that is submitted to the Committee's Subcommittee on 
Judgeships. The Subcommittee reviews each request for additional 
judgeships and survey report and then forwards these materials, with 
its recommendation, to the requesting appellate, district and 
bankruptcy courts for additional comment. All relevant materials are 
then provided to the full Committee, which makes recommendations to the 
Judicial Conference. The Conference makes its determination on the need 
for each requested judgeship and then submits its recommendation to 
Congress.\6\
---------------------------------------------------------------------------
    \6\ It should be noted that in those instances in which Congress 
declines to authorize the requested judgeships, the on-site survey 
process is not necessarily repeated before the request is renewed. 
Nevertheless, review of each request is conducted to determine whether 
or not the underlying justification for the request has changed to the 
extent that an on-site survey should be repeated.
---------------------------------------------------------------------------
    Various factors are considered in this process for determining the 
need for new judgeships. The most significant factor is the ``weighted 
judicial caseload'' of each bankruptcy court. This figure is derived 
from a formula established as a result of a time study of the 
bankruptcy courts conducted by the Federal Judicial Center during 1988 
and 1989. Absent exigent circumstances, the Judicial Conference 
considers requesting an additional judgeship only when the caseload of 
a court exceeds 1500 weighted filings per judge. In those instances in 
which the addition of a judgeship would result in a decrease of the 
caseload below 1500 weighted filings, the Conference seeks a temporary 
position; in those instances in which the weighted filings would remain 
above 1500 per judge even with the addition of another judge, the 
Conference seeks a permanent position.
    Other factors which are taken into consideration during this review 
process, especially in those districts with case weights near the 1500 
weighted filings threshold, include the nature and mix of the caseload 
of the court; historical caseload data and filing trends; geographic, 
economic and demographic factors; effectiveness of the case management 
efforts of the court; and, the availability of alternative resources 
for handling the caseload of the court.
    Additional bankruptcy judgeships have not been authorized by-
Congress since 1992 when 35 new judgeships were approved. In response 
to a substantial increase in case filings, the Judicial Conference has 
made recommendations to Congress for additional bankruptcy judgeships 
in 1993, 1995, 1997 and 1999. These judgeships have not as yet been 
authorized by Congress.
    The need for the required additional judicial officers is great. 
Bankruptcy filings continue at very high levels and well over a million 
cases are pending in our bankruptcy courts. While the judiciary employs 
a number of creative strategies to manage ever increasing caseloads, 
including the use of temporary bankruptcy judges, recalled bankruptcy 
judges, inter- and intracircuit assignments, additional law clerks, and 
advanced case management techniques, there remains a dire need for more 
judicial resources to handle the burgeoning judicial workload.

                              Filing Fees

    Section 325 of the bill amends the statutory filing fees for 
chapter 7 and chapter 13 cases and re-allocates a portion of the 
revenues generated by such fees from the judiciary and the Treasury 
general fund to the United States Trustee program. This amendment will 
reduce revenues to the judiciary of approximately $5 million per year. 
While the Judicial Conference takes no position regarding the proposed 
reduction of revenue to the Treasury general fund, it strongly opposes 
reducing revenue currently allocated to the judiciary and providing it 
to the United States Trustees. The existing fee structure takes into 
account the significant costs the judiciary bears in administering the 
Bankruptcy Code. The costs of the United States Trustees are far 
exceeded by the costs of maintaining 324 bankruptcy judgeships and the 
staffs and facilities for these judgeships.
    The current fee schedule took effect in December 1999.\7\ That 
schedule reflects an increase of $25 in the filing fee for both chapter 
7 and chapter 13 cases to a total of $155, and allocates the increased 
filing fee revenue equally between the judiciary and the United States 
Trustee program. Assuming total filings of approximately 1.3 million 
per year, as based upon fiscal year 2000 figures, this increase would 
annually generate approximately $16.25 million each for the judiciary 
and the United States Trustee program. The increase was enacted with an 
understanding by the Appropriations Committees that these funds were 
required by the judiciary to meet its current statutory 
responsibilities, without taking into account any additional funding 
that would be required to meet the new responsibilities imposed by the 
bankruptcy reform legislation.
---------------------------------------------------------------------------
    \7\ Omnibus appropriations bill for fiscal year 2000 (Pub. L. No. 
106-113).
---------------------------------------------------------------------------
    This bill would further revise filing fees to $160 for chapter 7 
cases and $150 for chapter 13 cases and reduce that portion of the 
filing fee that is allocated to the judiciary from $52.50 as provided 
under current law to $50.00 in chapter 7 cases and $45.00 in chapter 13 
cases. Assuming the annual filing of approximately 900,000 chapter 7 
cases and 400,000 chapter 13 cases, this provision would have the 
effect of reducing revenues to the judiciary by over $5 million per 
year, while increasing revenues to the United States Trustee program by 
over $7 million per year.
    The Judicial Conference strongly opposes this re-allocation of 
revenues at a cost to the judiciary of more than $25 million over the 
next five years. Not only are these funds required by the judiciary to 
meet its current statutory responsibilities, but other provisions of 
this bill will require additional expenditures by the judiciary of an 
estimated $80 million during the same five year period. Moreover, 
revising filing fees that took effect only 14 months ago, with all the 
attendant administrative costs and disruptions, would seem to be an 
unwise expenditure of taxpayer funds.

                            Data Collection

    Section 601 of the bill directs the clerks of court to collect, and 
the Administrative Office to compile and report, financial data of 
consumer debtors and certain categories of case event statistics in 
consumer bankruptcy cases. The Congressional Budget Office estimates 
that this requirement will cost the judiciary $30 million over the next 
five years.
    The Judicial Conference is opposed to the provisions of the bill 
that direct the judiciary to collect and report financial data that is 
unnecessary to fulfill its responsibility to report to Congress and the 
public information on the adjudication of cases. Under these 
provisions, the financial data is to be derived from the schedules and 
statements filed by consumer debtors. This information, filed by 
debtors at the outset of bankruptcy cases and in many instances without 
the assistance of a lawyer, is, at best, of questionable reliability\8\ 
Both assets and liabilities are frequently valued inaccurately by 
consumer debtors, and some debt simply cannot be valued definitively at 
the outset of the case because it is unliquidated, contingent or 
disputed. Therefore, these provisions will not generate ``improved 
bankruptcy statistics,'' but will impose significant costs upon the 
taxpayers.
---------------------------------------------------------------------------
    \8\ See Report of the National Bankruptcy Review Commission, vol. 
1, ch. 4 (October 20, 1997).
---------------------------------------------------------------------------
    A far superior approach, in our view, is to append the 
responsibility to collect, compile and report financial data to the 
responsibility of the United States Trustees to conduct audits under 
the bill. This approach would have two significant benefits: it would 
yield audited, and thus accurate, data, and it would accomplish this at 
a fraction of the cost to the taxpayer. We believe that this data would 
meet the needs of Congress to conduct a continuing assessment of the 
functioning and effectiveness of the bankruptcy system. The staff of 
the Administrative Office is prepared to work with congressional staff 
to craft an appropriate replacement for the provision that currently 
appears in this legislation.
    In the event Congress is committed to imposing the responsibility 
to collect, compile and report financial data upon the judiciary, we 
respectfully request extension of the date upon which this provision 
would take effect. Compliance with these new requirements will require 
revising official bankruptcy forms, developing new statistical data 
fields, training clerks in entering additional data into our computer 
systems, devising data extraction programs, and reprogramming 
Administrative Office statistical compilation programs. We will also 
have to coordinate with forms publishers and software developers so 
that the new forms can be made available to attorneys and debtors. In 
order for these responsibilities to be met in an accurate and thorough 
manner, we recommend that the provisions regarding collection and 
reporting of financial data be revised to take effect 24 months after 
enactment of the bill, with the first report due to Congress no later 
than 36 months after enactment of the bill.
    The bill also requires the bankruptcy clerks and the Administrative 
Office to collect and report certain case event statistics. While the 
judiciary is the appropriate entity to collect and report this 
information, this responsibility would similarly pose a significant 
problem. Events occurring in bankruptcy cases are reported to the 
Administrative Office through the electronic case management systems of 
the courts. The current systems, however, are nearing the end of their 
useful lives and cannot collect additional information of the sort 
required by these bills. To upgrade these systems to meet the 
requirements of this legislation would require a major financial 
investment, contrary to good government and common sense, and divert 
resources from and delay the development and deployment of a new, 
modern electronic case management system that is in the process of 
being deployed in the bankruptcy courts.
    This new system will not be installed and operating in all 
districts for at least three and a half years. Accordingly, if the 
judiciary is to be required to collect and report these case event 
statistics system-wide, we urge that this provision be revised to take 
effect 48 months after enactment of the bill, with the first report due 
to Congress no later than 60 months after enactment of the bill.

                           Income Tax Returns

    The bill requires chapter 7 and chapter 13 debtors, upon request of 
a creditor, to file with the bankruptcy court copies of federal income 
tax returns for the three year period preceding the order for relief 
and for the period during which the case is pending. The bill further 
requires the court to limit access to the returns pursuant to security 
procedures promulgated by the Director of the Administrative Office and 
requires the court to destroy the returns three years after the case is 
closed.
    Implementation of this provision would entail development and 
maintenance of a filing system separate from the public case files, 
with access limited to trustees and parties in interest. Court files, 
with the narrow exception of sealed records, are public records 
available on request. Because the sealing of records is relatively 
rare, sealed records can be easily segregated from the public case 
file. The routine filing of tax returns, however, would be problematic.
    Recognizing that tax returns are not to be made available to the 
public, the bill requires the Director of the Administrative Office to 
establish procedures to safeguard the confidentiality of tax 
information and to establish a system to make the information available 
to the United States trustee, case trustee, and any party in interest. 
To carry out this-responsibility, it would be necessary to establish a 
separate filing system for tax returns in each clerk's office, as well 
as to provide personnel to manage it so that unlawful dissemination of 
this information would not occur. This would be a costly undertaking 
requiring additional office space and personnel.
    As the United States Trustee's files are not public records, 
limiting access to trustees and parties in interest would not require 
segregating tax returns and creating separate procedures governing 
access to them. The Trustee's office also has personnel and procedures 
in place to deal with debtors. While the Trustees may well need some 
additional resources to meet this responsibility, that cost should be 
far less than the cost of establishing a new separate system in each 
clerk's office.
    Accordingly, the Judicial Conference takes the position that the 
bankruptcy courts should not be required to maintain tax returns filed 
by debtors, which are typically of no use in the administration of 
bankruptcy cases. The Conference believes that responsibility for 
collection and maintenance of these tax returns would be more 
appropriately assigned to the United States Trustees, who are 
responsible for supervising and estates and approving distributions to 
creditors.

                            Bankruptcy Rules

    Section 102 of the bill establishes standards governing sanctions 
for abusive filings that are inconsistent with Bankruptcy Rule 9011. In 
addition, section 319 states the sense of Congress suggesting several 
changes to Bankruptcy Rule 9011. The cumulative effect of the 
provisions will cause confusion and needless satellite litigation. 
Accordingly, they should be deleted from the bill.
    There are six provisions in the bill that directly task the Supreme 
Court or the Judicial Conference or its Advisory Committee on 
Bankruptcy Rules to promulgate a bankruptcy rule or an official form to 
implement a new requirement added by an amendment of the Bankruptcy 
Code. Section 221 amends section 110 of the Code to require bankruptcy 
petition preparers to provide to the debtor a notice, the contents of 
which are detailed in section 110(2)(B). The provision states that the 
notice shall be an official form issued by the Judicial Conference. 
Section 419 requires the Judicial Conference's Advisory Committee on 
Bankruptcy Rules, after considering the views of the Executive Office 
for United States Trustees, to propose for adoption rules and forms to 
assist a debtor to disclose the value, operations, and profitability of 
any closely-held business. Section 433 requires the Advisory Committee 
to propose for adoption a standard form disclosure statement and plan 
of reorganization for small businesses. Section 435 requires the 
Advisory Committee to propose for adoption rules and forms for small-
business debtors to file periodic financial and other reports. Section 
716 expresses the sense of Congress that the Advisory Committee propose 
rules amending Bankruptcy Rules 3015 and 3007 to extend deadlines for 
governmental units to object to confirmation of chapter 13 plans and to 
restrict the rights of interested parties to object to tax claims until 
the filing of a required tax return. Finally, section 1234 takes the 
extraordinary step of amending the Rules Enabling Act to prescribe the 
form to assist a debtor to report monthly income and expenses required 
to implement amended section 521 of the Code.
    These provisions are unnecessary because the Advisory Committee 
automatically reviews any legislation amending the Bankruptcy Code to 
identify and prescribe any needed amendments to rules and forms. More 
importantly, directing the Judicial Conference or one of its committees 
to amend a particular rule or form bypasses the initial stages of the 
Rules Enabling Act process and needlessly undercuts in varying degrees 
the proper role of the Judicial Conference and its committees, the 
bench and bar, the public, and the Supreme Court in that process.

                               Conclusion

    In conclusion, the Judicial Conference urges the Committee to amend 
the legislation to replace the expedited appeal provision with the 
Judicial Conference proposal, to re-authorize the lapsed South Carolina 
judgeship and provide the other needed judgeships, to leave intact the 
current filing fee structure, to re-assign the responsibility to 
compile and report financial data and maintain tax returns to the 
United States Trustee program, which is better suited to meet these 
responsibilities, to extend the effective date for collection and 
reporting of case event statistics by the bankruptcy clerks and 
Administrative Office, and to delete the provisions regarding amendment 
of bankruptcy rules.
    Again, thank you very much for this opportunity to appear before 
the Committee. I am prepared to answer any questions that you may have.

                                

SEC.______BANKRUPTCY APPEALS
    (a) Appeals.--Section 158 of title 28, United States Code, is 
amended--
(1) in subsection (c)(1) by striking out ``Subject to subsection (b),'' 
    and inserting in lieu thereof ``Subject to subsections (b) and 
    (d)(2),''; and
(2) in subsection (d)--
(A) by inserting ``(1)'' after ``(d)''; and
(B) by adding at the end of that subsection the following new 
        paragraph:
``(2) A court of appeals that would have jurisdiction of a subsequent 
    appeal under paragraph (1) or other applicable law may, in its 
    discretion, permit an immediate appeal to itself, in lieu of 
    further proceedings in a district court or before a bankruptcy 
    appellate panel exercising appellate jurisdiction under subsection 
    (a) or (b), if the district court or bankruptcy appellate panel 
    hearing an appeal certifies, that----
``(A) a substantial question of law or matter of public importance is 
        presented in the appeal pending in the district court or before 
        the bankruptcy appellate panel; and
``(B) the interests of justice require an immediate appeal to the court 
        of appeals of the judgment, order, or decree that had been 
        appealed to the district court or bankruptcy appellate panel.''
    (b) Procedural Rules.--Until rules of practice and procedure are 
promulgated or amended 19 under the Rules Enabling Act (28 U.S.C. 
Sec. Sec. 2071-2077) to govern appeals to a court of appeals 20 
exercising jurisdiction under section 158(d)(2) of title 28, as added 
by this Act, the following shall apply:
(1) A district court or bankruptcy appellate panel may enter a 
    certification as described in section 158(d)(2) during an appeal to 
    the district court or bankruptcy appellate panel under section 
    158(a) or (b).
(2) Subject to the other provisions of this subsection, an appeal by 
    permission under section 158(d)(2) must be taken in the manner 
    prescribed in Rule 5 of the Federal Rules of Appellate Procedure.
(3) When permission to appeal is requested on the basis of a 
    certification of a district court or bankruptcy appellate panel, 
    the petition must be filed within 10 days after the district 10 
    court or bankruptcy appellate panel enters the certification.
(4) When permission to appeal is requested on the basis of a 
    certification of a district court or bankruptcy appellate panel, a 
    copy of the certification must be attached to the petition.
(5) When permission to appeal is requested in a case pending before a 
    bankruptcy appellate panel, the terms ``district court'' and 
    ``district clerk,'' as used in Rule 5 of the Federal Rules of 
    Appellate Procedure, mean ``bankruptcy appellate panel'' and 
    ``clerk of the bankruptcy appellate panel.''
(6) When a court of appeals grants permission to appeal, the Federal 
    Rules of Appellate Procedure apply to the proceedings in the court 
    of appeals, to the extent relevant, as if the appeal were taken 
    from a final judgment, order, or decree of a district court or 
    bankruptcy appellate panel exercising appellate jurisdiction under 
    section 158(a) or (b).

                      SECTION-BY-SECTION ANALYSIS

Section.______Bankruptcy appeals
    Currently, decisions of bankruptcy judges can be appealed either 
to--
(a) the district court for the respective district or
(b) to a bankruptcy appellate panel of three bankruptcy judges. Further 
    appeals lie from the district court or bankruptcy appellate panel 
    to the court of appeals for the circuit.
    In practice, this approach to bankruptcy appeals has had difficulty 
fastening certainty and predictability in bankruptcy law. Unlike those 
of a court of appeals, decisions of a district court acting as an 
appellate court or a bankruptcy appellate panel have no stare decisis 
value or, in other words, are not binding beyond a particular case.
    To address that problem without sacrificing the economy to the 
parties of review by a single district court judge, this section amends 
section 158 of title 28 to permit an appeal to be heard directly by the 
court of appeals if the district court or bankruptcy appellate panel 
certifies that----
(1) the appeal presents a substantial question of law or matter of 
    public importance, and
(2) an immediate appeal to the court of appeals is in the interests of 
    justice, and if the court of appeals agrees to hear the matter. 
    Since this creates a new route of appeal, this section provides 
    interim procedures until permanent rules can be prescribed under 
    the Rules Enabling Act.
    This section preserves the option of prompt, inexpensive review in 
the district court for cases in which the parties need it--i.e., fact-
intensive cases, small cases, and cases where the parties only want a 
quick ``second look'' by another source. It also provides for direct 
review by the court of appeals so that binding precedent can be created 
in those cases and for those issues meriting that treatment, without 
flooding the courts of appeals with all bankruptcy appeals.

    Chairman Hatch. Our panel will be Judge Randall J. Newsome, 
United States Bankruptcy Court of the Northern District of 
California, in Oakland, California; Philip Strauss, Principal 
Attorney, San Francisco Department of Child Support Services, 
in San Francisco, California; Brady C. Williamson, Esquire, 
LaFollett, Godfrey and Kahn, former Chair of the National 
Bankruptcy Review Commission, from Madison, Wisconsin; Dean 
Sheaffer, Vice President and Director of Credit, Boscov's 
Department Stores, in Laureldale, Pennsylvania; Maria T. Vullo, 
Esquire, Paul, Weiss, Rifkind, Wharton and Garrison, out of New 
York City; Ken Beine, President of Shoreline Credit Union, of 
Two Rivers, Wisconsin; Dr. Robert Manning, Senior Research 
Fellow, Institute for Higher Education, Law, and Governance, 
University of Houston Law Center, in Houston; and Todd J. 
Zywicki, Esquire, George Mason University, Assistant Professor 
of Law.
    We are sorry to have such tight seating arrangements. They 
are left over from yesterday's hearing. We had the CEOs of all 
the major airlines appearing before us, and apparently the 
coach seating kind of upset them just a little bit. [Laughter.]
    Chairman Hatch. It has been left over for you today, so we 
hope it doesn't upset you as much as it did them.
    We will begin with Judge Newsome and go on from there.

  STATEMENT OF HON. RANDALL J. NEWSOME, JUDGE, UNITED STATES 
  BANKRUPTCY COURT, NORTHERN DISTRICT OF CALIFORNIA, OAKLAND, 
                           CALIFORNIA

    Judge Newsome. Good morning, Mr. Chairman and distinguished 
members of the committee. My name is Randall Newsome and I am a 
bankruptcy judge from the Northern District of California.
    I should note at the outset that I am here representing 
only myself, no other person or organization. My intention this 
morning is not to make policy pronouncements or value judgments 
about bankruptcy reform. That is the role of Congress, not the 
courts. But I think my position as a bankruptcy judge puts me 
in a unique position to provide observations about how S. 220 
will work as drafted.
    My first observation is that the means test in this bill 
will move very, very few people from Chapter 7 to Chapter 13. 
As the data in my written testimony indicates, only about 15 
percent of filers, if that, are above the median income, and 
probably no more than 3 percent will actually be forced into 
Chapter 13 or dismissed.
    Senator Biden. What was that percentage, Judge? I am sorry.
    Judge Newsome. Three percent.
    Senator Biden. Three percent will be forced into 13?
    Judge Newsome. Or dismissed.
    Senator Biden. Or dismissed.
    Judge Newsome. The problem for 97 percent of those who file 
will not be passing the test, it will be taking the test. By my 
count, the means test will require at least another five forms 
on top of what is already required. It will require the 
production of tax returns and a credit counseling certificate 
just to get in the courthouse door.
    So even if you are like the 65-year-old single woman from 
Monticello, Illinois, I discuss in my written testimony making 
$657 a month in Social Security, or the cook from Decatur, 
Alabama, making $850 a month, or the single mother who draws 
Social Security and makes $1,170 per month as a temporary 
worker supporting three kids, you will have to get the credit 
counseling, file 16 or more forms--it might be 14--and dig out 
your tax returns for at least 1 year or more before you can 
perfect a filing in bankruptcy court.
    The means test form alone will probably be several pages 
long. In any event, if you don't submit all the forms on time, 
your case will get dismissed automatically, no matter what the 
circumstances. And once you get dismissed, the bill makes it 
very hard to get back in and stay in. Thus, the overall effect 
of the bill is not to promote repayment of debts in bankruptcy; 
it is to try to keep people out of the system altogether.
    By adding all of these forms and requirements to a simple 
Chapter 7 case and by imposing new requirements on bankruptcy 
attorneys themselves, the bill will make legal services too 
expensive for most consumer debtors to afford. They will be 
left trying to represent themselves or will turn to bankruptcy 
petition preparers, who frankly have become the bane of the 
bankruptcy system.
    One thing it will not do is keep people from filing. If 
your income is about $21,500 a year, which is the median income 
of the bulk of the households in our case surveys, and your 
unsecured non-priority debts are about $23,400 a year, the 
median debt in our surveys, then bankruptcy is just about your 
only option.
    Not only will the bill move virtually no one from Chapter 7 
to 13, it largely destroys any incentive for debtors to file a 
voluntary Chapter 13, with the exception of those seeking to 
prevent foreclosure. At present, all Chapter 13 cases are 
voluntary. They comprise approximately 30 percent of all cases 
filed nationwide, and in some districts especially in the 
South, they amount to over 50 percent of the court's docket. 
Chapter 13 trustees pay out millions of dollars on unsecured 
debt every year. Much of that recovery for creditors may be 
lost under S. 220.
    If these were the results intended by the drafters of the 
bill, so be it. The bankruptcy judge's job is to uphold the law 
as it is written and we will, or at least we will try. But 
these results are not what I understood bankruptcy reform to be 
all about when the process began several years ago.
    Thank you for having me today.
    [The prepared statement and attachments of Judge Newsome 
follow:]

 Statement of Hon. Randall J. Newsome, Judge, United States Bankruptcy 
      Court, Northern District of California, Oakland, California

    Mr. Chairman and distinguished members of this committee, I very 
much appreciate the opportunity to comment upon the Bankruptcy Reform 
Act of 2001. By way of introduction, I have been a bankruptcy judge in 
the Oakland division of the Northern District of California since May 
of 1988. From October, 1982 until May, 1988 I was a bankruptcy judge in 
the Southern District of Ohio sitting in Cincinnati. From October of 
1998 until October of 1999, I was the president of the National 
Conference of Bankruptcy Judges. However, I want to make it clear that 
I appear before you today representing myself only, not the NCBJ.
    Before commenting on S. 220, it might be useful to provide some 
information about the people who are filing bankruptcies. One of the 
problems plaguing the debate over bankruptcy reform has been and 
continues to be the lack of empirical data. The anecdotes about 
bankrupt movie stars and rock musicians, as well as the catch phrases 
being bantered about, all make for, great speeches, but don't move us 
any closer to a real understanding of why over a million people filed 
for bankruptcy last year. In an attempt to help fill this empirical 
void, in 1999 60 bankruptcy judges from 33 different states surveyed 
5235 randomly-selected cases that were closed in their districts within 
the previous year. That data was analyzed by Professor Gary Neustadter 
of Santa Clara University School of Law. Based upon his review of the 
3151 cases filed and closed in 1998, he found (among other things) that 
the median gross income of debtors was $21,540, some $15,000 lower than 
the median income for all U.S. households in 1997. Only 15% of these 
debtors had gross annual income equal to or exceeding the national 
median income for families of the same size. The median amount of 
unsecured nonpriority debt for these same debtors was $23,411. A copy 
of Professor Neustadter's findings is attached as Exhibit 1.
    I had my staff review all 5235 cases as to several other categories 
of information. The results of their review are attached as Exhibit 2. 
One of the most disturbing numbers concerns the level of medical debt 
reported. The average unweighted percentage of cases reporting over 
$1000 in medical debt was 25%. The medical debt numbers are probably 
understated, because they don't include medical debts that might have 
been charged to a credit card.
    The data in the surveys also indicate that a small but significant 
number of debtors are either retired or disabled. It is very difficult 
to tell just how many people fall into these categories. Often debtors 
report receiving social security, but also state that they are 
employed, indicating that perhaps some of them are older people who 
can't get by without working.
    One of the more interesting findings from these cases concerns the 
automobiles debtors own. The average model year of all cars and pick-
ups reported in all 5235 cases was not quite 1989. In other words, the 
average debtor owns a car that is between 6 and 9 years old. Since the 
means test in Sec. 102 of S. 220 allows a deduction from the debtor's 
income for monthly contractual payments to secured creditors, and since 
many debtors probably need a new car anyway, purchasing an automobile 
may become a legitimate form of pre-bankruptcy planning if the bill is 
enacted. That may be good news for the automobile industry, but bad 
news for auto lenders.
    One number that I am unable to provide is how many of the debtors 
in these surveys would be dismissed or converted to chapter 13 under 
the means test. It seems there are as many ways to apply the test as 
there are people studying it. It's not just because some of the numbers 
seem to overlap. It's also because the IRS ``Other Necessary Expenses'' 
allowance appears to encompass anything that is reasonable and 
necessary for the health or welfare of the family or production of 
income. The alleged inconsistencies in applying the ``substantial 
abuse'' test presently incorporated into Sec. 707(b) will seem trivial 
by comparison to what is wrought by the means test.
    Notwithstanding these misgivings, I tend to agree with those who 
have speculated that very few debtors (probably less than 3%) will be 
dismissed or forced into chapter 13 by Sec. 102.
    If only 15% of all chapter 7 filers will trigger the means test, 
and only a handful of that group will be shuttled into chapter 13, why 
have the test at all? Putting aside the substantial burden this 
complicated construct will impose on the bankruptcy system, consider 
what every debtor, regardless of circumstance, will be required to do 
in order to obtain relief. I'll use a case from the Central District of 
Illinois. This case is fairly typical of what bankruptcy judges see 
virtually every day. The debtor is a 65-year-old retired single woman 
living in Monticello, Illinois, a small town about 40 miles from 
Decatur and 30 miles from Champaign. Her sole source of income is $657 
per month in Social Security benefits. She also receives $10 a month in 
food stamps. Her monthly expenses total $827 per month, and are 
probably understated. She owns a 1987 mobile home and a 1993 Chevrolet 
Lumina. Both of these assets are exempted and unencumbered by debt. She 
lists $21,739 in unsecured debt on five credit cards and two department 
store cards. To characterize her as insolvent does not do her financial 
condition justice.
    In order to be eligible for chapter 7 relief, she must first obtain 
credit counseling from an approved credit counselor within 180 days 
prior to filing, or if she has a good excuse, within 45 days after she 
files. She will then be required to file a certificate evidencing what 
credit counseling services she received, as well as any repayment plan 
developed.\1\ Assuming she knows she has to obtain credit counseling, 
that the credit counselor must be on the approved list, and she is able 
to locate one, what are they going to talk about? She's 65 years old, 
she's got almost' $22,000 in debt, and she makes $657 per month. She 
needed credit counseling before she went $22,000 into debt, not when 
the money's already been spent. Why are we burdening her with credit 
counseling on the eve of bankruptcy?
---------------------------------------------------------------------------
    \1\ S. 220, Sec. Sec. 106(a); 106(d).
---------------------------------------------------------------------------
    For many of the debtors in our 5235 cases, credit counseling would 
simply be a pointless exercise. A case from South Dakota involving a 
husband and wife who both work and have three children is illustrative. 
Their mortgage balance is $12,801, and their payments are $118 per 
month. They budget $75 per month for clothes and $25 for recreation. 
They own a 1984 Isuzu and a 1988 Pontiac, and report owing money on one 
or both cars. They aren't in bankruptcy because of credit card debt--
they don't have any. They apparently filed because of $67,373 in 
medical debts. With three dependents and a combined gross income of 
just over $2500 per month, it is unlikely that a credit counselor could 
do much for them. Nonetheless, S. 220 makes credit counseling a 
condition of eligibility for this couple, apparently on the presumption 
that their financial condition is the result of their profligate 
spending habits. This same presumption apparently applies to the single 
parent with three dependents in Lawrence, Kansas who makes $1170 a 
month as a temporary worker plus $341 in Social Security, has $249 in 
credit card debt but $10,900 in medical debt; and to the couple in 
Oxnard, California with one dependent whose only income is $1090 per 
month in SSI disability payments, who have no credit card debt, but 
report $5307 in medical debt; and to the cook in Decatur, Alabama who 
makes $850 per month and whose only unsecured debts are some $26,419 in 
medical debt. These cases are neither isolated nor anecdotal. There are 
many more just like them among the 5235 cases examined.
    In addition to the credit counseling certificate and the extensive 
set of forms presently required, the retired woman from Monticello, 
Illinois and all other consumer debtors will need to file a means test 
calculation form,\2\ an itemized statement of monthly income,\3\ a 
statement disclosing any reasonably anticipated increase in income or 
expenditures over the next 12 months,\4\ and a certificate of notice of 
alternatives under Sec. 342.\5\ Those who are employed will also be 
required to file pay stubs for the previous 60 days.\6\ If the debtor 
fails to file all of these documents within 45 days of filing the 
petition, or within such additional time as the court allows up to 
another 45 days, then the case is dismissed automatically the day after 
the deadline expires.\7\ If their case gets dismissed for failure to 
file any of these documents, and they try to file again within one 
year, they'd only be entitled to a 30-day automatic stay, which can 
only be extended if they rebut the presumption of bad faith the statute 
imposes.\8\
---------------------------------------------------------------------------
    \2\ S. 220, Sec. 102(a)(2)(C).
    \3\ S. 220, Sec. 315(b).
    \4\ Id.
    \5\ Id.
    \6\ Id.
    \7\ S. 220, Sec. 316.
    \8\ S. 220, Sec. 302.
---------------------------------------------------------------------------
    Debtors will also have to furnish the chapter 7 trustee with their 
most recent tax return by no later than the date first set for the 
meeting of creditors. All creditors are entitled to request copies of 
those returns. They may also request tax returns for the three years 
prior to filing and for returns that are filed postpetition and prior 
to the closing of the case.\9\
---------------------------------------------------------------------------
    \9\ S. 220, Sec. 315(b).
---------------------------------------------------------------------------
    The stated intent of the consumer provisions of S. 220 was to 
shepherd those who could repay some of their debts from chapter 7 into 
chapter 13. But the effect of the provisions highlighted above and many 
others in the bill is to make it more difficult for anyone to obtain 
bankruptcy relief of any kind. Notwithstanding all of the hurdles and 
pitfalls, it is doubtful that many people will be deterred from filing. 
The financial condition of the overwhelming majority of debtors is such 
as to leave no other viable option.
    Despite all of the problems in S. 220, there are many parts of this 
bill that would bring about welcome reforms. The provisions regarding 
collection of bankruptcy data, the permanent reenactment of chapter 12 
and amendments to the preference statute to protect small trade 
creditors are representative examples.
    Other provisions could be beneficial with some modification. 
Everyone agrees that instruction on personal financial management is 
sorely needed in this country. The financial management training test 
program in the bill is certainly a step in the right direction. If the 
program were offered at no cost to debtors immediately after they 
attend their Sec. 341 meeting, it probably would be far more effective 
than credit counseling obtained on the run to satisfy a bankruptcy 
eligibility requirement.
    If the bill is to have a means test, it should be similar to the 
one proposed by Senator Grassley in the original Consumer Bankruptcy 
Reform Act of 1997. It should be enhanced by specific standards for 
determining bad faith and the need for specific findings by the court. 
The United States trustee should be assigned to enforce the test as one 
of her mandatory duties. Creditors and chapter 7 trustees should be 
permitted to bring motions to dismiss or convert in any case in which a 
debtor earns more than 125% of the median income for comparable 
households in the state.
    If S. 220 must contain the means test as presently drafted, then 
debtors whose incomes are below the applicable median should be 
entirely insulated not only from its application, but from its 
paperwork requirements as well. All debtors should be required to file 
the schedules and statement of financial affairs presently prescribed 
by the Bankruptcy Rules in order to initiate their case. They should 
also be required to show the United States trustee their tax return for 
the previous year at or before the meeting of creditors. If the tax 
return and other evidence establish probable cause to believe that the 
debtor's income is above the median, then the debtor would be required 
to file all of the additional documents prescribed by the means test 
and by Sec. 315 of the bill. If no such probable cause is found, then 
the debtor would be relieved of any further filing requirements.
    This same two-tiered approach should apply to chapter 13 cases. As 
presently drafted, S. 220 destroys any incentive to file a voluntary 
chapter 13 case, unless the debtor is seeking to save his house from 
foreclosure. The enhanced discharge in chapter 13 has been 
eliminated,\10\ as has the ability to alter the terms of secured 
automobile debts.\11\ When these disincentives are combined with the 
continuing duty to turn over tax returns on a yearly basis and to 
fulfill other means test reporting requirements, the choice between 
chapter 7 and chapter 13 will be obvious to most debtors. If these 
provisions must be a part of S. 220, then they should only be 
applicable to those who were forced to convert their cases to chapter 
13 pursuant to the means test. Voluntary chapter 13 filers who propose 
to pay back a substantial portion of their unsecured debt at a minimum 
should be given the ability to the modify their secured debts on motor 
vehicles purchased more than one year prior to filing. They also should 
be able to discharge debts that would be nondischargeable in a chapter 
7 case under Sec. 523(a)(2), (4) and (6).
---------------------------------------------------------------------------
    \10\ S. 220, Sec. 314(b).
    \11\ S. 220, Sec. 306(b).
---------------------------------------------------------------------------
    One of the most glaring and widely-publicized abuses in the 
bankruptcy system is the ability of debtors in a few states to shelter 
most of their wealth through the use of an unlimited homestead 
exemption. Section 322 of the bill does not cure this problem. It would 
allow wealthy debtors to move to a state with an unlimited homestead, 
pour the bulk of their assets into a residence, and then hunker down 
for two years until they can file for bankruptcy. The two year 
provision should be eliminated, and a uniform $100,000 cap on homestead 
exemptions in bankruptcy should be imposed.
    A much-needed and relatively uncontroversial suggestion for 
improving the bill would be to stop trying to regulate bankruptcy 
petition preparers, and simply ban them instead. They are subject to no 
standards of practice or conduct, they too often engage in the 
unauthorized practice of law and they frequently cause great harm to 
debtors and creditors alike.
    These ideas for improving the bill are not fully formed, nor do 
they exhaust the list of suggestions. As always, I stand ready to 
assist this Committee in any way it deems appropriate in its pursuit of 
fair and workable bankruptcy reform. Thank you for this opportunity to 
appear and be heard.
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    Senator Sessions [presiding]. Mr. Strauss?
    Senator Hatch has stepped out. He will be back in a minute 
and he asked me to keep the panel moving.

    STATEMENT OF PHILIP L. STRAUSS, PRINCIPAL ATTORNEY, SAN 
FRANCISCO DEPARTMENT OF CHILD SUPPORT SERVICES, SAN FRANCISCO, 
                           CALIFORNIA

    Mr. Strauss. I am happy to move.
    Mr. Chairman and Members of the Judiciary Committee, good 
morning. My name is Phil Strauss. I am the Principal Attorney 
of the Department of Child Support Services in San Francisco. I 
am authorized today to speak on behalf of the National Child 
Support Enforcement Association, the California District 
Attorneys Association, and the California Family Support 
Council.
    Basically, my background is for the last 28 years I have 
been an employee of the Office of the District Attorney of the 
City and County of San Francisco, and for the last 25 years I 
have been with, as it was known at that time, the Family 
Support Bureau. That division is now an independent agency in 
San Francisco, known as the Department of Child Support 
Services.
    For the last 13 years, I have been specializing in the 
enforcement of support during bankruptcy. I have practiced in 
this field, litigated numerous cases, handled numerous appeals. 
I write and teach on the issue, and I am here for the limited 
purpose of discussing the effect S. 220 will have on the 
ability of custodial parents to survive after the non-custodial 
parent has filed for bankruptcy protection.
    I am very happy that this committee has invited me to speak 
today because it is important for you to understand the despair 
I see everyday when a bankruptcy petition stops child support 
debt in its tracks. I see far too many custodial parents, 95 
percent or more of whom are women, in very difficult 
circumstances with little or nothing to cushion their fall when 
their child support or spousal support suddenly ceases.
    I am the one who has to look them in the face and say there 
is just nothing I can do to get you the support which you need 
and are entitled to, at least in a timely fashion, after a 
parent has filed for bankruptcy protection. Much is needed to 
be done to protect this most vulnerable population, and these 
are basically moms who have custody of children.
    Based upon my experience, I have proposed nine changes in 
the Code to ensure that support obligations would be paid 
during bankruptcy, and that they would be given significant 
preferential treatment. These proposals were originally 
introduced in the 105th Congress. They were polished and 
enhanced by other child support enforcement attorneys like 
myself in consultation with the National Association of 
Attorneys General. The culmination of that work is the child 
support provisions of the 106th Congress which are now in S. 
220, Sections 211 through 217. Additional refinements were 
added in Sections 218 to 219.
    The principles in drafting these provisions were six-fold. 
The provisions were intended to be largely self-executing, and 
the resulting benefit would be a reduction in the cost of 
litigation, better and more efficient use of court time and 
public resources, and the protection of custodial parents who 
would otherwise simply lose their support rights or sacrifice 
them by having to pay large attorney's fees which would in 
essence eat up whatever they could recover.
    The provisions were intended to ensure that support 
payments would not be interrupted by the bankruptcy process. As 
members of the child support community, we wish to eliminate, 
or at least minimize the statutory conflicts between the 
Bankruptcy Code and the child support program.
    The next principle is we wanted a clear recognition of the 
primacy of child support debts and that all generally 
recognized support debts would be entitled to special treatment 
under the code.
    The fifth principle was the bankruptcy process should be 
structured so that the debtor would be able to liquidate non-
dischargeable debt to the greatest extent possible within the 
context of the bankruptcy case and allow the debtor to emerge 
from the process with as fresh a start as possible.
    Finally, the Code would assure that all support owing to a 
family would be paid first to the family before the government 
would receive any payments due to them for child support. Under 
current law, when a bankruptcy petition is filed, support 
frequently ceases. Debtors can emerge from the bankruptcy 
process with a discharge without paying their ongoing child 
support and liens securing the support debt can be lost. This 
loss may well doom any prospects for payment of the debt.
    With that in mind, I drafted the provisions. I am here to 
answer any questions about the provisions, but you should know 
that really my expertise is in the field of viewing the 
Bankruptcy Code from the point of view of support creditors.
    Senator Sessions. Thank you, Mr. Strauss.
    [The prepared statement of Mr. Strauss follows:]

   Statement of Philip L. Strauss, Principal Attorney, San Francisco 
                  Department of Child Support Services

    I welcome the opportunity to discuss the effect the ``Bankruptcy 
Reform Act of 2001'' will have on the collection of child support and 
alimony when a support debtor has filed a petition for relief under the 
Bankruptcy Code. For the past 28 years I have been employed as an 
attorney by the City and County of San Francisco, the last 25 of which 
have been spent establishing and enforcing support obligations in the 
Family Support Bureau of the Office of the District Attorney. At the 
end of last year the Bureau became the Department of Child Support 
Services, an independent county agency operated in compliance with the 
federal child support program under Title IV-D of the Social Security 
Act. For the last 13 years I have 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 the bankruptcy court, the district court, the Bankruptcy 
Appellate Panel, and the Ninth Circuit Court of Appeals.
    Three years ago I drafted amendments to the Bankruptcy Code which 
were incorporated in bankruptcy reform legislation of the 105 
th and 106 th Congresses. The language of those 
amendments was subsequently refined in a collaborative effort between 
myself and other child support attorneys in coordination with Karen 
Cordry of the National Association of Attorneys General. These 
amendments were adopted pretty must verbatim in the bankruptcy reform 
conference reports of the 105 th and 106 th 
Congresses and in the current bill, S. 220. It is my opinion, and the 
opinion of every professional support collector with whom I have 
discussed the issue, that the support amendments contained in Sections 
211 through 219 of S. 220 will enhance substantially 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.
    The support amendments have been endorsed by many individuals and 
organizations, including three national associations whose members 
consist of persons whose primary professional duty in the enforcement 
of support obligations in the federal child support enforcement program 
These organizations include: the National Child Support Enforcement 
Association, the National Association of Attorneys General, and the 
National District Attorneys Association. In giving my testimony on this 
issue, I am authorized to speak on behalf of the California District 
Attorneys .Association and the California Family Support Council. The 
membership of these organizations carries out the federal child support 
enforcement program in California.
    During the past 13 years in which I have taught the subject of 
support enforcement during bankruptcy, I have appeared continuously in 
bankruptcy court, written a manual for support attorneys to use when 
dealing with bankruptcy cases filed by support debtors, counseled 
support attorneys in handling bankruptcy cases, and have reviewed 
virtually every court opinion written. on this subject since the 
enactment of the Bankruptcy code in 1978. Based on this experience, I 
developed what essentially became a ``wish list'' of amendments to the 
Bankruptcy Code aimed at facilitating support collection from 
bankruptcy debtors This wish list is reflected in sections 211-217 of 
S. 220. In this statement I will discuss not only how these amendments 
affect support debtors during bankruptcy, but what they mean in the 
larger context of support enforcement generally.
    Before discussing specific sections, I would like to comment on the 
overall erect of these amendments. I believe they achieve the 
following: (1) a reduction in the need to appear in bankruptcy court 
and the consequential reduction in the cost of litigation; (2) a 
reduction in the current conflicts in law and policy between the 
Bankruptcy Code and the federal child support enforcement program 
[Social Security Act, Title IV-D]; (3) reasonable insurance that 
significant support enforcement mechanisms will not be interrupted by 
the bankruptcy process; and (4) a clear recognition of the policy that 
all generally recognized support debts are entitled to a preferential 
treatment in bankruptcy.
    The most important amendment is found in section 214 which removes 
several significant collection remedies from the effect of the 
automatic stay Of these, the most valuable by far, is a provision 
allowing the continued operation of an earnings withholding order as 
defined in the Social Security Act. [42 U.S.C. 666(b)]. 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 stay will require a support 
debtor to design his or her bankruptcy plan to accommodate support 
debts--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 other ordinary creditors when a 
support arrearage is paid pursuant to a bankruptcy plan.
    The importance of this amendment cannot be, underestimated. Federal 
law requires all support to be paid by employees through wage 
withholding orders. Such orders account for the lion's share of support 
collection receipts.\1\ tinder current bankruptcy law, when a debtor 
files for protection under Chapters 12 or 13, the collection of ever. 
ongoing support is stayed. The economic detriment to a debtor's family, 
which is not receiving public assistance, can be devastating Surely 
sound public policy must recognize that there are some obligations 
which must be met, even when a debtor should be relieved from 
obligations to general debtors. Of these, none can be greater than the 
payment of support needed for the health and welfare of the debtor's 
family.
---------------------------------------------------------------------------
    \1\ According to the Committee on Ways and Means. U.S. House of 
Representatives, 1998 Green Book, p. 572, 56% of support collected in 
the last reported year (1996) was collected through the wage 
withholding process.
---------------------------------------------------------------------------
    All too often a domestic court may reduce the current support order 
to accommodate the payment of arrears In such cases the total amount of 
payment through the assignment order may not only be helpful, but 
crucial, in providing for the daily needs of the debtor's spouse, 
former spouse, and children.
    This amendment, therefore, not only insures that the payment of 
support by wage earners will not be interrupted. by bankruptcy, it will 
also avoid the need to entangle the debtor's family in the bankruptcy 
process. Under current bankruptcy law the support creditors would have 
to seek relief from the automatic stay in bankruptcy court in order to 
re-institute the earnings withholding order and file a claim to collect 
arrearage payments from the bankruptcy trustee. And even if these 
procedures were preformed by an attorney in the child support program, 
delays in support enforcement would be inevitable and the outcome 
unsure.
    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 income tax refunds to pay support arrears: the license 
revocation procedures for those debtors who are not paying support; the 
continued enforcement of medical support obligations; and the continued 
reporting of support delinquencies to credit reporting agencies \2\
---------------------------------------------------------------------------
    \2\ In addition to the exclusion of enforcement remedies from the 
reach of the automatic, other family law issues are excluded from the 
stay, specifically (I) litigation of child custody and visitation 
issues, and (2) issues relating to domestic violence.
---------------------------------------------------------------------------
    Perhaps the second most important and useful amendment to the Code 
is found in section 213 of the bill 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. First it will prevent a support debtor from paying other debts 
at the expense of familial obligations. And second, this 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.
    In addition this section allows a support creditor to seek 
dismissal of an ongoing plan at any time the debtor fails to pay the 
on-going support payment These provisions working together, provide 
crucial check points a three stages of the bankruptcy process. At the 
earlier confirmation stage, the support debtor will be reminded that 
payment of all important current support obligation is a critical step 
in getting approval of a bankruptcy plan as well as the lesson that 
payment of this obligation is essential to financial rehabilitation. It 
will set an example for the debtor early in the bankruptcy process. 
Further, since the goal of the debtor is to obtain a discharge of debt, 
this debtor will, at the outset of his case, understand that the 
failure to meet continuing support obligations will also doom the 
prospects of discharge at the end of the bankruptcy process. Finally, 
the creditor will have the option to seek a dismissal of the case 
during the process if the support debtor ceases to boner payment of on-
going support obligations.
    Section 211 of S. 220 provides a definition of support obligations. 
This definition is then incorporated in other areas of the Code The 
purpose of this definitional addition is to streamline the provisions 
of the Code dealing with support debts and to give all debts generally 
recognized as deriving from support obligations similar treatment in 
the Code. This provision will not necessarily change current law, but 
it will resolve many conflicting bankruptcy decisions which turn upon 
very technical interpretations of what a support debt is and what it 
might not be. Most significantly, highly arcane decisions concerning 
the dischargeability of such debts will be made moot and litigation 
over these issues minimized. Finally, support debts of all kinds will 
be subject to the same dischargeability, lien avoidance, and preference 
recovery rules
    Under current law only a lien securing unassigned support is 
exempted from statutory lien avoidance procedures. With the new 
definition of support in section 211, all support obligations will be 
excepted from lien avoidance procedures. Not only will this change 
protect the tax payer when the debt is assigned to the government, it 
may also benefit the support creditor/parent who assigned the debt if 
the debt becomes unassigned under the new assignment rules established 
in the 1996 welfare reform legislation (the Personal Responsibility and 
Work Opportunity Reconciliation Act of 1996 or PRWORAI. For example, 
under current bankruptcy law if a support debtor files a Chapter 7 case 
when his support obligation has been assigned to the government under 
the Social Security Act, the bankruptcy court may rule that a lien 
securing this debt impaired the debtor's homestead exemption and then 
void it. The debtor would then. be free to sell the property. If this 
property were the only known asset of the debtor, the debt would become 
uncollectible If tie support creditor then ceased receiving public 
assistance, that debt, now unassigned world likewise be uncollectible. 
However, under section 216 of S. 220, the lien would not be removed and 
the support debt would remain secured and thus collectible.
    Under current bankruptcy law if the debtor pays support during the 
90 day period prior to filing a bankruptcy petition, the bankruptcy 
trustee cannot recover this payment for the benefit of the bankruptcy 
estate unless the debt is assigned Under section 217 of S. 220 the 
trustee would not be able to recover any support paid by the support 
debtor during the preference period This rule significantly benefits 
the debtor because this debt is not dischargeable and would otherwise 
remain owing if recovered for the estate
    No more significant statement of public policy has been made 
concerning the primacy of the payment of support debts than that found 
in section 212 of S. 220. Here the Code provides child support with the 
first priority for payment of unsecured claims. This section is divided 
into two sub-priorities so that distribution within the child support 
priority will go first to the family of the debtor, then to the 
government after the family has been paid, if the support has been 
assigned.
    When these proposed amendments are considered, it is not difficult 
to see why support enforcement professionals so strongly endorse them 
and are so thankful to the sponsors of this legislation for their 
inclusion. Many of these amendments literally remove bankruptcy as an 
obstacle to support enforcement, and they do so in a self-executing 
manner. Consequently, no claims or stay litigation is required to 
continue the collection of a support debt when an earnings withholding 
order is feasible; no confirmation litigation is be needed when the 
debtor is not paying a postpetition preconfirmation support order; and 
no dismissal or stay relief litigation would be required to insure 
postpetition support was paid before a discharge could be granted.
    Avoiding bankruptcy court is important to support creditors and 
their attorneys. Even when a support creditor is financially able to 
hire a bankruptcy attorney, litigation of support issues in bankruptcy 
is likely to eat up large chunks of recoverable support. Most support 
creditors would be totally lost if required to navigate through the 
complex set of rules and procedures to seek relief in bankruptcy court 
without counsel And government support attorneys are generally ill 
equipped to litigate bankruptcy issues and do not have the luxury of 
referring the case to bankruptcy specialists. After all, it should be 
remembered that the law of bankruptcy is a speciality with its own bar, 
judges, code, rules, procedures and, indeed, its own language.
    Some criticism has been raised that bankruptcy reform would be 
detrimental to women and children because it would pit them against 
banks and credit card companies for collection of nondischarged credit 
card debt. Although this argument has some surface logic, no support 
collection professional that I know believes this concern to be 
serious. Of course, if support and credit card creditors were playing 
on a level field, banks with superior resources might have an advantage 
However, nonbankruptcy law has so tilted the field in favor of support 
creditors that competition with financial institutions for the 
collection of post-discharge debts presents no problems for support 
collectors.
    In the first place the ubiquitous earnings withholding process for 
support collection absolutely trumps any financial institution's 
attempt to collect this debt from the debtor's wages or salary since 
withholding orders have priority, no matter when issued or served. In 
most cases if the support collection was 25% or more of the debtor's 
wages, the Consumer Credit Protection Act would lock out the financial 
institution from collection of its debt from the debtor's wages. Thus, 
with respect to creditors of wage earners, there is no conceivable way 
that the existence of postpetition credit card debt, dischargeable 
under current law, would adversely affect the collection of support.
    Even when the debtor is not a wage earner, support creditors have 
numerous and highly significant advantages over other creditors While 
this list is certainly not exhaustive, support creditors have the 
following remedies not possessed by other creditors, and certainly not 
credit card or other financial creditors: (a) support debts are already 
reduced to judgments and have the advantages of court process to 
collect judgments; (b) tax intercept collection; (c) interception of 
unemployment benefits/worker compensation benefits; (d) free or low 
cost collection services by the government; (e) license revocation for 
nonpayment of support; (t) free or low cost interstate collection, 
including interstate wage withholding and interstate real property 
liens; (g) criminal prosecution or contempt actions; (h) no avoidance 
of liens securing the support debt; (i) federal collection and 
prosecution for support debts; (j) denial of passports; (k) collection 
from otherwise protected sources: ERISA plans, trusts, and federal 
remuneration
    To say that these advantageous remedies will necessarily result in 
the collection of support is not possible. Many support debtors are 
actually quite skillful evaders of support obligations. These same 
people will probably be just as adept at avoiding collectors from 
financial institutions. The point to be made, however, is not that 
support debts will necessarily be collected after bankruptcy, but that 
the collection of support debt is in no way hampered simply because 
credit card debt has survived bankruptcy and financial institutions are 
going to attempt to collect it.
    Some have argued that after bankruptcy a support debtor will be 
inclined to pay credit card debt to retain a credit card and not pay 
support Of course, this argument assumes that after bankruptcy the 
debtor wilt find an institution willing to extend credit Even if one 
did, it seems unlikely that retention of a credit card would be more 
important than retention of a driver's license, staying out of jail, or 
keeping a passport.
    The bottom line as I see it in analyzing S. 220 with respect to its 
effect on the collection of support is to note that the advantages 
explicit in the bill far outweigh any speculative concerns that some 
debtors might not pay support if they are left with credit card debt 
after bankruptcy What concerns support collection professionals the 
most in carrying out their duties is not competition with financial 
institutions outside bankruptcy, but competition with other general 
creditors, including financial institutions, during bankruptcy. S. 220 
readjusts the relative strength of support creditors during the 
bankruptcy process, giving them meaningful, even crucial, assistance 
The support provisions of this bill certainly justify the praise given 
them by virtually all of the national public child support collection 
organizations in this country.

                                Summary

    The support amendments contained in Sections 211 through 219 of S. 
220 will enhance substantially the enforcement of support obligations 
against debtors in bankruptcy. The overall effect of these amendments 
will achieve the following: a reduction in the need to appear in 
bankruptcy court and the consequential reduction in the cost of 
litigation; a reduction in the current conflicts in law and policy 
between the Bankruptcy Code and the federal child support enforcement 
program, reasonable insurance that significant support enforcement 
mechanisms will not be interrupted by the bankruptcy process; and a 
clear recognition of the policy that all generally recognized support 
debts are entitled to a preferential treatment in bankruptcy.
    This bill allows the continued operation of an earnings withholding 
order, thus insuring that the payment of support by wage earners will 
not be interrupted by bankruptcy. Other federally mandated collection 
processes would also be exempt.
    The bill prevents a debtor from obtaining confirmation of a 
bankruptcy plan and a subsequent discharge if that debtor stops payment 
of support. It provides a comprehensive definition of support and 
treats such a debt preferentially throughout the code, including giving 
such a dept the first priority in payment.
    The support provisions of this bill certainly justify the praise 
given them by virtually all of the national public child support 
collection organizations in this country. It streamlines the bankruptcy 
process for support creditors by removing the need for their 
participation in it.

    Senator Sessions. Mr. Williamson is an attorney in Madison, 
Wisconsin, and former Chair of the Bankruptcy Review 
Commission.
    Mr. Williamson?

STATEMENT OF BRADY C. WILLIAMSON, LAFOLLETT, GODFREY AND KAHN, 
   AND FORMER CHAIR, NATIONAL BANKRUPTCY REVIEW COMMISSION, 
                       MADISON, WISCONSIN

    Mr. Williamson. Thank you, Mr. Chairman. Among other 
things, I am an appellate lawyer and I don't make it a practice 
to disagree with court of appeals judges, at least publicly, 
but I think it is necessary here, if I might start with a few 
seconds responding to Judge Becker.
    The National Bankruptcy Review Commission unanimously 
recommended the elimination of the two-tiered bankruptcy 
appellate system, and that recommendation is embodied in 
Section 1215 of the pending legislation. Section 1215 will save 
time, it will save an extraordinary amount of money in legal 
fees and costs, and it will improve the development of a law, 
because right now a bankruptcy court has no precedential 
influence beyond its own courtroom. A district court has no 
precedential influence beyond its own courtroom. So we have 
literally thousands and thousands of bankruptcy appeals that 
only matter to the parties, that do not help develop the law.
    While this provision would have a short-term impact on the 
caseload in the court of appeals, it would have a salutary 
impact on the court caseload in the district courts which are 
dealing everyday with drug cases and major civil litigation. 
This is a provision in the bill that should be adopted, has 
been adopted by the Congress, and I can't recommend it more 
forcefully.
    Judge Becker did make a point I want to agree with, and 
that is that an appeal to the U.S. Court of Appeals, at least 
for a practicing lawyer, is a little bit more formidable than 
an appeal to a district court judge. It does take more time, it 
does take more effort. Because of that, I think we will see 
fewer appeals. Litigants in bankruptcy cases will be less 
likely to appeal directly to the U.S. Court of Appeals than 
they will be to the district court. The single most important 
reason for this change is that it will improve the 
jurisprudential chaos that now rules in the bankruptcy courts.
    Now, on a broader point, this will be the fourth time in a 
hundred years that this Congress has undertaken major 
bankruptcy legislation--1898; 1938, in the wake of the 
Depression; and, of course, 1978. Yet, this legislation may 
have a more comprehensive effect, a more dramatic effect on 
consumer bankruptcies and on business bankruptcies, which is 
the focus of my testimony this morning, than those previous 
Congressional efforts to improve the bankruptcy system.
    There is relatively little doubt that bankruptcy 
legislation will be adopted by both Houses and that it will be 
signed into law. And it is that likelihood that leads me to 
urge this committee to review very carefully the changes that 
are being proposed, not to stop the bill, but to ensure that it 
reflects economic reality and that it actually accomplishes the 
goals its proponents espouse.
    Senator Biden. Brady, have you forgotten about Senator 
Kennedy?
    Mr. Williamson. I have not forgotten about Senator Kennedy. 
In fact, I spoke about this very matter with Senator Kennedy in 
Eau Claire, Wisconsin, not long ago.
    Senator Biden. I am sure you did.
    Mr. Williamson. But it is precisely, Senator Biden, because 
this legislation may well be headed for enactment that it 
really requires this committee's careful attention. This 
legislation is not ready for the floor, and it is not ready for 
two overarching reasons.
    One is the economy is literally changing around us. This 
morning's Washington Post: ``Verizon Lays Off 10,000 People.'' 
Saturday's Milwaukee Journal Sentinel: ``Record Layoffs Hit 
State.'' In December alone, more than 140 businesses in 
Wisconsin laid off 50 or more employees. That is the fifth 
highest in the country. Whatever the theoretical economists may 
tell us about what is happening in the economy, these layoffs 
are a harsh financial reality for American families, and for 
many they will be a disaster.
    But there is also grave concern about the effect of the 
economy and this legislation on small business layoffs and the 
small business bankruptcies that may follow. We all know about 
the major bankruptcies that have occurred just in the last 30 
days--a major airline. Health care insolvencies are increasing 
rapidly. In Senator Feinstein's State, we have had utilities 
threaten to file for bankruptcy.
    All of this makes a critical point. The legislation about 
which Senator Hatch spoke at the outset, how it passed the 
Congress in 1998 and last session, that happened at a time when 
we were hitting our economic prosperity. But times have 
changed, and that requires this committee to look more 
carefully, as President Bush suggested, at this legislation.
    Let me focus very quickly, Mr. Chairman, since I began 
with--
    Senator Sessions. This is not the court of appeals. You 
don't disappear into a pit if you go over the light, but we do 
try to follow the light as much as possible.
    Mr. Williamson. Thank you. They do tell the story about the 
Chief Justice of the United States cutting off a lawyer in the 
middle of the word ``is'' when his time was up.
    Senator Biden. Wasn't there another guy who had trouble 
with that word?
    [Laughter.]
    Senator Biden. That seems to be a complicated word.
    Mr. Williamson. You know, Senator Biden, as that anecdote 
escaped my lips, I did suspect somebody might make a reference 
to it.
    Senator Biden. I just wondered.
    Mr. Williamson. The bill covers more than 300 pages. It has 
almost 200 sections. With respect to its impact on small 
business and business generally, I want to point out three 
particular provisions that have not gotten a great deal of 
attention--Section 912 dealing with asset-based securitization, 
Section 708 which gives creditors the ability to argue that a 
corporation's obligations to them are not dischargeable.
    Now, this notion of non-dischargeability is common in 
consumer bankruptcy, but it introduces a major new element into 
business bankruptcy that will permit a single creditor--we are 
talking about corporate bankruptcy--to allege that the debtor 
corporation has issued false and misleading financial 
statements, and thereby in effect to stop the bankruptcy, to 
stop the reorganization. So this concept of non-
dischargeability in corporate bankruptcies ought to receive 
serious examination by the committee.
    Now, you can imagine what impact this would have on a small 
plastics company that employed 50 people in Mobile, Alabama. 
But imagine what this provision might do to a major 
reorganization, especially in an industry that produces a 
product or a service that is not quite so mundane as plastics--
tobacco, firearms, HMOs, and in California utilities.
    Senator Sessions. Mr. Williamson, I appreciate your 
comments and I know, serving on the commission, you have a lot 
of insight. We will make that a part of the record. If you have 
any other things you would like to add to it, what you have 
already said, we would be glad to hear it. However, in the 
interest of time, it would be good if you could wrap up 
shortly.
    Mr. Williamson. I do, Mr. Chairman, and I will do it on an 
issue that I know that you agree with me on, and that is the 
need for this legislation to contain the original Sessions-Kohl 
amendment. That amendment, of course, eliminates one of the 
grossest abuses in bankruptcy law, which is the unlimited 
homestead exemption. It passed this body 76-22, with bipartisan 
support.
    There has been widely reported in the media another example 
of a citizen in the State of Florida using the unlimited 
homestead exemption to cheat his creditors. The bankruptcy law 
in this country in many ways represents our values, and it 
cannot be one of our values that people who are able to use $3 
million homes are able to cheat their creditors.
    Thank you, Mr. Chairman.
    Senator Sessions. Thank you very much, and I share that 
view. It is not far from Mobile to Pensacola. It is a shame 
that you can simply sell your house in Mobile and buy one only 
50 miles away in Pensacola without having to give that house up 
after filing for bankruptcy.
    Mr. Williamson. Although I don't know why, Mr. Chairman, 
anyone would want to move from Mobile to Pensacola.
    Senator Sessions. I do not either.
    [Laughter.]
    Senator Feinstein. Mr. Chairman, he said three sections, 
but he only named two, 912 and 708. What is the third one?
    Mr. Williamson. Senator, the third would be the sections 
dealing with small business bankruptcies. There are a package 
of proposals to accelerate the process for small business 
bankruptcies. The difficulty with it, I think, is that the 
definition of a small business bankruptcy is a corporation that 
has less than $3 million in liabilities. And in some States--
Alabama, probably not Delaware or California, but Wisconsin for 
certain--that would be 90 percent of all bankruptcies. So it is 
not that we are doing a special provision for smaller 
bankruptcies. In most States, we are doing a provision that is 
going to affect all bankruptcies.
    Senator Sessions. As you know, on the homestead we did make 
progress with this legislation. We were up against a number of 
States whose constitutional provisions were being overridden by 
this legislation and Senators from those States were quite 
tenacious in protecting their State's law. It was not an easy 
task, but in spite of those Senators' tenacity we were able to 
craft this much-improved alternative.
    [The prepared statement of Mr. Williamson follows:]

  Statement of Brady C. Williamson, LaFollett, Godfrey and Kahn, and 
Former Chair, National Bankruptcy Review Commission, Madison, Wisconsin

    Three times in the last 100 years, Congress has passed major 
legislation exercising its Constitutional responsibility to adopt 
``uniform'' laws of bankruptcy. The Bankruptcy Act of 1898 gave the 
country its first comprehensive system. The Chandler Act of 1938, 
adopted in the wake of the Depression, gave American families the 
choice they still have today--between liquidation in Chapter 7 and a 
multi-year repayment plan in Chapter 13. And, of course, the 
legislation adopted in 1978 recreated the bankruptcy code that (amended 
in 1984 and 1994) today protects creditors and consumer and business 
debtors.
    The legislation pending before the Senate Judiciary Committee is no 
less comprehensive than the three major ``reforms'' of the last 
century--indeed, in many ways, it is more comprehensive. And it will be 
more dramatic in its impact on creditors, on consumers with unbearable 
debt, and on failing corporations. This legislation, in different 
forms, passed both the Senate and the House in 1998 but failed when 
there was no agreement on a conference report. This legislation, as a 
conference report, passed both the Senate and the House last year but 
failed when the President declined to sign it. Now, it is again before 
the Congress: S. 220 here and H.R. 333 in the other body.
    There already have been hearings, the bill's proponents maintain, 
and the Congress already has expressed bipartisan support for the 
legislation. With a new President, they contend, the bill is ``ready'' 
for final passage.
    It is not.
    There is relatively little doubt that new bankruptcy legislation 
will be enacted this year. Yet the legislation before the Committee 
should not be sent to the floor of the Senate, let alone adopted there 
wholesale, without significant improvements. In fact, the likelihood 
that the bankruptcy law will be changed this year should lead the 
Committee to review very carefully the pending legislation--not to stop 
it, but to ensure that it reflects economic reality and that the bill 
actually accomplishes the goals its proponents espouse.
    The bill is not ``ready'' for two overarching reasons. First, the 
significant changes occurring today in the American economy are not 
reflected in the bill. Second, notwithstanding the previous 
consideration of the bill, it carries provisions that are self-
defeating and, in particular, the business bankruptcy sections of the 
legislation will have significant consequences that have not received 
the attention they deserve. Some of the most troubling provisions were 
added to the bill late last year without the benefit of any 
consideration at all in either body.

                            Economic Change

    Last Saturday, the Milwaukee Journal Sentinel carried this 
headline: ``Record layoffs hit state.'' In December alone, more than 
140 state businesses laid off 50 or more employees, the fifth highest 
in the country. There no doubt have been similar news stories in Utah 
and Vermont and New York and many other states because the dramatic 
increase in layoffs is a national trend.
    Even with relatively high employment, businesses are laying off 
American workers in record numbers. Most find jobs elsewhere--although 
often only after a period of no income--frequently at lower wages and 
benefits. Bankruptcy has become a pace to stop for those on their way 
down the economic ladder who want to climb back. Two-thirds of the 
debtors is bankruptcy report a significant period of unemployment 
preceding their filings. For single-parent households, even a short 
period of unemployment can be devastating. Married couples fare 
slightly better, but they do not escape employment problems: more than 
half of the married couples in bankruptcy reported both the husband and 
the wife unemployed preceding the bankruptcy filing.
    Whatever the theoretical economists may conclude, the harsh reality 
of these layoffs means financial disaster for some American families. 
Given the falling national savings rate and the thin financial margin 
familiar to many families, the result surely will be more consumer 
bankruptcies.
    There is also a harsh reality in these statistics for American 
business. The layoffs at AOL Time Warner, Lucent Technologies, 
DaimlerChrysler, General Electric and other major companies add up, The 
Chicago Tribune has just reported, to a ``corporate carnage'' that is 
overwhelming. Yet small business layoffs have a far greater cumulative 
effect on the economy, and these less-publicized layoffs may well 
precede a sharp rise in small business bankruptcies. Unlike consumer 
bankruptcies, which have decreased for months, business bankruptcies 
have been increasing, and they will only continue to increase.
    While the bankruptcy courts are flooded with laid off workers, the 
entrepreneur who has struggled to run a small business is also at grave 
risk. Creditors will not lend to small businesses without the personal 
guarantee of the owners. The legal structure that protects large 
corporations offers no debt relief for the owner of a failing small 
business. Small business owners are three times more likely to file for 
bankruptcy than their wage-earning counterparts.
    Business bankruptcies is some areas--steel and heavy manufacturing, 
the motion picture theater industry, and the dot-coms so vibrant in the 
past--already have reached alarming levels. Another major airline just 
filed for Chapter 11. Sunbeam went into Chapter 11 this week. Health 
care insolvencies, particularly failing HMOs, continue to increase and, 
while the pending legislation addresses limited aspects of that trend 
in the health care industry, it does not address more fundamental 
questions--whether federal or state law has precedence, for example. 
Nor does it address the loss of health care coverage for consumers 
already pushed to their financial limit.
    And all of this makes this critical first point. This legislation 
was largely drafted at a time when this country's economy was at the 
height of its prosperity--when business and consumer bankruptcies were 
decreasing. That prosperity was the prism through which the Congress 
and legislation requires thoughtful analysis in today's light.
    President Bush, in an interview on Monday, expressed that very 
concern. The Milwaukee Journal Sentinel reporter who took part in that 
interview quoted his complete response to a question about the national 
debt:
``It's important to pay down the debt at the federal level,'' Bush 
        said. ``No question about it, and our plan does that. The debt 
        I'm most concerned about, however, is the consumer debt, credit 
        care debt, the debt that burdens thousands of Americans. And 
        we'd better be really careful about not recognizing the 
        combination of an economic slowdown, high energy prices and 
        debt overhand--what that means to working people.''
    The President said that it was time to be ``really careful,'' and 
so it is with this legislation.
    Nowehere, perhaps, is the light of today's economy colder or 
harsher than in California, where about one of every ten consumer 
bankruptcies in this country are filed. There, a new problem has 
arisen: major utilities already have threatened to file for 
bankruptcy--leaving the state and its ratepayers and the financial 
institutions with millions of dollars at risk all potential parties in 
a single bankruptcy proceeding before a single federal judge.
    Has anyone (besides the legal counsel for the utilities and their 
creditors) closely reviewed the bankruptcy code to determine the effect 
a utility filing might have? Has anyone (including the legal counsel 
for the utilities and their creditors) closely reviewed this 
legislation to determine it effect on a utility filing? Everyone has a 
stake in these questions, including the pension funds and their members 
heavily invested in utility stock.
    Five years ago, the U.S. Supreme Court in Seminole Tribe of Florida 
v. Florida, 517 U.S. 44 (1996), applied the Eleventh Amendment in a 
case about the regulation of gambling that has had significant 
repercussions in bankruptcies where state and local government are 
often creditors and claimants. If a major utility fails and files for 
bankruptcy, whether in California or in any other state, the tension 
between federal authority and state autonomy inherent in the 
Constitution will have to be resolved in very difficult circumstances.
    Over the last two years, the Congressional debate on this 
legislation has focused on its consumer provisions--the means test, for 
example, and the expanded priority status the bill affords some credit 
card debt. That attention was, and it remains, warranted, but the 
debate has obscured the sweeping effect of the legislation's Chapter 11 
proposals. And those proposals need the same kind of vigorous debate 
that has characterized the consumer provisions.
    In yet another development, not reflected in the legislation, the 
new Study on Financial Privacy and Bankruptcy requires prompt 
consideration. Its recommendations should be considered as part of this 
legislation to balance the important privacy interest of individual 
families and businesses using the bankruptcy system with the public 
interest in the open and efficient administration of that system. The 
bankruptcy process necessarily involves ``private'' financial 
information, and there can be abuse both in disclosing the information 
needlessly and in subject it to confidentiality too readily.

                          Legislative Problems

    Too much has happened since the bill was drafted to rush it to the 
floor of the Senate, especially at the beginning of a new Congress and 
especially with the country's economic direction uncertain. So, even if 
the legislation before the Committee were flawless, it still would 
require the attention of the Committee's members and staff. But the 
bill is far from flawless.
    Parts of the bill were drafted in haste in the closing days of the 
last session. Parts of the bill were not even considered by the Senate, 
let alone by this Committee, and parts of the bill stand in sharp 
contrast to the expressed will of the Senate. (This is not the bill 
that the Senate initially adopted last year.) While all of that may be 
understandable, it should not bind this Committee or the Senate to 
adopt the legislation unchanged. Many of the bill's problems arise not 
from what the drafters or the proponents intended but from the 
unintended consequences of those intentions.
    The bill covers more than 250 pages and has almost 200 sections. 
While there are more examples, three sufficiently illustrate the point 
that the bill requires additional consideration to prevent it from 
having harsh or unintended consequences.
    The bill section 912 declares that assets transferred as part of an 
``asset based securitization,'' including accounts receivable, no 
longer will be property of the estate as defined in 11 U.S.C. Sec. 541. 
That means these assets no longer will be available to help the 
corporate debtor reorganize. This provisions has not been fully 
explored, yet it may well prove a significant obstacle to successful 
corporate reorganizations that will save jobs.
    Section 708 gives creditors the ability to argue that a 
corporation's obligations to them are non-dischargeable. While this 
concept, non-dischargeability, is common in consumer bankruptcy, it has 
not been part of the bankruptcy code since 1978. And for good reason. 
The old law permitted a single creditor to disrupt a corporate 
reorganization at the expense of other creditors. Indeed, a single 
creditor could prevent what almost everyone else desires: a 
reorganization that treats all creditors fairly and permits the 
corporation to reorganize for the benefit of all of its creditors, 
customers and employees.
    If the legislation becomes law, a single creditor can stop a 
potentially successful reorganization with the charge that a 
corporation deliberately made materially false financial statements. 
Whether or not the allegation can be provide, there organization 
process will slow to the point that it becomes impractical if not 
impossible for the corporation to reorganize. Creditors no longer will 
be united in interest nor dedicated to a reorganization that treats all 
of them fairly. Smaller businesses will be particularly susceptible to 
this kind of tactic but, just for the moment, consider it repercussions 
not on a plastics company employing 50 workers but on a company 
employing thousands of workers with a less mundane product or service--
tobacco products, for example, or firearms or, more recently HMO's and 
utilities.
    There is no evidence that the provisions was added, late in the 
legislative process, to address a particular problem or to affect a 
particular industry. Indeed, there is no public evidence at all of the 
provision's genesis. The potential impact of this single provisions is 
enormous, however, and undeniable. Moreover, it collides with the 
provisions of the bill designed to more business bankruptcies through 
the judicial system more quickly. And those provisions, too, require 
additional attention from this Committee.
    The proposal provides accelerated deadlines for the ``small 
business debtor'' in bankruptcy, and this is the third--and, perhaps, 
best--example of the law of unintended consequences. In addition to its 
mandate for speed and new reporting requirements, these provisions 
require that the corporate debtor show within six months that, more 
likely than not, the court will confirm a plan of reorganization within 
a reasonable period of time. Many aspects of this part of the bill 
reflect current judicial scheduling practices. Yet the new requirements 
will have a dramatic impact on the number of successful reorganizations 
and, of no less significance, on the number of successful creditor-
debtor negotiations that lead to successful reorganizations or orderly 
liquidations.
    The collective impact of these provisions, moreover, regardless of 
their individual merit, warrants reconsideration in light of their 
virtually universal application. The proposal defines the ``small 
business debtor'' as any business with less than $3 million in 
liabilities. In some states, that will include every Chapter 11 filed. 
Especially in light of current economic conditions, the Committee 
should ask whether the inflexibility in the proposed statutory 
deadlines for ``small business debtors'' makes sense. Four out of every 
five corporations that face a potential Chapter 11 today might well be 
subject to these ``special'' provisions.
    For these reasons, and others, the legislation has drawn opposition 
from creditor groups like the Commercial Law League and businesses 
concerned about its practical impact. The National Bankruptcy 
Conference, perhaps the pre-eminent independent group in the bankruptcy 
field, has reviewed last year's conference report and just released its 
analysis. Provision by provision, the NBC's report reviews the areas 
where the legislation makes good sense and, in contrast, the areas 
where it conflicts with itself or promises consequences neither desired 
nor imagined by its proponents.
    The Committee already has heard testimony about the need for 
careful consideration of this bill--both in light of changing economic 
conditions and the consequences, unintended in some instances, of the 
proposal. There is another reason the Committee needs to place its mark 
on the proposal: it ignores, in some key respects, the expressed wishes 
of the Senate. Important provisions adopted by the Senate have 
disappeared without a trace. There are several examples, but I'll 
conclude with just one.
    On November 10, 1999, the Senate by an overwhelming vote of 76 to 
22 adopted the Kohl-Sessions amendment limiting the homestead exemption 
to $200,000 nationwide. The legislation returned by the other body to 
the Senate late year, and the proposal now before this Committee, does 
not include that provisions. In its place, there is only a two-year 
limitation on a debtor's ability, in some states, to claim an unlimited 
homestead exemption. That provision invites the continuation of state-
sanctioned abuse that cheats creditors out of their money and that 
cheats this country out of a law that is fair and balanced.
    Just last month, a Florida citizen, Paul Bilzerian used that 
state's unlimited homestead exemption to cheat his creditors. He filed 
for bankruptcy in 1991. He now has filed for bankruptcy again. Yet he 
retains his $5 million Florida home, which no one can touch--not the 
government and not his other creditors that, together, claim $200 
million in debt owed to them. Today, Mr. Bilzerian is in jail, but he 
stills owns that home with all of the equity in it. The provisions of 
this would not change that. By contrast, if the Kohl-Sessions amendment 
were part of this proposal and became law, he might still be in jail, 
but his creditors would not be paying part of his penalty.
    The National Bankruptcy Review Commission conducted 21 public 
hearings and meetings in 1996 and 1997, and it received more than 2,300 
submissions from people across the country interested in a fair and 
balanced bankruptcy system. A consistent theme emerged from that 
process. The bankruptcy system should reflect the values of this 
country. Most states, for example, offer a homestead exemption because, 
as a society, we place a high value on home ownership and the stability 
it can provide. Most states do not offer an unlimited homestead 
exemption, however, because creditors are entitled to be repaid if 
there is a legal basis for repayment and the debtor has the ability to 
repay. Unlike the insolvency systems in many countries, the law of this 
country recognizes the economic benefit of a second chance for 
businesses and for families: while we are altruistic, we also are 
pragmatic.
    These are parts of this bill that could be passed today--without 
strong objection and with obvious benefit. The family farm bankruptcy 
provisions in Chapter 12, the translational insolvency system 
established in the bill and the elimination of mandatory district court 
appeals provide the best, but not the only, examples. Other parts of 
the legislation require serious attention and amendment. While that 
might be done on the Senate floor, this Committee--particularly with 
the expertise of its members--is in the best position to make the 
changes and additions the bill requires and, in the process, to ensure 
that the bankruptcy system continues to represent this country's 
values.

    Senator Sessions. Mr. Beine, I understand you are with 
Shoreline Credit Union and have a unique perspective to share 
with us. I see that you are a credit union president.

  STATEMENT OF KENNETH H. BEINE, PRESIDENT, SHORELINE CREDIT 
                  UNION, TWO RIVERS, WISCONSIN

    Mr. Beine. Thank you. Good morning, Chairman Hatch and 
other members of the committee. I am Kenneth Beine, President 
of Shoreline Credit Union in Two Rivers, Wisconsin, a $50 
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.
    I am speaking on behalf of the Credit Union National 
Association, CUNA, which represents over 90 percent of the 
10,500 State and Federal credit unions nationwide. We are very 
pleased that the committee is holding today's hearing on 
bankruptcy abuse prevention legislation, S. 220.
    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 voluntary reaffirm their debts.
    Last year's conference report, while a product of 
compromise, did a good job of balancing these issues. We 
strongly urge the 107th Congress to pass this compromise bill 
as soon as possible. Any further dilutions may result in this 
bill not addressing the real bankruptcy problems facing 
America's consumers.
    CUNA strongly supports the provisions in S. 220 that 
require a person contemplating bankruptcy to receive a briefing 
about available credit counseling and assistance in performing 
a budget analysis, and prohibits a 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 educational 
requirements to give debtors the tools they need to make wise 
decisions about filing for bankruptcy, and more importantly to 
succeed financially after bankruptcy. 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 mid-20's decided they wanted 
a clean slate prior to getting married. They ran up credit card 
purchases, one pre-paid on an auto loan with us to have a 
cosigner released, the father. 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 
approximately $3,000 in credit card debt, plus another couple 
hundred dollars in disposal of the auto.
    Credit unions strongly believe that reaffirmations are a 
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.
    As not-for-profit financial cooperatives, losses to 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. CUNA is pleased that S. 220 preserves the 
ability of its members to voluntarily reaffirm their loans. 
CUNA could not support bankruptcy reform legislation that 
undermined the ability of credit unions and their members to 
work out reaffirmation agreements.
    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 in 1999 due to 
several medical problems and a 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, today they are members in good standing and 
only ask to be granted future loans.
    Credit unions are very anxious to see Congress enact 
meaningful bankruptcy reform, and believe that needs-based 
bankruptcy presents the best opportunity to achieve this 
important public policy goal. Credit unions believe that 
consumers who have the ability to repay all or some of their 
debts should be required to file a Chapter 13, rather than have 
all their debts erased in Chapter 7.
    Therefore, CUNA supports the needs-based provision that is 
contained in S. 220. This provision was a compromise developed 
out of the bankruptcy reform bill that received overwhelming 
support in the 106th Congress. The 106th Congress strongly 
supported needs-based bankruptcy, and CUNA supported these 
efforts. Today's hearing shows that the 107th Congress is 
continuing to move toward passage of bankruptcy abuse reform 
legislation, and we hope that bankruptcy reform will become law 
in the coming months.
    Thank you. I will be happy to answer any questions.
    Senator Sessions. Thank you very much.
    [The prepared statement and attachments of Mr. Beine 
follow:]

    Statement of Kenneth H. Beine, President, Shoreline Credit Union

    Kenneth Beine, president, Shoreline Credit Union, in Two Rivers, 
Wisconsin.
    Credit unions have consistently had three top priorities for 
bankruptcy reform legislation: a needs based formula; mandatory 
financial education; and maintaining the ability of credit union 
members to voluntarily reaffirm their debts.
    Last year's conference report, while a product of compromise, did a 
good job of balancing these issues. We strongly urge the 
107th Congress to pass this compromise bill as soon as 
possible.
    Any further dilutions may result in this bill not addressing the 
real bankruptcy problems facing America's consumers.
    The current near-record level of filings has occurred in the best 
of economic times.
    Credit unions are very anxious to see Congress enact meaningful 
bankruptcy reform and believe that ``needs-based bankruptcy'' presents 
the best opportunity to achieve this important public policy goal.
    Credit unions believe that consumers who have the ability to repay 
all or some part of their debts should be required to file a chapter 
13, rather than have all their debt erased in chapter 7.
    CUNTA supports the needs-based provision that is contained in S. 
220. This provision was a compromise developed out of the bankruptcy 
reform bills that received overwhelming support in the 
106 Congress.
    CUNTA strongly supports the provision in S. 220 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.
    Credit unions are not-for-profit financial cooperatives, therefore 
losses to the credit union have a direct impact on the entire 
membership due to a potential increase to loan rates or decrease in 
interest on savings accounts.
    Credit unions strongly believe that reaffirmations are a benefit 
both to the credit union, which does not suffer a loss, and to the 
member/debtor, who by reaffirming with the credit union continues to 
have access to financial services and to reasonably priced credit.
    CUNTA could not support bankruptcy reform legislation if any 
amendment would undermine the ability of credit unions and their 
members to work out reaffirmation agreements.
    Good morning, Chairman Hatch and other members of the Committee. I 
am Kenneth Beine, president of Shoreline Credit Union in Two Rivers, 
Wisconsin, and 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. I am speaking on behalf of 
the Credit Union National Association (CUNA), which represents over 90 
percent of the 10,500 state and federal credit unions nationwide.
    We are very pleased that the Committee is holding today's hearing 
on bankruptcy abuse prevention legislation, S. 220. Credit unions have 
consistently had three top priorities for bankruptcy reform 
legislation: a needs based formula, mandatory financial education, and 
maintaining the ability of credit union members to voluntarily reaffirm 
their debts. Last year's conference report, while a product of 
compromise, did a good job of balancing these issues. We strongly urge 
the 107th Congress to pass this compromise bill as soon as 
possible. Any further dilutions may result in this bill not addressing 
the real bankruptcy problems facing America's consumers.
    Shoreline is a $50 million state-chartered, federally insured 
credit union. We have a community-based charter, serving everyone who 
lives or works in Manitowoc County, and have almost 12,000 members. 
Currently we have $38 million in loans to our members-some $14 million 
in car loans, more than $16 million in home-secured loans, and almost 
one-half million in personal loans. In addition, we have issued about 
1,600 credit cards for another $1.5 million.
    Nationwide, non-business bankruptcy filings were almost 925,000 in 
the first nine months of 2000. While final full-year data is not yet 
available, the results from the first nine months suggest that full-
year filings will exceed 1.2 million--very close to the 1.39 million 
record level of 1998. The 2000 total is likely to be about 4 percent 
lower than in 1999, but viewed in a broader historical context the 
results are disturbing: 1.2 million felines is double the national 
total in 1989 and four times higher than the total in 1984.
    Furthermore, the current near-record level of filings has occurred 
in the best of economic times. The U.S. economy grew at its fastest 
annual pace in 16 years in 2000 and unemployment rates hovered near 30-
year lows throughout the year. As the economy slows, the number of 
filings will undoubtedly begin to climb. We expect overall filings to 
grow by roughly 5 percent in 2001, though some industry experts believe 
the increases ;will be even higher. In fact, according to SMR Research, 
bankruptcy filings are predicted to increase nationwide in 2001 by up 
to 20 percent to record heights for a variety of economic reasons.
    Credit unions are quite concerned about bankruptcies in the last 
few years because they have seen similar trends in the number of credit 
union members who file. Data from credit union call reports to the 
National Credit Union Administration (NCUA) suggest that roughly 
220,000 credit union member-borrowers will file in 2000. This figure is 
nearly 66 percent higher than the level of filings we witnessed just 
six years ago. In addition, CUNA estimates that over 40 percent of all 
credit union losses in 2000 will be bankruptcy-related, and those 
losses will total approximately $475 million.
    In Wisconsin we expect a 2.5 percent increase in the total number 
of credit union borrower bankruptcies in 2000. This translates to a 
total of roughly 4,150 filings.
    At Shoreline Credit Union, bankruptcy filings and losses have shown 
a steady increase since 1996. In 1996 we had 1 member who filed for 
bankruptcy; in 1997 we had 3; 1998 brought 5 filings; in 1999 it rose 
to 8; and we hit 10 in 2000. We had only one Chapter 13 bankruptcy 
filing during the same period. In our case over 60 percent of our 
chargeoffs are Chapter 7 filings.
    As the number of member bankruptcies has increased, so too have the 
dollar losses to my credit union. Our loss from the one bankruptcy in 
1996 was only $1,875, but in just one year the losses increased to 
$9,883--an increase of over 500 percent. As noted in the Fact Sheet 
attached to my testimony, our bankruptcy losses have doubled each of 
the past three years.
    Shoreline is a careful lender. We cannot afford to be otherwise. We 
do a good job with scrutinizing loan applications and carefully 
determining that the applicant is creditworthy before extending credit. 
We examine credit reports, verify income, and see that a reasonable 
debt-to-income ratio is maintained by the borrower. We even look at the 
applicant's disposable income to determine that the applicant can make 
the payments. We routinely monitor our credit cards and do not make 
across-the-board increases to the credit limit.
    In an effort to combat the number of bankruptcies at the credit 
union, Shoreline has tightened its credit policies. We now use 
bankruptcy predictors as part of the credit granting process. We have 
increased collateral requirements and opt to require a cosigner or co-
maker on more loans than in the past. We do not reissue cards to those 
members who are overextended or have a poor repayment history with the 
credit union. We are also looking into introducing ``risk-based 
lending'' procedures in the near future.
    If a member is experiencing financial problems and mentions 
bankruptcy to us, our loan officers inform the member of the downside 
to such an action--damaged credit, loss of services--and let the member 
know that the credit union is there to help them through the financial 
difficulty. We attend all 341 hearings, where creditors are permitted 
to question the debtor, and encourage reaffirmations by offering 
debtor-friendly terms.

               Credit Unions Support Financial Education

    Credit unions clearly recognize the value of financial counseling 
for their members. According to a recent CUNTA bankruptcy survey, 70 
percent of credit unions counsel financially troubled members at the 
credit union. A similar percentage of credit unions may also refer 
members to an outside financial counseling organization, such as the 
Consumer Credit Counseling Service (CCCS), and many do both. Shoreline 
regularly refers members who are experiencing financial difficulties to 
the local CCCS and have found the program to be beneficial for the 
members and their families. We also try to educate our members about 
alternatives to bankruptcy. We address credit issues in our newsletter 
and recently added a consumer credit session to our annual spring Home 
Buying Seminar series.
    CUNA strongly supports the provision in S. 220 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 to succeed financially after bankruptcy.
    We also strongly support amendments to Section 527 that would 
require a debt relief agency providing bankruptcy assistance to analyze 
the benefits of different forms of debt relief with the debtor and to 
emphasize the need for full and accurate disclosure of assets, 
liabilities and income.
    CUNA is also an active supporter of the Youth Financial Education 
Act (H.R. 61) as introduced by Representatives David Dreier (R-CA) and 
Earl Pomeroy (D-ND). This legislation would authorize the U.S. 
Department of Education to provide grants to state educational agencies 
to develop and integrate youth financial education programs. It would 
also require these funds to be used to carry out programs for students 
in kindergarten through grade 12, based on the concept of achieving 
financial literacy through the teaching of personal financial 
management skills, and the basic principles involved with earning, 
spending, saving and investing.
    Credit unions recognize that financial education needs to be 
available early on and before consumers experience financial problems. 
We are pleased that a financial management training test program is 
included as part of S. 220, as well as the provision encouraging states 
to develop personal finance curricula for elementary and high schools.
    Financial education is a high priority for our national trade 
association. Last year, CUTA and the National Endowment for Financial 
Education (NEFE) entered into a partnership whereby credit union 
volunteers teach financial education in our nation's schools. It is 
based on the philosophy that discipline in managing money is best 
achieved if it is learned early in life. Many credit unions had already 
been working with their local schools, as well as devoting office space 
for consumer libraries that enable members to use a wide range of 
financial periodicals, manuals, and books to learn more about money 
management.
    Credit Unions have also differentiated themselves from other 
financial institutions in terms of giving college students credit 
cards. Many credit unions offer educational sessions on budgeting and 
using credit wisely on college and university campuses at various times 
during the year, including freshmen orientation and classes. Education 
is, the key in helping college students to avoid falling into debt at 
an age where their main focus is on obtaining a college degree. By 
educating these students, credit unions help them to positively handle 
their personal finances and to make them even more attractive 
candidates for credit products such as auto loans and mortgages later 
in life. Many colleges and universities welcome credit union 
representatives to teach these courses on their respective campuses and 
continually ask these representatives to come back year after year.
    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 mid-twenties 
decided that they wanted a ``clean slate'' prior to getting married. 
They ran up credit card purchases. One prepaid on an auto loan with us 
to have the cosigner released. (Both were employed full-time.) They 
both then filed for Chapter 7. My credit union's share of their version 
of financial planning was a write-off of almost $3,000 in credit card 
debt plus another couple of hundred dollars on the disposal of the 
auto.
    In another case, an expectant young mother who lived at home with 
her parents (with a stable part-time job and a small automobile loan at 
Shoreline) wanted to quit her job, but didn't want to ``burden her 
child with her credit problems,'' and asked if we would accept the car 
in full payment of the loan balance. My loan officer offered to rewrite 
the loan terms or suspend payments for several months and also informed 
her that she would still be responsible for the remaining balance on 
the loan after the sale of the car. She was not interested. She 
subsequently filed Chapter 7 and turned over the vehicle to us. We 
incurred about a $3,000 loss.
    Even with financial counseling, I recognize there are instances in 
which bankruptcy may be the only alternative for some members, the way 
for them to get a much needed ``fresh start.'' But I am not convinced 
that in either of these examples, bankruptcy was the right solution.

 Credit Unions Support Reaffirmations as a Benefit Both to the Member 
                        and to the Credit Union

    Because we are not-for-profit financial cooperatives, losses to the 
credit union have a direct impact on the entire membership due to a 
potential increase to loan rates or decrease in interest on savings 
accounts. Credit unions strongly believe that reaffirmations are a 
benefit both to the credit union, which does not suffer a loss, and to 
the member/debtor, who by reaffirming with the credit union continues 
to have access to financial services and to reasonably priced credit. 
CUNA could not support bankruptcy reform legislation if any amendment 
would undermine the ability of credit unions and their members to work 
out reaffirmation agreements.
    CUNA strongly supported the original House-passed bankruptcy bill 
in the 106th Congress, which did not materially amend the 
reaffirmation provisions. The bankruptcy bill that eventually passed by 
both houses and presented to the President in December, however, 
contained a lengthy disclosure statement for reaffirmations, which is 
contained in Section 203 of S. 220. The form is intended to assure that 
debtors entering into a reaffirmation agreement understand all aspects 
of signing that contract. CUNA appreciates the work of this committee, 
and the work of Senators Jeff Sessions (R-AL) and Jack Reed (D-RI), to 
recognize in the Section 203 language the unique relationships that 
credit unions have with their members.
    Shoreline, like most credit unions, has a policy that if a member 
causes a loss to the credit union, services to that member, aside from 
maintaining a share account, will be withheld. Most credit union 
members take this seriously and continue to reaffirm on their credit 
union loans. However, we are beginning to see that some members do not 
care if they cause a loss and are denied service because they believe 
they can get credit elsewhere--even though it may be at a higher rate. 
We continue to see more surprise bankruptcies, where the member is a 
long-time member and is current on his or her debt at the time the 
bankruptcy petition is received.
    Perhaps the best defense of the credit union movement's position 
that reaffirmation benefits both the member and the credit union is to 
provide another real life example. We had a middle aged couple file for 
Chapter 7 in 1999 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, today they are members in good standing, and need only 
ask to be granted future loans.

              Credit Unions Support Needs-Based Bankruptcy

    Credit unions are very anxious to see Congress enact meaningful 
bankruptcy reform and believe that ``needs-based bankruptcy'' presents 
the best opportunity to achieve this important public policy goal. 
Credit unions believe that consumers who have the ability to repay all 
or some part of their debts 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. 220. This 
provision was a compromise developed out of the bankruptcy reform bills 
that received overwhelming support in the 106th Congress.
    Let me tell you about a case at my credit union that illustrates 
why needs-based bankruptcy and its provisions are needed. A young woman 
had an automobile loan from Shoreline Credit Union, with her mother as 
a co-signer. The daughter fell behind on the payments, and the mother 
offered to take over the loan completely if the credit union was 
willing to remove the daughter's name from the loan. Since the mother 
had a good credit and employment history, we agreed to do so. The woman 
filed for Chapter 7 before the due date of the first payment. We lost 
$6,000. We eventually learned that she had previously filed for 
bankruptcy and ``didn't want her daughter to have the same credit 
problems.''
    What this member did borders on fraud. People should not be able to 
use the bankruptcy code as a tool to avoid inconvenient obligations by 
transferring their debts to fellow consumers--my members--your 
constituents. This is wrong. This is abuse.
    You have the power to make it right.
    Again, let me say that I am pleased you are holding this hearing 
today. Credit unions are very anxious to see Congress enact meaningful 
bankruptcy reform and believe that a needs-based bankruptcy system 
presents the best opportunity to achieve this important public policy 
goal. The 106th Congress strongly supported needs-based 
bankruptcy, and CUNA supported these efforts. These hearings that are 
being held on S. 220 show that the 107th Congress is 
continuing to move toward passage of bankruptcy abuse reform 
legislation, and we hope that bankruptcy reform will become law in the 
coming months.
    Thank you, and I will be happy to answer any questions.

                               FACT SHEET

       Total Assets:          $50.5 million (data as of December 2000)
            Members:                                            11,700
              Total Loans:                                38.0 million

                        Losses Due to Bankruptcy:

          2000           522,375
          1999           534,577
          1998            15,309
          1997             9,883
          1996             1,875

    Number of
     Filings:          Chapter 7          Chapter 13          Total

          2000                 10                  0               10
          1999                  7                  1                8
          1998                  5                  0                5
          1997                  3                  0                3
          1996                  1                  0                1

                                            George R. Yacik
                                   SMR Research Corporation
                                             Hackettstown, NJ 07890

Bankruptcies Will Rise Strongly in 2001; Research Firm Predicts ``Flood 
                              of Filings''

    Hackettstown, NJ 09/21/00. Personal bankruptcy filings will begin 
to rise this year and are likely to grow by 10% to 20% in 2001, SMR 
Research Corp. forecast today.
    The new rising trend will mark the end of a mild bankruptcy down-
cycle. Personal filings reached record levels in 1998, and then receded 
a bit in 1999. In the first two quarters of 2000, bankruptcies 
continued to decline, but only slightly.
    SMR said it expects data for the third quarter of 2000 to show a 
slight increase in personal filings from June levels, followed by a 
stronger increase in the fourth quarter. In 2001, there will be a flood 
of fillings, SMR predicted.
    Total filings in 2001 probably will set a new national record, 
exceeding those of the prior record year, 1998.
    SMR is a market research and predictive modeling firm that 
specializes in consumer financial subjects. SMR operates a database of 
bankruptcy filings and trends at the national, state, county, and metro 
area levels, updated quarterly and with a history back to 1989. SMR 
makes annual forecasts on national trends in personal bankruptcies.
    ``What we're now seeing is the impact of the new interest rate 
cycle, made a little worse by rising energy costs,'' declared SMR 
President Stuart A. Feldstein. Changes in long-term interest rates tend 
to impact the bankruptcy rate with about a 1-year lag, so rising rates 
in 1999 are now starting to hit home.
    In news releases in 1998 and '(999, SMR correctly forecast the 
bankruptcy decline in 1999, and also the impending increase in the 
second half of 2000.
    Interest rate movements are not the major cause of bankruptcy 
filings, but do modify the trend. Most of the central causes of 
bankruptcy have been growing worse since the mid-1980s, as has the 
overall bankruptcy filing rate. The main causes, highlighted in various 
SMR published studies, include:
 Growth in consumer debt relative to income caused by too much 
        spending;
 A host of worsening socio-economic problems, including a long-
        time increase in the percent of adults who are divorced and 
        increased numbers of Americans lacking any form of health 
        insurance;
 A decline in household liquid savings as a ``rainy day'' 
        cushion--especially among middle class people;
 Increased advertising promotion of bankruptcy by lawyers, and
 Increased credit-risky behavior, such as casino gambling.
    In calendar 1998, total personal filings reached a record high at 
1.38 million, not counting U.S. territories or persons living overseas. 
This number was up from only 0.77 million as recently as 1994.
    In 1999, filings fell to 1.26 million. But for 12 months ended 
March 31, 2000, the number of filings was 1.24 million, showing that 
the declining trend of 1999 had nearly petered out.
    Based on its research, SMR believes that third quarter 2000 data 
will show the annualized filing rate to be up slightly from the second 
quarter of 2000. Fourth quarter 2000 numbers, when available, should 
show a well-developed upward bankruptcy trend.
    The danger for 2001 is that it will mirror events in 1996, when 
bankruptcies exploded by more than 28% from the prior year. In the 
interest rate cycle, 2000 looks similar to 1995 and 2001 may look a lot 
like 1996. Calendar 1995 was the last time a bankruptcy decline leveled 
off, and in 1996 the floodgates opened.
    ``This time around, the snap-back in 2001 could be powerful,'' 
Feldstein said. ``Aside from interest rates, we now have fast-rising 
energy and electricity costs. These impact people in danger of 
bankruptcy more than they impact highly solvent consumers.''
    Indeed, SMR's bankruptcy forecast for 2001--a 10%-20% filings 
increase might have been even higher. However, the increase in interest 
rates in 1999 and 2000 hasn't been quite as severe as it was in the 
fast period of rising rates.
    Interest rate changes modify what otherwise has been a long-term 
increase in bankruptcies, SMR noted. Since 1985, bankruptcies have 
declined only in years following periods of sharply reduced long-term 
interest rates. They never declined as low as in previous troughs. And 
when rates rose again, bankruptcies increased sharply about one year 
later.
    SMR's forecast is based on the assumption that federal bankruptcy 
laws will be unchanged. Bills to toughen bankruptcy rules have been 
pending in Congress for the last few years, but haven't been passed. 
One reason is that when passage seemed most imminent in 1999, the 
number of filings fell. Some legislators hoped the problem in 
bankruptcies was about to fix itself.
    ``People who still think that will be in for a rude awakening very 
shortly,'' said SMR's Feldstein. ``Nothing has changed in the 
underlying causes of personal bankruptcy, nearly all of which continue 
to worsen.''
    If new and tougher bankruptcy legislation is passed in 2001, SMR's 
forecast would change.
    As currently written, the legislation would take effect six months 
after passage. During those six months, there likely would be an 
explosion of filings, as lawyers would advise their clients to make use 
of the existing law. Afterwards, the effect of new legislation would 
depend on its precise content.

    Senator Sessions. Dr. Manning, you are a Senior Research 
Fellow at the Institute of Higher Education, Law, and 
Governance at the University of Houston Law Center. We are glad 
to hear from you now.

    STATEMENT OF ROBERT D. MANNING, SENIOR RESEARCH FELLOW, 
INSTITUTE FOR HIGHER EDUCATION, LAW, AND GOVERNANCE, UNIVERSITY 
             OF HOUSTON LAW CENTER, HOUSTON, TEXAS

    Mr. Manning. Thank you, Mr. Chairman and members of the 
committee. I would like to share a somewhat different 
perspective as an economic sociologist and some of my research 
of the last 15 years of studying the impact of U.S. industrial 
restructuring on the standard of living of various groups in 
American society.
    Over the last 10 years, I have been particularly interested 
in the role of consumer credit in shaping the consumption 
decisions of Americans, as well as the role of retail banking 
in influencing the profound transformation of the financial 
services industry.
    I have studied the rise of the credit card industry, in 
general, and the emergence of financial services conglomerates 
such as Citigroup during the deregulation of the banking 
industry in 1980, and the results of my research are summarized 
in my new book Credit Card Nation.
    I think if we take a somewhat global perspective, I would 
like to use the analogy of the American economy as an athlete 
who uses steroids to temporarily exaggerate muscle mass and to 
boost physical strength.
    The U.S. economy, I believe, has been perilously inflated 
through the enormous increase of debt over the last two 
decades. Across all sectors of U.S. society, whether it is 
household, government or corporate, access to easy credit has 
led to pervasive dependence on debt.
    Like the myriad of medical maladies that eventually afflict 
steroid abusers, the negative long-term consequences of social 
debt have been neglected during the past decade of 
unprecedented economic growth. Indeed, what we have seen is a 
tremendous shift in emphasis from savings to debt, the 
emergence of products such as the City Sony credit card, the 
currency of fun, the emergence of young adults that refer to 
their credit card as yuppie food stamps.
    The economic expansion of the last decade, I do not believe 
was as strong as described by leading economic indicators due 
to bank lending policies that promoted inflated consumer 
expectations through easy access to high-cost consumer loans, 
whose interest rates far exceed the pace of household income 
growth.
    I think the point that I want to make very clear is it is 
not just debt, but it is the cost of this debt that is going to 
have such a profound impact on whether this economic slowdown 
will progress to a consumer-led recession. Indeed, similarly, 
the economic indicators do not necessarily imply a consumer-led 
recession if leading financial services conglomerates like 
Citigroup and Bank of America, J.P. Morgan and Chase do not 
overreact to the abrupt decline in national economic growth.
    The concern is that these financial service corporations 
may tighten their lending policies for small businesses, the 
primary generator of U.S. jobs, and the heavily indebted 
families that previously were considered acceptable credit 
risks. I can't overestimate what I think is the importance of 
this issue today.
    This may not only limit future levels of business 
investment and household consumption which could exacerbate a 
downward spiral in macroeconomic growth, but it could also 
force tens of thousands of financially distressed households 
into personal bankruptcy, due to unforeseen events. As the most 
comprehensive analysis of bankruptcy in the early 1980's shows, 
most bankruptcy filings are attributed to unforeseen events, 
such as job loss, health and medical expenses, and divorce, 
rather than simply excessive consumer spending patterns.
    Surprisingly, the consumer financial services industry has 
responded by reducing the fair share contributions to non-
profit consumer credit counseling organizations and the need 
for financial education at the same time that the demand for 
these services are rapidly escalating.
    Like replacing small business loans with high-interest 
credit cards, the question is whether the financial service 
industry is truly committed to reducing the national rate of 
consumer bankruptcies by supporting institutionally responsible 
policies that balance the often unrealistic consumption desires 
of American households.
    The renewed efforts of the financial service industry to 
enact more stringent personal bankruptcy laws could lead 
bankers to exacerbate a national economic slowdown by forcing 
financially insolvent households to continue paying off a 
portion of their consumer debt years after filing for personal 
bankruptcy. This is not a propitious time for enacting such a 
painful and often devastating policy on some of America's most 
vulnerable households.
    The present legislative proposals tend to reflect a 
societal context of rapid economic growth rather than current 
realities of an unexpected economic slowdown. The U.S. economy 
needs greater stimulation through increased consumer demand 
rather than curtailing the future buying power of a large 
segment of the U.S. population.
    The industry's call for greater individual responsibility 
belies its disregard for its own traditional underwriting 
criteria. For the record, I have provided excerpts of the 
hundreds of interviews that I have conducted in terms of 
perceptions of easy access to credit. Indeed, what is striking 
about the credit card nation is that grandparents with stellar 
past job histories are often rejected for credit cards, while 
their grandchildren who have never had a full-time job are 
inundated with solicitations while in college. Similarly, 
recent college graduates may be rejected for credit cards after 
graduation, but as soon as they do graduate their low salaries 
lead them to a rejection for their credit card debt.
    A striking finding of my study of credit cards among 
students and their debt levels is that recent graduates of the 
late 1980's and early 1990's were more likely to assume most of 
their credit card debt while seeking gainful employment rather 
than when they were enrolled in college. Today, college 
students are routinely graduating with credit card debts of 
$5,000 to $15,000 before they even have a full-time job, plus 
their student loans, before they enter the job market.
    With the specter of a tight job market in the near future 
and the continued corporate promotion of inflated consumer 
expectations, it can be expected that the bankruptcy rate of 
recent college graduates will continue to soar, with 
potentially disastrous long-term consequences. Indeed, the 
fastest growing group of bankruptcy filers last year were 
individuals under 25 years old.
    The recent assumption of tremendous levels of consumer debt 
provided by financial service institutions that have routinely 
ignored their traditional underwriting criteria--and I 
especially refer to the marketing of credit cards to college 
students--requires accountability and financial responsibility 
from both sides, borrowers as well as lenders. Lending policies 
that routinely require the poor and heavily indebted to 
subsidize the low and even free cost of credit card loans to 
the affluent through escalating interest rates and penalty fees 
does not reflect an appropriate policy of shared individual as 
well as institutional responsibility.
    In fact, the increasing financial obligations of filers to 
their creditors after bankruptcy could encourage banks to 
continue extending easy credit to those least able to assume 
their financial responsibilities during a period of economic 
uncertainty and distress.
    Senator Sessions. Dr. Manning, the time has expired, if you 
will wrap up I would appreciate it.
    Mr. Manning. Banks and other financial institutions should 
share the pain as well as the gain associated with liberal 
extension of high-cost consumer credit. Otherwise, consumer 
lending policies of financial institutions may continue to 
discourage the promulgation of prudent and responsible 
underwriting policies. It is my hope that the final form of 
this legislation will promote personal responsibility as well 
as corporate accountability.
    Thank you.
    Senator Sessions. Thank you.
    [The prepared statement of Mr. Manning follows:]

 Statement of Robert D. Manning, Senior Research Fellow, Institute for 
Higher Education, Law and Governance, University of Houston Law Center, 
                             Houston, Texas

    I would like to thank the Committee for this opportunity to 
contribute to ongoing discussions over proposed legislative reforms of 
existing consumer bankruptcy law. As an economic sociologist, I have 
spent the last 15 years studying the impact of U.S. industrial 
restructuring on the standard of living of various groups in American 
society. Over the last 10 years, I have been particularly interested in 
the role of consumer credit in shaping the consumption decisions of 
Americans as well as the role of retail banking in influencing the 
profound transformation of the financial services industry. In regard 
to the former, my research includes indepth interviews and lengthy 
survey questionnaires with over 800 respondents. In terms of the 
latter, I have studied the rise of the credit card industry in general 
and the emergence of financial services conglomerates such as Citigroup 
during the de-regulation of the banking industry beginning in 1980. The 
results of this research are summarized in my new book, CREDIT CARD 
NATION: America's Dangerous Addiction to Consumer Credit and are 
updated on my web site at www.creditcardnation.com.

                 The Explosion of U.S. Consumer Credit:
       long-term performance enhancer or short-term miracle drug?

    Like an athlete who uses steroids to temporarily exaggerate muscle 
mass and to boost physical strength, the U.S. economy has been 
perilously inflated through the enormous increase of debt over the last 
two decades. Across all sectors of U.S. society (household, government, 
corporate), access to easy credit has led to a pervasive dependence on 
debt, much like American's addiction to low cost energy supplies. And, 
like the myriad of medical maladies that eventually afflict steroid 
abusers, the negative long-term consequences of societal debt have been 
neglected during the past decade of unprecedented U.S. economic growth.
    Most Americans would be surprised to learn that total consumer 
debt, including home mortgages (over $6.5 trillion), exceeds the 
cumulative U.S. national debt ($5.7) trillion. And, like the sharp 
increase in federal borrowing that augmented the modest growth of 
federal revenues over the last 20 years (U.S. national debt totaled 
($940 billion in 1981), consumers have become increasingly dependent on 
unsecured or ``revolving'' credit (about $55 billion in 1981) to 
compensate for stagnant real wages, increasing employment disruptions, 
and higher costs for big ticket items such as automobiles, college 
tuition, insurance, housing, and health/medical costs. Although the 
finance charges on the national debt have grown substantially (from 
$292.5 billion in 1993 to $362.0 billion in 2000), accounting for over 
12 percent of the current federal budget, heavily indebted consumers 
are facing a more serious financial burden since their loans are more 
likely to be in the form of higher interest credit cards (average of 
over 18% APR) versus more modest Treasury bonds (5%-6%).
    At the same time that ``one-stop'' financial shopping has provided 
greater convenience and lower prices for a small minority of U.S. 
households, the most economically disadvantaged or financially indebted 
are increasingly relegated to the ``second tier'' of the financial 
services industry (pawnshops, rent-to-own stores, `payday' lenders) 
where interest rates typically range from 10 to 40 percent--and more--
PER MONTH! Significantly, this fastest growing segment of the financial 
services industry features the participation of some of the largest 
``first-tier'' banks such as Wells Fargo, Goleta National Bank, and 
Bank of America. To the dismay of most Americans, the deregulation of 
the financial services industry has led to record revenue growth and 
profits for banks while providing more complex pricing systems, less 
personalized service, and sharply increased costs to the majority of 
consumers. In sum, while U.S. wages in general and household income in 
particular have typically declined over the last two decades, the 
effective demand of American consumers has been enhanced by their 
access to increasingly higher cost credit. This trend is especially 
significant since the U.S. post-industrial economy has been fueled by 
the growth of consumer related goods and services--accounting for about 
\2/3\ of America's economic activity (Gross Domestic Product). As long 
as U.S. consumer demand has increased, stagnant real wages (from mid-
1970s to late 1990s), declining labor benefits (health, pension), and 
the growth of temporary or ``contingent'' workers (from 417,000 in 1982 
to 1.22 million in 1989 and to 2.66 million in 1997) have been obscured 
by the unprecedented extension of consumer--especially ``revolving'' 
credit.
    Like steroid abuse, the dramatic decline in the U.S. personal 
savings rate (from nearly 8.5% in the early 1980s to less than zero 
today) and the sharp rise in consumer debt could have long lasting 
effects on the U.S. economy. Since the end of the last recession (1989-
91), the Federal Reserve reports that total installment consumer debt 
(credit cards plus consumer loans such as autos and appliances) rose 
from $731 billion in 1992 to about $1.5 trillion today. This includes a 
huge increase in unsecured credit card debt: from $292 billion in 1992 
to $654 billion at the end of 2000. A remarkable trend since credit 
card debt was only $50 billion in 1980. Together with the sharp 
increase in stock market valuations during the 1990s (``wealth effect 
'') and the corporate promotion of immediate gratification (``Just Do 
It'' consumption) which inflated consumer expectations, Americans have 
tended to purchase more than they could possibly afford on their 
household income. Not surprisingly, this was facilitated by the 
aggressive marketing of bank and retail credit cards to traditionally 
neglected groups such as college students, senior citizens, and the 
working poor. It is sobering that the recent decade of economic growth 
and falling unemployment has featured a perplexing phenomenon: personal 
bankruptcy rates in the late 1990s (peaking at 1.4 million in 1998) 
soared to nearly ten times the rate of the Great Depression.
    Not only are most U.S. households being squeezed by mounting 
mortgage and consumer debt, but the ``real'' cost of borrowing has 
risen dramatically since the de-regulation of banking in 1980. For 
instance, the real cost of corporate credit (prime rate) has increased 
only marginally (2.5%-3.0%) whereas the real cost of consumer credit 
card debt has more than doubled (less than 6% to over 11 %) since the 
early 1980s--not to mention soaring penalty fees (about one-third of 
all credit card revenues). Furthermore, even the robust wage increases 
of the last three years do not compensate for the rising cost of 
financing personal debt; only home mortgage related interest is tax 
deductible.
    Today, three out of five U.S. households are responsible for the 
approximately $560 billion in outstanding credit card debt.\1\ Among 
these ``revolvers,'' credit card debt averages over $11,000 per 
household. Hence, a four percent increase in the annual median income 
of U.S. family households (about $50,000) is nearly the same as the 
average cost of financing household credit card debt (18% excluding 
fees) or approximately $2,000. And, this does not include the 
tremendous growth of finance companies (over 24% APR) and the rising 
cost of ``second-tier'' banks. The enormous profits of the latter 
explain the recent entry of the largest ``first-tier'' banks into 
providing second-tier financial services. For instance, Wells Fargo 
formed a joint venture with Cash America (largest U.S. pawnshop 
company) in 1997 to develop a state-of-the-art system of automated, 
payday loan kiosks. Overall, credit card interest charges, penalty 
fees, and second-tier finance costs could total over $140 billion in 
2001. This is an enormous transfer of income to an industry that has 
slashed jobs, cut wages, and raised consumer prices. In terms of 
sustaining the current economic expansion, the effect could be a 
significant reduction in the effective demand of U.S. households as the 
purchase of goods and services is subordinated to the payment of rising 
finance charges attributed to previous consumption.
---------------------------------------------------------------------------
    \1\ This figure is based on a conservative estimate that 
approximately 9 percent of credit card debt is paid off before 
incurring interest charges and another 5 percent is not credit card 
debt. The monthly Federal Reserve Bulletin, which reports revolving and 
nonrevolving consumer debt levels, is available at www.bog.frb.fed.us.
---------------------------------------------------------------------------
    Before reporting on the experiences of people who have been 
encumbered with high levels of consumer debt, it is important to note 
the recent trends and institutional policies in the consumer financial 
services industry. First, in contrast to descriptions of the credit 
card industry as highly competitive with 6,000 competitors, the reality 
is that the last decade has witnessed a dramatic consolidation of 
credit card issuers. In 1977, the top 50 banks accounted for about half 
of all U.S. credit card accounts. The impressive revenues of most 
credit card portfolios has precipitated massive mergers and 
acquisitions over the last decade. For instance, Bank One's acquisition 
of credit card giant First USA in 1997 was followed by Citibank's 
purchase of AT&T's credit card subsidiary--the eighth largest in 1998. 
Today, the top ten card issuers control over three-fourths of the 
credit card market and nearly 70 percent of the over 1.3 trillion in 
credit card charge volume. Not surprisingly, competition for clients is 
less likely to be expressed in the form of lower prices. Indeed, it is 
striking that the average cost of consumer credit card debt has 
actually risen over the last five years.
    Second, the enactment of the 1998 Financial Services Modernization 
Act has precipitated a new trend in the formation of consumer financial 
services conglomerates. For instance, the 1998 merger of Citicorp with 
Traveler's Group has created a new role for consumer credit cards: 
compiling consumer information files. Credit cards provide a lucrative 
revenue stream for conglomerates such as Citigroup as well as strategic 
information for the cross-marketing of other financial services such as 
insurance, investment services, student loans, home mortgages, and 
consumer loans. By combining different sources of consumer activities 
from various corporate subsidiaries (e.g. Traveler's Insurance, AT&T 
credit cards, Solomon Smith Barney investments), plus the forging of 
strategic partnerships with specific corporate retailers, these 
conglomerates are developing increasingly cost-effective marketing 
campaigns for persuading customers to use their credit for purchasing 
products from members of the conglomerate's extended corporate 
``family.'' It is not surprising, then, that the major credit card 
associations recently have begun marketing credit cards to teenagers--
with the required financial contract signed by their parents or 
guardians. This card program is ostensibly designed to help promote 
financial responsibility by encouraging parents to discuss financial 
purchases/budgets with their minor children. Of course, financial 
education could be promoted through the use of debit cards or personal 
checks. Indeed, the key objective is to promote credit card use at an 
early age, especially purchases through virtual internet shopping 
malls. Furthermore, this credit card program facilitates the collection 
of consumer information at an earlier age as well as the direct 
marketing of teenagers without the filter and/or confusion of 
distinguishing the purchases of children from their parents. By issuing 
credit cards in a teenager's name, companies are seeking to shape 
consumption behavior and corporate loyalties at an earlier age while 
minimizing the influence of their parents.
    Third, the growth of subprime credit cards has led to outrageous 
financial terms for the most naive and inexperienced market of the 
working poor. With annual percentage interest rates of over 30 percent 
and costly ``hidden'' charges, even large issuers have been formally 
reprimanded and even sued over duplicitious advertising. For example, 
the sixth largest credit card issuer, Providian National Bank, agreed 
to an out-of-court settlement for a record $300 million in June 2000. 
According to the U.S. Comptroller of the Currency, John D. Hawke Jr., 
``We found that Providian engaged in a variety of unfair and deceptive 
practices that enriched the bank while harming literally hundreds of 
thousands of its customers.'' They include a `no annual fee' program 
that failed to disclose that the card required the purchase of $156-a-
year plan credit-protection plan; customers who complained were 
informed that the plan was mandatory unless a annual fee was paid.
    For those who desperately seek a credit card as a ``bank account of 
last resort,'' the terms that are required of subprime applicants--
especially the working poor--include unwanted educational materials and 
high membership fees with little available credit. This is illustrated 
by the conditions of the United Credit National Bank Visa. It's direct 
mail solicitation declares, ``ACE VISA GUARANTEED ISSUE or we'll send 
you $100.00! (See inside for details.)'' For those who bother to read 
the fine print, and a magnifying glass would be useful in this case, 
the terms of the contract are astounding,

``Initial credit line will be at least $400.00. By accepting this 
        offer, you agree to subscribe to the American Credit Educator 
        Financial and Credit Education Program. The ACE program costs 
        $289.00 plus $11.95 for shipping and handling plus $19.00 
        Processing Fee--a small price to pay compared to the high cost 
        of bad credit! The Annual Card Fee [is] $49.00.  .  . For your 
        convenience, we will charge these costs to your new ACE 
        Affinity VISA card. [They] are considered Finance charges for 
        Truth-In-Lending Act purposes.''

    Unbelievably, an unsuspecting applicant could pay $369 for a net 
credit line of only $31 at a moderate 19.8 APR. It is no wonder that 
those households who are most desperate for consumer credit often give 
up on the financial services sector after they realize the exploitative 
terms of these contracts.
    A final issue concerns the trend of consumer financial services 
conglomerates of replacing traditional, low cost consumer and small 
business loans with higher cost substitutes. For instance, in low-
income neighborhoods, this may result in the closing of a first-tier 
bank branch and its replacement with high cost, finance companies (such 
as Citigroup's newly acquired Capital Associates) or second tier 
``fringe banks'' such as check cashing outlets, pawnshops, and rent-to-
own stores. Especially disconcerting is the application of this policy 
to the small business sector. Today, the number one source of start-up 
financing for small businesses is credit cards followed by home equity 
loans. Aspiring entrepreneurs--especially women and minorities--are 
routinely denied small business loans and encouraged to assume higher 
cost, credit card debt. As one owner of a computer supply company 
explained, ``1 wanted a business loan [from Wells Fargo] but all 1 got 
was a[nother] credit card instead.'' This trend has potentially serious 
consequences as credit cards have dramatically changed from the credit 
of last resort to the initial source of start-up financing. Since small 
businesses are the primary source of net job growth in the U.S. 
economy, this trend could have severe repercussions during the next 
economic downturn. That is, small entrepreneurs may not be able to 
survive unfavorable economic conditions after exhausting their high 
cost lines of consumer credit at the same time that the economy needs 
to generate more jobs. This restrictive corporate lending policy could 
exacerbate an economic slowdown and possibly contribute to a recession.

                    `Plastic Money for Real People'
        --college marketing campaign by associates national bank

    The lack of individual responsibility in the assumption of 
escalating levels of consumer debt is the cornerstone of the credit 
card industry's argument for the reform of existing bankruptcy laws. 
The emphasis on ``if you play then you should pay'' belies the dramatic 
shift in the promotion of high interest, unsecured lines of credit 
which are most efficiently provided through universal or bank credit 
cards. As the credit card industry successfully increased the ``real'' 
cost (net of inflation) of consumer credit and saturated middle-class 
households in the 1980s, the spectacular profits of the consumer-debt 
driven economy led to banks to finance enormous marketing campaigns 
that sought to penetrate nontraditional markets in the late 1980s. The 
abrupt change in the industry's underwriting standards for these loans 
raises the question of whether these new, far less stringent lending 
criteria are encouraging American households to borrow more money than 
banks know they can ever possibly repay. Ironically, these new groups 
tend not to be engaged in full-time employment nor are they adequately 
educated on the lending policies of the financial services industry: 
college students and senior citizens.
    In terms of college students, the lack of information on their 
consumer debt levels (obscured by student loans, private loans, direct 
parental payments, and other forms of family assistance), has led to 
the surprising discovery that the fastest growing group of bankruptcy 
filers is 25 years old or younger. The credit card industry has funded 
research studies that present an idyllic world of tech savvy and 
financially responsible college students that belie the escalating 
social problems associated with credit card debt. Through the ``rose 
colored glasses'' of the credit card industry, which claims that 
approximately 3 out of 5 college students pay off their charges at the 
end of each month, the credit card is portrayed as a ``knight in 
shining armor'' a la Jerry Seinfeld's advertisements for American 
Express. Instead, the flawed research methodology of these few industry 
sponsored studies ignores such crucial trends as the use of student 
loans to pay credit card debts (80% of college students are enrolled in 
public schools), surveys that explicitly exclude students that have 
dropped out of college due to high credit card debts, informal family 
loans or payments for reducing high interest credit card debt, 
supplementary private loans for paying off credit card debts, and 
inclusion of parents' credit cards (where students are secondary card 
users that are not responsible for monthly charges).\2\ Furthermore, by 
focusing on the lifestyle enhancements that credit cards offer to 
``mature'' students, public attention has been directed away from the 
social problems that have emerged from their unprecedented expansion 
over the last decade. These include physical maladies (from anxiety, 
excessive smoking and drinking, depression), parental authority 
conflicts, loss of scholarships due to extra jobs for monthly payments 
(low grades), job rejection, denial of auto and home mortgage loans, 
rejection for student loans for graduate and professional school, 
decline of apartment rental applications, increasing defaults on 
federal student loans, and, in the most extreme cases, student 
suicides; the latter was recently reported in a Sixty Minutes II 
program (www.cbs.com and www.creditcardnation.com). Not incidentally, 
the sharp increase in consumer debt among college students has defied 
the recent decline in consumer bankruptcies; last year, the number of 
bankruptcy filers 25 years old or younger jumped to nearly 150,000. In 
view of the enormous increase in consumer credit offered to college 
students and the ongoing slowdown in the U.S. economy, the experiences 
of recent college graduates offers instructive insights into industry 
responsibility in the rapidly growing group of bankruptcy files. 
Significantly, the case-studies reported in my 1999 study include 
students whose parents emphasized the importance of credit as a 
convenience and debt as a moral vice.\3\ Even in these cases, the 
promotion of credit cards on college campuses--where universities 
``earn'' multi-million dollar annual royalties for exclusive credit 
card marketing agreements--quickly erodes cautious family values toward 
the use of consumer credit and the accumulation of debt.
---------------------------------------------------------------------------
    \2\ See Robert D. Manning, ``Credit Cards on Campus: Current Trends 
and Informational Deficiencies,'' Consumer Federation of America, 1999 
available at www.creditcardnation.com.
    \3\ See Robert D. Manning, ``Credit Cards on Campus: The Social 
Consequences of Student Debt,'' Consumer Federation of America, 1999 
available at www.creditcardnation.com and Robert D. Manning ``Credit 
Cards on Campus: The Social Consequences of Student Credit Dependency' 
in Credit Card Nation: The Consequences of America's Addiction To 
Credit (Basic Books, 2000).
---------------------------------------------------------------------------
    For example, beginning with his middle-class upbringing in Indiana, 
where his father inculcated the Midwestern values of frugality and debt 
avoidance, Jeff entered Georgetown University in 1995 with a commitment 
to conduct his financial affairs on a cash-only basis. Initially, he 
socialized with students like himself--from moderate income Midwestern 
families--whom shared similarsocial backgrounds and cultural 
experiences. But, Jeff soon realized that he wanted to transcend his 
family background and enjoy the more exciting lifestyle of his more 
affluent and urbane friends such as his roommate. At first, his 
adherence to the `cognitive connect' (i.e.; that his income/resources 
must determine consumption) made him ``stand out'' among his peers. For 
instance, Jeff's father always paid restaurant bills in cash. His motto 
is, ``if you don't have the cash then you shouldn't buy it.'' Jeff's 
new friends, however, associated this behaviorwith the quaint and 
backward cultural practices of Depression era farmers. Rare is the 
situation when their parents use cash for common financial 
transactions.
    This clash of cultures led Jeff to apply for a credit card. He 
received two credit cards his first semester including a Gold 
MasterCard. Although Jeff initially obtained his credit cards for 
convenience, he was impressed by the favorable response of others to 
his Gold credit card, ``It made me feel like I had made it.  .  . 
people treated me different when they saw [the Gold card].'' Jeff 
acknowledges that this new respect was premature, since he did not yet 
have a `real' job, but perceived it as an early recognition of his 
future social status as a graduate from a prestigious university. 
Significantly, Jeff first began using his credit cards like cash, 
paying off the balances at the end of the month, ``Why pay cash. 
[Afterall] what's the point of having a credit card.'' His other reason 
for obtaining credit cards was for emergencies. Hence, as long as 
Jeff's savings and loans could finance a carefree lifestyle, his credit 
cards served as a modern convenience that befitted his status as a 
student at an elite, private university. Of course, this situation 
quickly changed when his financial resources were exhausted in the fall 
of his sophomore year.
    As a freshman, Jeff saw his credit cards as his best friend, an 
angel of mercy during crisis situations, ``At first, I decided that my 
credit cards would only accumulate debt in case of emergencies, such as 
being stranded in an airport and needing a [plane] ticket. After a 
while, i decided that it was okay to charge necessary things like books 
and other school related expenses.  .  . Then, after charging for 
'needs;' it was just so easy.. I decided that it was okay to charge 
anything I damn well wanted.'' As his debt increased, with 8 new credit 
cards during his sophomore year, Jeff became disheartened. Although 
they enabled him to rebel against the strict social control of his 
father, Jeff was now encumbered with several thousand dollars of debt. 
Over time, Jeff confounded his pursuit of personal independence with 
the rejection of the cultural ethos of the 'cognitive connect.' 
Afterall, he argued, consumer debt it is a common--even modern--trend 
of professionally successful people and ``everyone else I knew was in 
debt.  .  . and so were many of their parents.'' Among his peers, they 
rationalized their indolent spending behavior by emphasizing ``the 
great jobs that we will get [after graduation] that will enable us to 
pay off our credit card [debts].''
    At the onset of his college career, Jeff's conservative Midwest 
background made him a most unlikely candidate for accumulating a large 
credit card debt. However, with tuition over $23,000 per year at 
Georgetown University, Jeff quickly exhausted the $40,000 ``loan'' that 
his parents saved for his college education. And, with a combined 
household income of over $100,000, his financial aid was primarily 
limited to student loans. Unlike students at less costly public 
colleges, moreover, Jeff was not able to transfer any of his personal 
debts into student loans. This is because Jeff's student loans paid 
only a fraction of Georgetown's tuition while his duties as an on-
campus resident hall advisor (RA) provided his room and board. Jeff's 
family inculcated the importance of adhering to the `cognitive connect' 
of consuming only what could be paid in cash; credit card use was 
acceptable only if one had sufficient savings or earnings that ``could 
back up your purchases.'' initially, Jeff succumbed to the temptations 
of credit cards for non-economic reasons. They offer emotional security 
in case of personal ``emergencies'' and alleviate social status anxiety 
because ``people treat me so much better when they see my Gold 
[American Express, MasterCard] cards.'' Jeff's first credit card was an 
impulsive response to a Citibank advertisement ``that was hanging on 
the wall in the dorm.'' The Visa card offered a credit limit of $700 
with an introductory rate of 4.9%. By the end of his freshman year, 
Jeff had received three credit cards which were used primarily for 
entertainment-related activities.
    The shift from using credit cards for convenience to financing an 
inflated standard of living was a normal extension of Jeff's college 
experience. As he explains, ``Everyone has to take on debt to go to 
college.  .  . everyone is expected to have student loans.  .  . Even 
in my Midwestern [culture] which emphasizes that debt is bad, college 
loans are viewed as good debt.  .  . Low interest rates.  .  . High 
price of college equals high value.  .  . [produces] a greater return 
on your investment.'' By the middle of Jeff's sophomore year, he had 
exhausted his parents' college ``loan.'' At this point, he confronted a 
profound crossroads in his college career. Either he fundamentally 
altered his consumer oriented lifestyle or abandon his familial 
attitudes toward debt. Faced with the choice of losing his more 
``sophisticated'' and urbane friends, whom view debt as a necessary 
means to a justifiable end, Jeff easily accumulated 8 more credit cards 
in 1997.
    The most striking feature of Jeff's credit card use is how quickly 
he abandoned the virtue of frugality as a necessary means for 
establishing his own social identity outside of his father's strict 
control. Afterall, the culture of consumption that permeates collegiate 
life views saving as a practice of ``hicks'' while debt is the 
``breakfast of champions.'' By the end of his sophomore year, Jeff had 
accumulated a couple of thousand dollars in credit card debt. Instead 
of beginning his junior year with savings from his summer job, most of 
Jeff's earnings were used to pay off his credit cards. Significantly, 
as his credit card balances rose, Jeff received congratulatory letters 
from credit card companies extolling his good credit history and 
raising his credit limits as a ``courtesy to our best customers'' so 
that he could avoid over limit fees. Although he has never earned 
$10,000 in annual income, the deluge of credit card offers obscured the 
fragility of his Jeff's financial circumstances, ``with the constant 
arrival of new `pre-approved' credit card applications AND the raising 
of my credit limits the credit card companies made it seem like [my 
level of debt] was okay.  .  . When I started to fall behind, I even 
received letters that allowed me to `skip a payment' because the 
company `understood' that sometimes debts can back-up such as during 
the holidays.'' It was during this period that Jeff eagerly embraced 
the marketing ploys of the credit card industry so that he could 
accumulate ``miles'' or ``points'' for frequent flier and consumer gift 
programs. More importantly, this practice led to ``surfing'' or 
transferring debt from high to low interest ``introductory rate'' 
credit cards.
    As Jeff learned to ``tread water'' by ``surfing'' in this period, 
he learned the next lesson of the credit dependent: the ``credit card 
shuffle.'' That is, paying his credit card bills with other credit 
cards through monthly balance transfers and `courtesy checks.' This 
acceptance of his new debtor status was ``disheartening.  .  . but I 
rationalized it by telling myself that everyone else is in debt.  .  . 
Afterall, I'm going to get a great job and pay it off.'' The ``good'' 
or ``responsible'' credit card debt such as school related expenses, a 
personal computer, and work suits was soon taken over by entertainment 
on weekends, restaurant dinners, spring break in Florida and then 
London and Canada. With one ten-day vacation costing over $5,000, ``I 
even charged the passport application fee,'' Jeff found himself on the 
verge of exhausting his available cash and credit. Fortunately, the 
university credit union is willing to assist students like Jeff whom 
find themselves ``drowning in credit card debt.  .  . most of the 
people I know that go to the credit union are getting loans to pay 
their credit cards.'' Without the option of federally guaranteed 
student loans to service his credit card debts, Jeff received a $10,000 
loan at a moderate 11.9 percent. This credit union loan essentially 
``bought some time'' for Jeff before entering the job market--an option 
not available to most college students. Not incidentally, a condition 
of the loan disbursement was that $3,000 had to be used to pay off one 
of his credit cards. The balance of the loan was spent on school 
expenses as well as catching up on his other monthly credit card 
payments.
    During his junior year, Jeff began to engage in riskier and more 
creative credit card schemes. For instance, he began ``surfing'' which 
entails transferring debts from high interest rate cards to those with 
much lower albeit temporary `introductory' rates. As Jeff learned how 
to lower his monthly payments through this technique, he began to 
exhaust his lines of credit. Instead of triggering cautionary warnings 
from his credit card companies, Jeff received new ``Pre-Approved'' 
credit card solicitations and congratulatory letters announcing that he 
had ``earned'' an increase in his credit limits. He even began 
receiving letters that encouraged him to miss a payment, such as during 
holiday gift-giving seasons, while lauding his good credit history. 
These mixed messages are easy for college students to misinterpret. 
Indeed, Jeff rationalized that his accumulating debt was not very 
serious since the the credit card companies ``made it seem that 
everything was okay by sending new applications and raising existing 
credit limits.'' During this period, moreover, Jeff became so dependent 
on ATMs (his parents never used them) that he did not even think about 
the transactional costs ($1.50-$3.00). As cash advances became more 
frequent, he did not want to know that the fees and higher interest 
rates made their cost comparable to short-term pawnshop loans. 
Eventually, he ``hit the [financial] wall'' when his meager stipend as 
a residence hall advisor made it difficult to send even minimum credit 
card payments. The $10,000 debt consolidation loan from the university 
credit union temporarily averted an economic crisis. But, this proved 
to be only a temporary financial ``band-aid.''
    Ironically, a contributing factorto his financial crisis was two 
failed business ventures with his roommate which were intended to 
eliminate their debts. The first was a service to translate resumes of 
Mexican and other Latin American students whom were seeking internships 
or applying to colleges in the United States. Encouraged by friends 
seeking their assistance, they purchased all the necessary office 
equipment of a high-tech company: computer, fax machine, cell phones, 
executive chairs, high quality business cards and fliers, web site 
fees, P.O. box, and legal fees for incorporation in Delaware. After 
several months without clients and rapidly depreciating business 
technology, Jeff and his ``partner'' opted to ``cut our losses'' and 
terminate the business. Each lost over $2,500. To add further financial 
insult, they had to pay additional legal fees to dissolve their 
corporation and are still paying the contract for their listing with an 
internet ``search engine.''
    Following this entrepreneurial debacle, they sought to recoup their 
losses through the stock market. Instead of becoming more cautious 
about debt, ``our credit cards allowed us to get too big for our 
britches'' According to Jeff, ``my roommate found out that his company 
was going to be bought out. So, he was convinced that we would make a 
quick profit if we bought some stock before [the acquisition].  .  . a 
sure winner! We each bought $5,000 worth of stock with cash advances 
from our credit cards.  .  . with e-trade we even saved on brokers' 
commissions.  .  . The company was bought-out alright but then it was 
cannibalized and the stock fell.  .  . We each lost over $3,000.'' When 
asked why they pursued such risky ventures while still in school, Jeff 
responded, ``Because we could! The courtesy checks gave us the 
opportunity act on our impulses.''
    By the end of Jeff's junior year, the social empowerment provided 
by his 11 bank and 5 retail credit cards had changed dramatically: they 
had evolved from friends to foes. The social ``doors'' that they had 
previously ``opened'' were now increasingly closed. Jeff was ``so 
concerned about meeting the right people and fitting in with them.  .  
. that [he] did not think twice about $50 bar tabs and spending spring 
break in London.  .  . To think otherwise would have meant certain 
social death.'' Fortunately, Jeff was forced to confront his situation 
after realizing that ``I no longer had control over my credit cards. 
Now, they controlled me.'' The earlier freedom to ``act like an adult'' 
had been replaced with the financial responsibility of paying for his 
earlier excesses. Indeed, rather than enjoying his final year at 
college, Jeff is enduring social hell by working full-time while taking 
a normal course load and applying/interviewing for jobs. He works at 
least 30 hours perweek at two part-time jobs (in addition to his 
position as a resident advisor) simply to make the minimum payments on 
his $20,000 credit card debt and $10,000 debt consolidation loan. Most 
of his friends have stopped calling to make plans for the weekend 
because he is ``shackled to my credit cards.  .  . I can't go out with 
them like I used to because I have to work.  .  . ultimately, to pay 
for the fun that I charged on my credit cards a couple of years ago.''
    Today, Jeff views his credit cards with complete disdain, ``I hate 
them.'' He is delinquent on many of his accounts and has threatened to 
declare bankruptcy unless the banks offer him more favorable interest 
rates. Ironically, Jeff's social odyssey of the last four years has 
brought him ``full-circle'' in affirming his father's mantra toward 
debt: ``if you can't afford it, don't buy it.'' What angers him the 
most about credit card marketing campaigns on campus is that they extol 
the benefits of `responsible use' but neglect to inform impressionable 
and inexperienced students about their ``downside'' such as the impact 
of poor credit reports on future loans and even prospective employment. 
This is crucial, according to Jeff, because he now understands that 
``the credit card industry knows exactly what it is doing [in 
encouraging debt] while taking advantage of students whom are trying to 
learn how to adjust to living away from home, often for the first time.  
.  . Let's face it, how can these banks justify giving me 11 credit 
cards on an annual income of only $9,000. These include a Gold American 
Express and several Platinum Visa cards.''
    Although Jeff does not dismiss his financial responsibility, he 
states that ``I almost feel victimized.  .  . giving credit cards to 
kids in college is like giving steroids to an athlete. Are you not 
going to use them after you get them?'' Furthermore, as a dorm Resident 
Advisor (RA), Jeff emphasizes that the university offers an wide range 
of student informational programs and services but with one notable 
exception, ``there if nowhere to go for debt counseling.  .  . 
everything is discussed in Freshman Orientation or incorporated in 
Resident Advisor training and residence hall programs.  .  . AIDS, 
suicide, eating disorders, alcohol, depression, peer pressure, sex ed, 
academic pressures, learning handicaps.  .  . all but financial crisis 
management.''
    As Jeff has ``gone full circle'' in his attitudes toward credit 
cards, he is now coping with the unexpected ``pain'' of his past credit 
card excesses. Over $20,000 in credit card debt (plus his $10,000 debt 
consolidation loan and over$30,000 in student loans), Jeff has washed 
ashore from his ``surfing'' escapades. Although working two part-time 
jobs during his senior year, Jeff is now delinquent on several of his 
16 credit cards. A business major, Jeff is anxiously awaiting the 
outcome of his job search. He is optimistic as some of his peers have 
already received starting salaries that range from $40,000 to $55,000 
per year. In addition, several have received signing bonuses between 
$3,000 and $10,000. For Jeff, the latter is especially important 
because he plans to use this money to reduce his credit card debt.
    Unfortunately, Jeff's promising career is encountering obstacles 
from an unexpected source--his credit cards. During a recent interview 
with a major Wall Street banking firm, Jeff was asked, ``how can we 
feel comfortable about you managing large sums of our money when you 
have had such difficulty in handling your own [credit card] debts?'' 
Jeff was stunned. It was obvious that the interviewer had reviewed his 
credit report--without prior notification--in evaluating Jeff's 
desirability to the firm. ``Can you believe it,'' Jeff declared, ``they 
want an explanation about my personal finances in college and yet they 
lost over $120 million last year! ''
    In their decision not to offer him employment, Jeff wonders how 
much was based on his GPA and how much on the ``score'' calculated by 
the consumer credit reporting agency. This is certainly not a potential 
consequence that is explained by the credit card industry when it 
exclaims, ``Build your credit history.  .  . you'll need [it] later for 
car, home or other loans.'' As Jeff passes by the MBNA Career Center on 
campus, which is named after the credit card company that he owes 
several thousand dollars, the irony of his ``catch-22'' situation is 
not lost on him, ``how can I pay them back when their credit reports 
are hurting my chances of getting a good job!'' It is not surprising 
that growing numbers of students like Jeff are increasingly using 
sexual analogies in describing their unforeseen circumstances. More 
bluntly, they are denouncing the predatory policies of the credit card 
industry as a form of ``financial rape.''
    As Jeffs experience shows, student financial strategies are 
becoming increasingly complex as credit card companies offer ``the 
[financial] freedom to hang ourselves.'' Even students at expensive 
private schools are finding ways to transfertheir credit card debt into 
supplementary loans without the knowledge of their parents. This 
increasingly popular practice helps to explain the wide vacillation in 
student credit card balances due to infusions of cash from other 
sources of loans. In addition, Jeff demonstrates how access to credit 
facilitates costly purchases that would not have been considered under 
the financial constraints of a typical student budget. The latter is 
especially disconcerting. It reflects the strong influences of 
escalating peer consumption pressures as well as sophisticated 
marketing campaigns that target the youth culture. One of the most 
seductive is the Sony advertisement, ``Don't deny yourself. Indulge 
with the Sony [Visa] Card from Citibank.  .  . The official currency of 
playtime,'' Or, more succinctly, the ubiquitous NIKE slogan, ``Just Do 
It.'' Although Jeff has so far avoided personal bankruptcy by securing 
a well-paying job with a commercial real estate developer, he notes 
with concern that some of his classmates have already been laid off due 
to the slowdown of the economy. In fact, some of his highest salaried 
classmates have become victims of the ``reality check'' that many 
dotcom companies are only recently confronting. If Jeff is forced into 
the ranks of the unemployed for an extensive period, he anguishes over 
the prospect that bankruptcy may be his most realistic option.

                  When the `Magic of Plastic' Expires:
              bankruptcy in the age of financial ignorance

    Unlike Jeff, Cris has not been so fortunate in evading the 
dangerous financial shoals of consumer bankruptcy. This situation is 
especially surprising since her parents are both medical professionals 
with a combined household income of over $100,000. At the University of 
Maryland, Cris enjoyed the freedom of college life (with its promotion 
of a consumer lifestyle) which contrasted sharply with the harsh 
discipline of living at home. At the time, Cris' parents were oblivious 
to her new college lifestyle since she was limited to her meager 
savings from high school. Unbeknownst to them, however, the credit card 
industry was aggressively expanding into the previously ignored market 
of ``starving students'' in the late 1980s. For her father, it was 
ludicrous to think that major banks would give essentially unsecured 
loans to unemployed teenagers whom lacked experience in managing their 
economic affairs or discipline in controlling their consumption. 
Ironically, he was naive when it came to student finances and bank loan 
policies. Indeed, banks were eager to make high interest loans to 
students and credit cards became their financial `vehicle' of choice. 
Ultimately, credit cards became the personal junk bonds of Generation 
X.
    Cris' initial encounter with ``plastic money'' began early in the 
fall of 1989--her first semester of college. Citibank Visa 
advertisements ``were plastered allover the university'' and she 
thought that there was nothing to lose in submitting an application. 
Besides, Cris was curious about the ``power of plastic'' since her 
parents would not permit her to use a credit card in high school and 
she did not want to provoke an argument by asking now. Furthermore, all 
of her friends were receiving financial assistance for college from 
their parents and thus they had considerably more discretionary 
resources for ``play.'' Emboldened by the prospect of financial 
independence, Cris eagerly filled-out the form which did not require 
the consent of her parents--only a copy of her student ID. At the time, 
Cris was 18 years old and working part-time at a telephone answering 
service for about $5.00 per hour. To her surprise, Citibank granted a 
$500 line of credit, which she immediately used to pay a large library 
fine and ``buy a bunch of clothes at the mall that I couldn't otherwise 
afford.'' More importantly, Citibank's decision had a much more 
profound impact on Cris than the monetary value of its loan because, 
``it made me feel emotionally and financially mature.  .  . [The credit 
card] helped me become independent [in my relations] with my family and 
my friends.  .  . It made me realize that I deserved to be responsible. 
That i should not have to beg my stepfather for money or call my 
grandfather for [financial]] help.''
    Cris' new social and economic empowerment transformed her attitudes 
toward consumption and debt. No longer forced to ``earn'' the ability 
to consume through work related savings (`cognitive connect'), Visa 
also ``liberated'' her from the social control of her parents. At 
first, Cris limited her charges to school expenses and personal items. 
By the end of the academic year, Cris was routinely using her credit 
card for mall excursions, restaurant meals, bar tabs, concert and 
professional sports tickets, and weekend trips to the beach. These 
activities underscored Cris' newfound ``freedom'' and were reflected in 
her rising credit card debts. Indeed, the ``power'' of Cris' first 
credit card convinced her to get a second by the end of the fall 
semester and two or three more in the spring. During this period, Cris 
learned the flip side of the ``power of plastic:'' the need to refuel 
its financial engine with monthly infusions of cash. By the second 
semester, Cris' top priority was maintaining her lifestyle and she 
began working full-time at the answering service company.
    Not surprisingly, Cris' grades plummeted. For the first time in her 
life, she received a `D' and an 'F' which resulted in academic 
probation from the university. As conflicts with Karl intensified over 
her social activities, Cris moved into an apartment with some of her 
college girlfriends. These additional financial pressures reinforced 
Cris' dependence on her credit cards. As her most dependent ``asset,'' 
Cris saw them as both her personal ``savior'' and ``best friend.'' When 
she needed economic help, they were always there for her. And, they did 
not ask questions about why she needed the money or moralize about her 
spending patterns. The only problem is that they are ``high 
maintenance'' friends with a small financial price to pay for their 
invaluable assistance. At least that was what Cris thought at the time.
    Cris enjoyed a largely carefree summer and, to reduce her expenses, 
she enrolled in a local community college forthe fall semester. Already 
over $3,000 in debt and earning only $5.00 per hour, Cris was deluged 
with ``Pre-approved'' credit card offers. She attributes her 
desirability to the credit card industry by her prompt remittance of 
minimum monthly payments. During this period, Cris began to view her 
credit cards differently. ``After spending my paycheck, I used my 
credit cards like savings.  .  . I used them for everything .  .  . 
books, tuition, gas, food, hotel rooms at the beach.  .  . whether for 
school, emergencies or simply to enjoy an evening with friends.'' This 
intermingling of credit and earnings was reinforced by unexpected 
situations such as car repairs and medical emergencies. Afterall, she 
had to get her car fixed in order to drive to work and her health 
deserved immediate attention or she could not perform her job.
    During this period, Cris began to engage in more creative and 
costly credit card practices that would foreshadow her eventual debt 
crisis. First, she began to regularly use her credit cards to generate 
additional cash flow. This strategy usually entailed charging all of 
her friends' meals at a restaurant and then collecting their money 
afterwards. Second, she began to routinely take cash advances from her 
credit cards ``when I realized that I could.'' Initially, Cris would 
use cash advance checks to pay bills like rent, utilities, or car loan. 
As she got further into debt, however, Cris learned a sophisticated 
version of the ``credit card shuffle.'' She would take cash advances at 
the end of the month and then deposit the money into her checking 
account so that she could send the minimum payments to the credit card 
companies. According to Cris, ``it got to the point where I had written 
down all of the PIN numbers of my credit cards and, at the same ATM, I 
would take cash advances and then deposit the money directly into my 
[checking] account.'' Significantly, this financial management 
``system'' was encouraged by her credit card companies whom profit from 
high interest rates, cash advance fees, and over limit penalties, 
``Every time I began to bump against my limit, the banks would raise 
them. [Because of this practice] it did not become a crisis early when 
I could have realized the seriousness of my situation.'' At the same 
time, market-ing inducements such as 10% off with a new retail credit 
card such as Hechts or a free Orioles bag with an application for an 
MBNA MasterCard were ``too easy'' to pass up.
    Over the next two years, Cris' credit card debt jumped from about 
$5,000 to over $15,000. Cris marveled as she reflected on how she was 
unaware of the amount of debt that had accumulated on her 8 or 9 credit 
cards: ``after being relatively stable for a couple of years it just 
[tripled] overnight.'' She moved back with her parents to reduce 
expenses which now included payments on a stereo, VCR, and TV. However, 
the recurrent conflicts with her stepfather ensured that this was only 
a short-term move. The following year, she moved in with her boyfriend. 
Although Cris had received a moderate raise to $6.50 per hour and 
earned as much overtime as possible, the economic burden of rent and 
utilities plus her car payment led to a sobering realization: her basic 
expenses exceeded her income. At the time, Cris had been content to 
send minimum payments on her credit cards because she had convinced 
herself that she would soon get ``a good job and pay them all off.'' 
Instead, at 21 years old, Cris was forced to accept the reality that 
she would have to wcrk full-time and remain a part-time student while 
attempting to reduce her credit card debts. A $5000 debt consolidation 
loan offered only temporary relief.
    As Cris slipped closer to her financial abyss, she was astounded by 
a debt counseling announcement that she saw on television. It explained 
that merely sending minimum payments would require over 30 years to pay 
off existing credit card balances. ``With no end in sight,'' Cris' 
attitude toward her credit cards changed dramatically. From being her 
``best friend,'' they became her worst enemy--``I hated them.'' 
Dependent on the credit card shuffle to ``simply get by,'' Cris sought 
help at a local debt counseling agency. What she received was a 
``shock.  .  . I thought that they could help anyone.  .  . instead, 
they told me that they could not help me at all.  .  . that I should 
declare bankruptcy. I was mad, they implied that I was beyond help.  .  
. I had nowhere else to go.  .  . I could not believe that this was 
happening to me.'' Cris did not want to abandon her debts but, on the 
other hand, she could not find anyone whom was interested in helping 
her ``put my life back together'' unless she ``started over again.'' In 
fact, the first bankruptcy lawyer that she consulted recommended that 
she ``max-out'' all of her credit cards before filing for bankruptcy. 
Cris was appalled by his suggestion. Afterall, she emphasized, ``I am 
not irresponsible. I was not looking for an easy way out.  .  . He made 
me feel bad about myself and the whole [bankruptcy] process.  .  . I 
was doing it because there was no other option.'' Cris declined his 
offer to represent her during the bankruptcy proceedings.
    In December 1994. at the age of 23, Cris' bankruptcy petition was 
approved. With the guidance of her attorney, which cost $695, the court 
discharged a total of $22,522 from 13 credit cards and a $5,000 
consumer loan; she ``reaffirmed'' two credit cards and continued 
payments on her car loan. According to Cris, ``I felt awful about 
abandoning my debt. Afterall, I tried to renegotiate through Debt 
Counselors but no one was interested in helping me renegotiate my 
debts.'' Indeed, the striking feature of Cris' story is her emphasis on 
individual responsibility while at the same time criticizing credit 
card companies for aggressively marketing excessive lines of credit to 
naive and emotionally vulnerable students, ``I admit that I charged way 
too much.  .  . my debts were all my fault.  .  . [However] they should 
NEVER have given me all those credit cards at my age [under 22].  .  . 
There was just too little effort to get them. The banks make it too 
easy to get into debt.''
    Fortunately for Cris, bankruptcy was a prudent decision because it 
enabled her ``to put the pieces of my life back together.'' In fact, 
she was able to complete her junior college studies as a full-time 
student and is now enrolled to a four-year university. In May 2001, 
almost twelve years after receiving her first credit card, Cris is 
scheduled to graduate with a BA in accounting. For those whom contend 
that the consequences of bankruptcy are too lenient, Cris' experience 
is instructive. Although she agrees that the social stigma is 
diminishing, Cris emotionally responds that,

``you don't know how bad [bankruptcy] is. They said [my bad credit] 
        would last only 7 years but it will take ten years before the 
        bankruptcy is erased from my credit report.  .  . I can't get a 
        real credit card, AT&T just rejected me for their card, and 
        forget about a house mortgage.  .  . I've talked to people who 
        are thinking about declaring bankruptcy for only $4,000-$5,000 
        of debts. As little as they knew about credit cards, they know 
        even less about bankruptcy.  .  . Kids need to understand the 
        future repercussions of accumulating multiple credit cards. 
        Many young people see only the immediate benefits/
        gratification. They are so [financially] ignorant. It is so 
        sad.''

                       `It's The Economy, Stupid'
  shuffling and surfing in the turbulent seas of economic uncertainty

    Even students who eventually obtain steady, well-paying jobs after 
college graduation, the financial albatross of credit card debt may be 
insurmountable--especially those entering a less favorable job market. 
This increasingly common trend of employment disruption, which has been 
``regularized'' through the enormous growth of temporary or 
``contingent'' workers, has fundamentally changed the nature of 
employee loyalty and, in the process, created often unmanageable 
personal debt burdens. For a generation that has never witnessed an 
economic downturn, the perceived lack of an imperative to accumulate 
financial reserves (savings, lines of credit) suggests a potential 
social crisis when they must endure extended periods of un- and 
underemployment. The prospect of a potential recession in 2001, which 
belies the aggressive marketing of credit cards to college students, 
underscores the instructive experiences of ``Daniel'' whose graduation 
from college in the early 1990s resulted in unfulfilled expectations, 
disappointing job prospects, and insurmountable consumer debt 
obligations.
    At the beginning of the employment life-cycle, ``Daniel'' 
illustrates how the impact of credit card debt acquired in college can 
be obscured by the middle class squeeze after graduation. That is, 
recent graduates tend to assume greater levels of consumer debt during 
their job search. This includes employment related expenses (resumes, 
business clothing, transportation) as well as personal living expenses 
(rent, food, car, entertainment). Significantly, recent graduates that 
are financing their lifestyle with credit cards are neither classified 
as students or new workers. It is during this transitional period that 
personal credit card debt often grows at a rapid rate--especially 
during a `tight' labor market.
    Daniel's unexpected odyssey into the financial depths of credit 
card debt began innocuously when he was offered a Citibank Visa 
application by a corporate representative while walking through the 
student center. A sophomore at a Howard University, he was struggling 
to pay for his college expenses and enjoy a modest social life in 
Washington, D.C. Daniel's middle-class, professional family is from 
Kenya and his goal was to become an accountant. With limited funds, 
Daniel was eager to receive ``free money'' but was skeptical that a 
major bank would give him a credit card since he was several years away 
from earning a middle class salary. From Daniel's perspective, an 
undergraduate college student is a major loan risk.
    In 1988, however, Citibank was aggressively marketing credit cards 
to college students like Daniel whom it viewed as potentially lucrative 
customers for high interest, consumer loans. Citibank was so desperate 
to expand its credit card portfolio that it abandoned the industry 
policyof requiring parental co-signatures for unemployed students. 
Banks realized that they could ``persuade'' parents to pay for their 
children's credit card debts with threats of lawsuits and today 
``inform'' parents of the disastrous consequences to their children's 
credit reports if their credit card debts are not repaid. By only 
requiring a copy of his university ID, Daniel quickly completed the 
application and received a $600 line of credit. He immediately used all 
of his ``new money'' for school books, food, and an occasional cash 
advance. At the time, Daniel thought that his ``plastic cash'' had been 
exhausted and he would have to survive on his previous ``starving 
student'' budget. Instead, to Daniel's surprise, he began receiving new 
credit cards in the mail--a peculiar reward for maxing-out his Citibank 
Visa. Over the next seven months, Daniel received Citibank MasterCard 
and Visa ``Gold cards'' with rapidly rising credit limits as well as 
several retail credit cards. For Daniel, it was amazing that all of 
these credit card applications were ``pre-approved'' before he had 
applied for his first job. Apparently, he thought, this reflected the 
banks' confidence in his future earning ability.
    By the time Daniel finished his B.A. degree in 1990, he had over 
five thousand dollars in credit card debt. Although he does not 
remember most of these purchases, Daniel is grateful that his credit 
cards enabled him to enjoy a middle class lifestyle before he had a 
well-paying job. In fact, this consumer debt did not seriously concern 
Daniel because he was convinced that he would earn a good salary soon 
after completing his studies. This is why he justified the frequent 
payment of his consumer debts through cash advances and balance 
transfers from bank cards--the credit card ``shuffle.'' Over the next 
two years, Daniel used students loans and credit cards to finance his 
Masters' degree in accounting. Upon graduating in fall 1991, Daniel had 
amassed over $15,000 in credit card debt. As a Certified Public 
Accountant (CPA), Daniel expected that he would be able to quickly 
payoff these high interest consumer debts. To his shock, however, the 
1989 recession severely affected his employment prospects. Daniel spent 
the summer interviewing for jobs as an accountant and paid his living 
expenses with his credit cards. Although no longer a student but still 
looking for his first job, Daniel's credit card debts were approaching 
$20,000 when he took a ``temporary'' position as a security guard. 
Daniel was stunned that his first annual salary of approximately 
$15,000 was less than his total credit card debt
    Even when a ``good job'' did not materialize, Daniel did not 
perceive his credit card debt as a serious problem. He was certain that 
it was simply a matter of time before he became financially solvent. 
Undeterred by his escalating consumer debt, Daniel's full-time job and 
extensive credit history enabled him to obtain even more credit and 
``buy whatever I wanted. In stores, I would apply for instant credit 
cards and be set to buy in a few minutes.'' Unfortunately for Daniel, 
his temporary position lasted nearly two years. As he explains, 
``During this time, I was basically surviving off credit cards. They 
paid my rents, entertainment, gas, and shopping...'' In 1993, Daniel 
finally joined a Washington, D.C. firm as an accountant. As a CPA, his 
initial salary was over $50,000 and he believed that he could begin 
reducing his over $25,000 in credit card debt. However, Daniel's 
newfound professional success persuaded him to ignore his original goal 
of escaping credit dependence and he quickly accepted ``pre-approved'' 
offers for Chevy Chase Gold Visa, American Express, and Diner's Club 
cards. Emboldened by his new buying power, Daniel bought a condominium 
and furnished it with his credit cards. He rationalized the condominium 
as a good investment and, after all, the mortgage unlike his credit 
card debts is tax deductible. After a couple of salary increases, 
Daniel's rising standard of living soon included a new car and of 
course auto loan payments in 1994. Now Daniel felt like his hard work 
was being rewarded as a tax paying member of the American middle class.
    By 1996, even with an annual salary of nearly $60,000, Daniel's 
credit card debts exceeded $30,000--and rising. According to Daniel, 
``My paycheck could only pay my condo, car, and credit cards. Then I 
had to depend on the credit cards for gas, groceries or anything else I 
wanted to buy. No savings. [Over] a few months, I would make thousands 
of dollars in credit card payment and the debts were not going 
anywhere.'' Efforts to replace his high interest credit card debts with 
lower interest debt consolidation loans were time consuming and 
ultimately fruitless. Banks were reluctant to approve new consumer 
loans with such a high debt to income ratio. Reluctantly, Daniel 
believed that he had no other option but to file for personal 
bankruptcy. In early 1997, his Chapter 7 filing was approved by the 
D.C. bankruptcy court and all of his credit card debts were discharged.
    Today, Daniel is recovering from the personal pain of bankruptcy 
and thankful for the opportunity to rebuild his financial future. 
``Without it [bankruptcy], I would still be increasing my credit card 
debt and they [banks] would still be increasing my credit limits.  .  . 
instead of relying on cash [advances] from my credit cards I can now 
get cash from my savings account.'' Daniel still uses ``plastic'' but 
only for convenience and ``prestige.'' That is, to minimize suspicions 
about his past financial problems; he has a debit card and a `secured' 
Visa credit card. The credit line on his collateralized secured card 
has been raised twice and Daniel hopes that he will be approved soon 
for a retail credit card following two previous rejections. Although 
the days of ``easy credit'' are temporarily over, Daniel knows that it 
is only a matter of time before he is able to rejoin the ranks of the 
middle class with the full privileges of a Gold credit card.You know 
office politics.'' In sum, a review of Daniel's bankruptcy petition 
portrays a well-paid professional who appears to have been unable to 
control his consumption desires. In reality, however, about two-thirds 
of his credit card debt was accumulated during college and his initial 
job search. Hence, the roots of Daniel's financial insolvency were sown 
by his credit dependency as a university student and the unforeseen 
difficulty in obtaining a job in the aftermath of the 1989 recession.

       The Arrival of the `Magic of Plastic' in the Golden Years:
           patching the social safety-net of elderly survival

    Among America's senior citizens, the credit card industry has 
encountered the most formidable challenge to its promotion of easy 
credit.\4\ The debt abhorrent behavior of the parents and grandparents 
of America's Baby Boomers was profoundly shaped by their personal 
experiences during the Great Depression. Today, however, many seniors 
are confronting formidable economic realities that are challenging 
their longstanding attitudes toward ``easy'' consumer credit. The fact 
that the credit card industry began aggressively marketing its products 
to senior citizens in the late 1980s, including lucrative agreements 
with the American Association of Retired Persons (AARP), illuminates 
the intense resistance of these generations to the social shame of 
personal debt. Not surprisingly, according to the 1995 Survey of 
Consumer Finances, older Americans are the least likely to revolve debt 
on their credit cards. In answering `yes' to the question, ``Do You 
Almost Always Pay Off Your Credit Card Balance,'' the response by age 
of respondent is revealing: under 35 years old (40.2%), 35-44 (40.7%), 
45-54 (47.1 %), 55-64 (59.3%), 65-74 (72.0%), and 75 and older (85.8%). 
And yet, with stagnant retirement incomes and rising rent and medical 
costs, credit cards increasing are becoming the financial glue of the 
crumbling social safety-net of America's senior citizens. This sudden 
receptivity reflects both industry policies (reluctance to give 
conventional, low-interest ioans to retirees and aggressive credit card 
marketing campaigns) as well as the growing desperation and 
socialisolation of the elderly--especially widows. This trend is 
illustrated by 78 year old Jeannie May Lawson.
---------------------------------------------------------------------------
    \4\ For an extended discussion of credit card use among senior 
citizens, see Robert D. Manning, ``Aging Into Debt'' in Credit Card 
Nation (Basic Books: 2000).
---------------------------------------------------------------------------
    Jeannie May has worked hard, all of her life, to raise three 
children and generally to ``just get by.'' Divorced for over 40 years, 
she survives on asocial security check of $648 per month and part-time 
work in the ``old folks home'' where she lives in a small town in 
upstate Illinois; the rent for her subsidized, one-bedroom apartment is 
$196 per month. Unlike many of her generational peers, Lawson lacks an 
accumulated ``nest egg'' for retirement. Her low-income, blue-collar 
jobs did not offer a private pension and divorce deprived her of the 
opportunity for greater household savings. More importantly, the modest 
home that she and her husband purchased with a VA loan after The War, 
was sold years ago. This seemingly uneventful decision has had a major, 
unforeseen impact on Lawson's ``Golden Years.'' That is, home equity is 
the most important source of personal wealth for retirement, especially 
among working class families. Today, nearly four out of five (79.1 %) 
seniors over 64 years old are home owners and only 8 percent are still 
paying on their first mortgages while 28 percent have various home 
equity and second mortgages. Not surprisingly, home equity accounts for 
most assets of older adults.
    Jeannie May symbolizes the plight of America's working class 
elderly. Born in 1915, the United States was still a largely rural 
society--especially in the Midwest--when she was growing Lap in 
northern Illinois. The youngest of five children, her parents worked 
the small family farm that produced mostly corn, and some vegetables 
for the market as well as pigs, cows, and chickens primarily for 
household consumption. Money was scarce as the family, second-
generation immigrants from England, struggled to make ends meet in a 
local farm economy where credit was informally negotiated and debts 
were commonly satisfied through bartered exchanges. For example, the 
local dentist was frequently paid for his services ``in-kind'' with 
eggs, butter, and freshly dressed chickens while the school teacher 
received food and housing which was supplemented with a small monetary 
salary. This practice of non-monetary exchange was especially common 
during the 1930s when Lawson's most vivid memories concerning credit 
and debt were molded. ``Moneywas hard to come by in those days.  .  . 
many people were losing their farms and even their homes.  .  . it was 
tough times.''
    Jeannie May's rural life experiences, Calvinist religious 
upbringing, and recollections of the Great Depression profoundly shaped 
her attitudes toward personal debt. On the one hand, the economic 
rhythms of the seasonal farm economy required rural families to rely on 
credit for agricultural and household supplies during the planting and 
fallow seasons and then repay their debts after harvesting the corn or 
selling some livestock in the cash economy. Hence, even among yeoman 
farmers, credit and debt were ``natural'' features of their modest 
lifestyle. On the other hand, the local Protestant churches emphasized 
the Calvinist values of hard work and frugality as evidence of a 
virtuous life. This emphasis on savings as a ``sign'' of potential 
spiritual salvation contrasts sharply with the negative views toward 
leisure activities and personal consumption. Lawson remembers sermons 
in the little white church that chastised ``idle hands'' and indolent 
``material desires'' as moral sins that would lead to disastrous 
personal debt. Together with the painful experiences of the Great 
Depression, when friends and family members ``lost everything to the 
banks,'' Lawson entered her ``golden years'' with very conservative 
attitudes toward credit and debt.
    At 78 years old, Jeannie May still enjoys an active lifestyle that 
belies her age. Unlike her affluent brother, John, she was unable to 
translate the generational advantages of rising wages, inexpensive 
housing, and low educational costs into economic security in 
retirement. This is partially due to Jeannie May's divorce and 
inability to re-marry which forced her to assume the economic 
responsibility of raising her three children on a single income. 
Although national poverty rates among older adults at least 65 years 
old have been falling over the last two decades, from 15.7 percent in 
1980 to 10.8 percent in 1996, older women are nearly twice as likely as 
older men to live in poverty. Also, African American and Latino seniors 
are nearly three time as likely as Whites to live in poverty; Asian and 
Pacific Islander rates are nearly the same as Whites (9.7 versus 9.4%).
    For Lawson, her fragile financial circumstances mean that she can 
not enjoy a leisurely life in her final years; she would prefer to 
catch up on her ``patchin' [a quilt] or kniftin' [an Afghan]'' for a 
newborn nephew or niece. Instead, when her health permits (she has 
diabetes and high blood pressure), Jeannie May works 15 to 30 hours per 
week in the ``[retirement] home's'' kitchen as well as housework and 
errands for ``neighbors'' who are usually several years younger. 
Lawson's experience, of course, is not unusual. The U.S. Census Bureau 
reports that 8.6 percent of women and 17.1 percent of men over 64 years 
old are still ``officially'' employed in 1997, with projected increases 
in 2006 to 8.7 percent for senior women and 17.8 percent for senior 
men. Significantly, this rate for men has declined from 19.0 percent in 
1980 whereas it has risen from 8.1 percent for women. 15 Although 
Lawson occasionally receives small financial gifts from a son in 
Seattle, her older brother is the only source of economic assistance 
that she can depend on in case of an emergency. That is, until the day 
that she received that miraculous piece of plastic in the mail--her 
secret financial savior.
    Jeannie May does not recall the first VISA solicitation that 
arrived in late 1987. What she does remember is her excitement over the 
financial ``freedom'' that it offered. Afterall, as a struggling single 
mother, Lawson was always grateful for the higher standard of living 
that installment credit had provided for her and the children in the 
1940s and 1950s. TheVA home mortgage loan, used car loans from finance 
companies, corporate loans for appliances and furniture, store credit 
from local merchants for clothing, and a charge card for gasoline. 
Lawson confides that she rarely paid off the balance of her credit 
accounts at the end of the month and was often late with her payments. 
Although she accepts most of the responsibility as a poor ``budget 
keeper,'' she laments that her ex-husband's irregular child support 
increased her dependence on consumer credit by ``stretching'' her 
meager earnings.
    Unlike her past experience with proprietary credit cards (Sears, 
Montgomery Ward), the new ``universal'' VISA card offered herthe 
``magic'' of purchasing items nearly anywhere she wanted and whenever 
she wanted them: local merchants, mail order, and even over the 
telephone. More importantly, it enabled Lawson to the avoid the 
scrutiny of her financially secure brother (a successful dentist) and 
his condescend ing wife who frequently criticized Jeannie's lifestyle 
when ``helping'' with her financial crises. Hence, by avoiding such 
embarrassing financial assistance, Jeannie May did not have to confront 
the Calvinist guilt that would eventually erupt from her escalating 
mountain of consumer debt. This attitudinal denial was reinforced by 
the marketing strategies of the the credit card industry. As long as 
she ``paid her minimums [monthly credit card payments],'' Jeannie May 
convinced herself that she was satisfying her financial obligations and 
thus adhering to her generation's moral code of conduct.
    Unaware of the technological advances in mass marketing, Lawson was 
flattered by the personalized ``invitations'' for bank cards that 
arrived in her mailbox. Jeannie's limited education (she did not 
complete high school), low self-esteem (modest family background), 
meager income as a divorced, blue-collar worker (``scarred'' credit 
history), and respect of authority figures (bankers), made her 
especially susceptible to the marketing ploys that affirmed her self-
worth as a ``valued'' client. Even after violating her own Calvinist 
values and life experiences during the Great Depression, by. consuming 
more than she could afford, Jeannie willing accepted the banks' 
explanation that she was credit worthy and that she ``deserved'' to be 
``rewarded'' with a higher line of credit. After all, she did what she 
was told, at least for the first few years: promptly remit the minimum 
payment at the end of each month. As Lawson recounts,

``I never really looked at the credit card bills much. What was 
        important [to me] was what I had to pay at the end of the 
        month.  .  . I didn't really keep track of how much I owed. I 
        paid 'em what they wanted [minimum payment]. They were happy 
        and I was happy.''

    What is striking and especially disturbing about Jeannie May's 
experience is the ease of manipulating her to assume debt levels that 
she was incapable of financing much less eventually able to pay-off. 
Indeed, the predatory marketing strategies of the credit card companies 
are very effective in exploiting the low self-esteem and falling 
standard of living of America's senior citizens. As a divorcee who 
never remarried, for example, Jeannie May's material lifestyle had 
plunged below that of her brother and even her children--especially 
after her retirement. Although she accepted the Calvinist ethos of hard 
work and frugality, Lawson yearned for some of the indulgences that 
members of the middle class take for granted: vacation trips, new cars, 
household furniture, restaurant outings, gift-giving, and even 
chocolate candies. With few friends (most deceased or in nursing homes) 
and a disconnected extended family (children in Seattle, Milwaukee, New 
York), she began coping with her loneliness by embracing material 
rewards during her leisure time. In the process, Jeannie May sought to 
emulate the consumption privileges of many middle-class wives (such as 
her sister-in-law), whom balanced their husbands' economic success as 
``producers'' by being the primary household ``consumers.''16 It was 
through the magic of Jeannie May's piece(s) of plastic that she was 
able to finally enjoy a comfortable life that previously had been 
withheld from her.
    For Lawson and millions of elderly citizens, credit cards are 
serving increasingly important purposes during the current era of 
fragmented families and an increasingly fractured social-welfare 
system. Indeed, Jeannie May did not use her credit cards frivolously by 
middle class standards, at least at the beginning. The car needed 
repairs and new tires, her automobile insurance premiums were raised, 
her diabetes and high blood pressure medications were more costly, she 
replaced her reading glasses, and finally bought anew winter coat. 
Lawson's newfound purchasing power also unleased the ability to satisfy 
other ``wants'' that she felt had been unfairly denied. This led to 
such purchases as a sofa and dining room table for her apartment, a set 
of pots and pans for the kitchen, new clothes, knitting and sewing 
materials/supplies, restaurant dinners, and small gifts for family 
members during the holiday season.
    Although supermarkets did not initially accept credit cards, she 
charged groceries and household supplies at drug stores and even mail-
order steaks (delivered by dry ice) from Nebraska. Later, Lawson began 
making purchases over the telephone via the Home Shopping Network. 
Jeannie May described with irrepressible glee her anticipation of the 
UPS truck as it made its appointed deliveries of her eagerly awaited 
``surprises.'' For Lawson, the magic of plastic offered the opportunity 
to enjoy the consumer lifestyle promoted by mass advertising yet denied 
by Social Security.
    By the time Jeannie had maxed out her first credit card in late 
1988, about $3,000 in less than a year, she truly believed the banks' 
form letters that extolled her responsible credit history. In fact, she 
began to accept the ``pre-approved'' credit card solicitations that 
arrived in her mail box with the now familiar logos of VISA and 
MASTERCARD, as these were not just any banks that were ``callin' on 
her.'' Esteemed financial institutions such as Citibank, First Chicago, 
Continental Bank, and Chase Manhattan were actually vying for her 
business. According to Lawson, ``I figured if the banks keep on sending 
`em to me, then I figured I'd keep on usin' em.  .  . [Afterall] 
they're in the business of lending money. I. trusted 'em. I thought 
they knew what they were doing.'' And they did. Instead of eliciting a 
financial warning after reaching her credit card limit, Jeannie's 
``mature'' account status triggered a second and then a third card in 
1989 followed by a fourth credit card in early 1990. By 1991, Lawson 
had a huge credit card debt and was having difficulty ``making all my 
[minimum] payments.''
    Jeannie May really did not know how much debt she had accumulated 
(over $12,000) or even how bad her financial situation was at the time. 
What she did admit was that the infirmities of old age were finally 
catching up to her. ``I never thought of myself as one of the old folks 
[in the retirement home].  .  . I could get around on my own and even 
helped them with their own chores. With my car and job, my life really 
hadn't changed much [in retirement].  .  . I just didn't have to work 
as hard [at a full-time job].'' The reality, however, was that she 
could not live adequately on her Social Security income--even with 
participation in public programs for the elderly such as subsidized 
housing and medical care. As a result, it became increasingly difficult 
to budget her modest monthly income due to rising health-related 
expenses and an uncertain level of supplementary earnings. On the one 
hand, her high blood pressure and diabetes required more costly 
medicines--even with Medicaid assistance--which increased her need to 
work. On the other, her poor health meant that she could not work 
regularly at ``the home'' and thus could not rely on extra earnings to 
supplement her meager Social Security check. Although Jeannie's 
children remain in contact with her, they provide little financial 
help; occasionally they send money, but it amounts to only a ``couple a 
hundred dollars a year.'' Hence, with a limited family support system 
and America's shrinking social safety-net, Lawson's credit cards became 
her most reliable form of assistance against the unforeseen and 
debilitating exigencies of the aging process.
    it was primarily for economic reasons that Jeannie May ignored her 
doctor's advice to ``slow down'' and stubbornly continued to work part-
time. For Lawson, employment was crucial to maintaining her newfound 
independence. That is, work enabled her to shield the escalating credit 
card debt from outside scrutiny while continuing to enjoy her 
relatively comfortable lifestyle. Unfortunately, the combination of 
financial duress, failing health, and a long life of arduous manual 
labor finally culminated in a mild stroke at the end of 1991. Already 
stretched to her financial limit, the temporary end of her part-time 
job forced Jeannie May to finally confront the reality that she could 
no longer make the minimum payments on her credit cards. While 
convalescing at home, moreover, the tone of her credit card statements 
shifted radically--from friendly to concerned and then to threatening. 
It was at this time time that Lawson desperately sought help from the 
source of last resort: her brother. And, she knew that this decision 
would require a humiliating explanation as well as the end of her 
credit reliant lifestyle. For Jeannie, her Calvinist guilt and personal 
shame would soon be supplanted with the punishment of her previously 
spartan lifestyle.
    Lawson's brother, John, remembers the phone call that led to his 
dismay over the predicament of his sibling. John lived in a posh, 
northside suburb of Chicago and immediately made the three-hour drive 
to Jeannie's apartment. He had always been protective of his youngest 
sister and was surprised by her agitation over what he assumed was a 
relatively minor problem. Afterall, she was a frugal person and there 
were no obvious warning signals to indicate a sudden change in her 
lifestyle. In fact, John was unaware that Jeannie May had any bank 
cards. Upon reviewing her credit card charges, he found not one but 
four separate accounts. Furthermore, John was able to reconstruct her 
consumption patterns. What were normal and modest purchases for him 
were often unnecessary or too costly for Jeannie. Even so, John was 
impressed by the general pattern of essential charges: car repairs, 
gasoline, medicine, groceries, clothes, insurance, and other necessary 
household items.
    After compiling all of Lawson's outstanding credit card bills, John 
was shocked by what they revealed. In less than five years, Jeannie May 
had amassed over $12,000 in consumerdebt. Fear and shame had led her to 
ignore the cumulative outstanding balance while the marketing campaigns 
of the credit card industry continued to persuade Lawson that she was a 
``good'' customer. For Jeannie May, her elevation to a middle class 
standard of living proved to be a temporary respite. After paying the 
rent, Lawson's Social Security check barely covered the minimum 
payments of her credit card accounts. Clearly, if she ever was to 
regain economic self-sufficiency, Jeannie May had to escape from this 
financial albatross and return to her more modest lifestyle. With the 
help of John's lawyer, Jeannie May filed for personal bankruptcy and is 
no longer responsible for her past credit card debts. In addition, John 
purchased a small annuity that supplements Lawson's retirement income 
(about $200/month) for the rest of her life. Although a compassionate 
and foresightful act, John's recent death of a heart attack at age 87 
means that Jeannie May has lost her only dependable source of economic 
assistance. For her and increasing numbers of the impoverished elderly, 
the ability to secure a bank credit card is the most realistic strategy 
for obtaining a modicum of financial security in their later years. 
And, this is not an unlikely prospect in view of the intensifying 
competition by credit card companies over new accounts of revolvers.

                             Consumer Debt:
             individual versus institutional responsibility

    In conclusion, the economic expansion of the last decade was not as 
strong as described by leading economic indicators due to bank lending 
policies that promoted inflated consumer expectations through easy 
access to high cost consumer loans whose interest rates far exceed the 
pace of household income growth. Similarly, the economic indicators do 
not necessarily imply a consumer-led recession if the leading financial 
services conglomerates like Citigroup, Bank of America, and J.P. Morgan 
Chase do not overreact to the abrupt decline in national economic 
growth. The concern is that these financial services corporations may 
``tighten'' their lending policies for small businesses (primary 
generator of U.S. jobs) and heavily indebted families that previously 
were considered acceptable credit risks. This may not only limit future 
levels of business investment and household consumption--which would 
exacerbate the downward spiral in macro-economic growth--but it may 
also force tens of thousands of financially distressed households into 
personal bankruptcy due to unforeseen events. As the most comprehensive 
analysis of consumer bankruptcy in the early 1990s shows,\5\ most 
filings are attributed to unforeseen events (job loss, health/medical 
expenses, divorce) rather than excessive consumer spending patterns. 
Surprisingly, the consumer financial services industry has responded by 
reducing its ``fair share'' contributions to nonprofit consumer credit 
counseling organizations at the same time that the demand for these 
services is rapidly escalating. Like replacing small business loans 
with high interest credit cards, the question is whether the financial 
services industry is truly committed to reducing the national rate of 
consumer bankruptcies by supporting institutionally responsible 
policies that balance the often unrealistic consumption desires of 
American households.
---------------------------------------------------------------------------
    \5\ Teresa Sullivan, Elizabeth Warren, and Jay L. Westbrook, The 
Fragile Middle Class: Americans in Debt (Yale University Press, 2000).
---------------------------------------------------------------------------
    With the renewed efforts of the financial services industry to 
enact more stringent personal bankruptcy laws, bankers could exacerbate 
a national economic slowdown by forcing financially insolvent 
households to continue paying off a portion of their consumer debt--
years after filing for personal bankruptcy. This is certainly not a 
propitious time for enacting such a painful and often devastating 
policy on some of America's most vulnerable households. Indeed, 
legislative proposals tend to reflect an societal context of rapid 
economic growth rather than a sudden and unexpected economic slowdown. 
The U.S. economy needs greater stimulation through increased consumer 
demand rather than curtailing the future buying power of a large 
segment of the U.S. population.
    The industry's call for greater individual responsibility belies 
its disregard for its own traditional underwriting criteria. For 
example, grandparents with stellar past job histories are often 
rejected for credit cards while their grandchildren who have never had 
a full-time job are inundated with solicitations while in college. 
Similarly, recent colleges students may be rejected for credit cards 
after graduation when their entry-level salaries suggest an inability 
to service higher levels of debts. Indeed, a striking finding of my 
study of college student credit card debt is that recent graduates of 
the late 1980s and early 1990s were more likely to assume most of their 
credit card debtwhile seeking gainful employment than while enrolled in 
college. Today, college students routinely graduate with credit card 
debts of from $5,000 to $15,000 plus student loans before they enter 
the job market. With the specter of a tight job market in the near 
future and the continued corporate promotion of inflated consumer 
expectations, it can be expected that the bankruptcy rate of recent 
college graduates will continue to soarwith potentially disastrous 
long-term consequences. Indeed, the faster growing group of bankruptcy 
filers last year were individuals 25 years old or younger.
    Clearly, the recent assumption of tremendous levels of consumer 
debt--provided by financial services institutions that have routinely 
ignored their traditional underwriting criteria--requires 
accountability and financial responsibility from both sides: borrowers 
and lenders. Indeed, lending policies that routinely require the poor 
and heavily indebted to subsidize the low and even free cost of credit 
card loans to the affluent through escalating interest rates and 
penalty fees, does not reflect an appropriate policy of shared 
individual and institutional responsibility. In fact, increasing the 
financial obligations of filers to their creditors after bankruptcy 
would encourage banks to continue extending ``easy'' credit to those 
least able to assume their financial responsibilities during a period 
of economic uncertainty and distress. Banks and other financial 
services institutions should share the pain as well as the gain 
associated with the liberal extension high cost, consumer credit. 
Otherwise, consumer lending policies of financial services institutions 
may continue to discourage the promulgation of prudent and responsible 
underwriting policies. It is my hope that the final form of this 
legislation will promote personal responsibility as well as corporate 
accountability. Thank for you for this opportunity to present the 
implications of my research before the Committee prior to its 
deliberations on this legislation which will impact millions of 
vulnerable citizens.

                                   Robert D. Manning, Ph.D.
                  Institute for Higher Education Law and Governance
                                   University of Houston Law Center

    Senator Sessions. Mr. Dean Sheaffer is the Vice President 
and Director of Credit for Boscov's Department Stores, in 
Laureldale, Pennsylvania.
    Mr. Sheaffer?

STATEMENT OF DEAN SHEAFFER, VICE PRESIDENT, DIRECTOR OF CREDIT, 
   BOSCOV'S DEPARTMENT STORES, INC., LAURELDALE, PENNSYLVANIA

    Mr. Sheaffer. Thank you very much. Good morning. My name is 
Dean Sheaffer. I am Vice President and Director of Credit for 
Boscov's Department Stores. Boscov's is a family owned Mid-
Atlantic chain with stores in Maryland, New Jersey, two stores 
in Delaware, three stores in New York, and more than two dozen 
stores in our home State of Pennsylvania.
    I am testifying today on behalf of the National Retail 
Federation. I would like to thank the Chairman for providing me 
with the opportunity to testify before this distinguished 
committee.
    Between 1995 and 1999, national bankruptcy filings rose 
more than 60 percent. Last year, there were nearly 1.25 million 
bankruptcy filings. At Boscov's, we have significantly 
tightened our credit standards. Between 1996 and 2000, we 
closed, reduced the credit limit, or took other preemptive 
action on nearly 41,000 accounts, in direct response to 
increased bankruptcies.
    Despite these actions, Boscov's combined January and 
February 2001 bankruptcy write-off will be more than 40 percent 
higher than January and February of last year. Part of the 
problem is that higher-income people who do not really need 
Chapter 7 relief are using that chapter to wipe out all of 
their debts. These people are not on the margin.
    Our response, tightening credit, is a very blunt 
instrument. It does hurt the people who are at the margin--the 
young, the old, the low- to moderate-income. It limits their 
access to credit, but it does not get at the higher-income 
individuals who are filing bankruptcies of convenience.
    Mr. Chairman, I would like to put these numbers in 
perspective. If the current rate of filings holds, within the 
next decade one in every seven American households will have 
filed for bankruptcy. The system is seriously flawed. It is 
estimated that over $40 billion was written off in bankruptcy 
losses last year, which amounts to the discharge of at least 
$110 million every single day. This money does not simply 
disappear. Last year, to make up for these losses, it cost each 
of our households several hundred dollars. Estimates suggest 
this year's numbers will be 10 percent higher, and next year's 
filings yet another 20 percent higher.
    We cannot eliminate all of these losses. some of them are 
unavoidable. Bankruptcy must remain an option for those who 
have experienced serious financial setbacks, such as 
catastrophic accident, illness, divorce, or job loss, from 
which they cannot otherwise recover.
    Finally, most people who file for bankruptcy do need 
relief. We must be very careful to distinguish the average 
filer who uses the system properly from the smaller but 
significant group of others who misuse the system for their 
benefit.
    For many years, we tracked the payment history of those of 
our customers who use the Boscov's card. The vast majority of 
our customers pay as agreed. In the past, however, we could 
occasionally see a customer who might fall behind a few months, 
make payments to catch up, fall behind again, attempt to 
recover, and so forth. We monitored these accounts and 
intervened as necessary, perhaps by suggesting consumer credit 
counseling or by limiting their credit to minimize the damage.
    Today, however, we see a very different picture. Often, the 
first indication we receive than an individual is experiencing 
financial difficulty is when we receive their notice of 
bankruptcy petition. In a 1998-99 study at Boscov's, almost 
half of the bankruptcy petitions we received were from 
customers who were not seriously delinquent at the time they 
made the decision to file bankruptcy. It appears that 
bankruptcy is increasingly becoming a first step rather than a 
last resort.
    Senator Biden. Could you repeat that again? I am sorry. I 
am not sure I understood what you just said about those who 
filed were not seriously----
    Mr. Sheaffer. When they made the decision to file 
bankruptcy, their account at Boscov's was not seriously 
delinquent.
    Senator Feinstein. Was not seriously----
    Senator Biden. Delinquent.
    Mr. Sheaffer. Delinquent, past due.
    Senator Biden. In other words, they were not in trouble yet 
at Boscov's.
    Mr. Sheaffer. Right.
    In today's law, individuals have a choice as to whether to 
file in Chapter 7, which generally wipes out all their 
unsecured debts, or to file in Chapter 13. Instead of wiping 
out everything, a Chapter 13 filer attempts to pay as much as 
her or she can afford and then the court discharges the rest.
    Not surprisingly, most people file in Chapter 7, but many 
people who are filing in Chapter 7 do have the ability to pay 
some or all of what they owe. I understand that various studies 
have pegged this number at anywhere from 30,000 filers per year 
to nearly a quarter of a million.
    Why are so many persons asking the court to make others pay 
for their debts? Part of it is lawyer advertising. We have all 
seen the ads on TV by lawyers promising to make individual's 
debts disappear. Some do not even mention bankruptcy; they talk 
about restructuring of finances. I question whether these 
aggressive advertisers inform their clients about the serious 
downsides of filing bankruptcy. I also believe part of the 
problem is the declining social stigma associated with filing 
for bankruptcy.
    Finally, these changes have revealed a flaw in the system 
itself. Our Bankruptcy Code allows individuals to choose the 
chapter they wish to file in, regardless of need. If shame will 
not keep the subgroup of filers who could pay from either 
filing or from filing on the wrong chapter, Congress must 
establish a mechanism that will, and that is simple, fair and 
efficient.
    In 1998, we strongly supported the bill introduced by Mr. 
Gekas and Mr. Moran, H.R. 3150. It provided a very simple, up-
front, needs-based formula that allowed the overwhelming 
majority of those who needed bankruptcy relief in Chapter 7 to 
have it. But for that subgroup of filers, for those higher-
income individuals who would abuse Chapter 7, the needs-based 
test would have said no, pay what you can afford, then society 
will wipe out the rest.
    Last year, we supported the conference report that passed 
both the Senate and the House, but died while Congress was out 
of session. We continue to support both S. 220 and H.R. 333, 
which are identical to last year's conference report. However, 
we are deeply concerned that if these heavily negotiated bills 
are further watered down, the intended benefits are lost.
    We are also deeply concerned that some wish to attach 
amendments regarding essentially unrelated issues. While these 
issues may be important, they should stand on their own merit. 
In the context of bankruptcy, their primary effect is to derail 
the critical, needed changes to bankruptcy law.
    In closing, I want to say that we offer credit to help our 
customers purchase merchandise. In fiscal year 2000, we 
received thousands of bankruptcy petitions amounting to $3.5 
million. For a retailer our size, that cannot continue.
    On behalf of the National Retail Federation, we urge 
Members of Congress to swiftly pass legislation to address the 
problems confronting the Nation's bankruptcy system in the form 
of S. 220 without amendment. If we are not careful, the costs 
of the rising tide of discretionary filings may tax society's 
compassion for those in genuine need. We must not allow that to 
happen.
    Thank you very much.
    Chairman Hatch. Thank you.
    [The prepared statement of Mr. Sheaffer follows:]

    Statement of Dean Sheaffer, Vice President, Director of Credit, 
       Boscov's Department Stores, Inc., Laureldale, Pennsylvania

    Good Morning. My name is Dean Sheaffer. I am Vice President and 
Director of Credit for Boscov's Department Stores and Chairman of the 
Pennsylvania Retailers' Association. Boscov's is primarily a Mid 
Atlantic department store chain. In addition to Maryland and New 
Jersey, we have 2 stores in Delaware, 3 stores in New York, and more 
than two dozen stores in our home state of Pennsylvania. I am 
testifying today on behalf of the National Retail Federation. I would 
like to thank the Chairman for providing me with the opportunity to 
testify before this distinguished committee.
    The National Retail Federation (NRF) is the world's largest retail 
trade association with membership that comprises all retail formats and 
channels of distribution including department, specialty, discount, 
catalogue, Internet and independent stores. NRF members represent an 
industry that encompasses more than 1.4 million U.S. retail 
establishments, employs more than 20 million people--about 1 in 5 
American workers--and registered 2000 sale (2000 sales of $3.1 
trillion. NRF's members and the consumers to whom they sell are greatly 
affected by the recent surge in consumer bankruptcies.
    Bankruptcies are still out of control. Between 1995 and 1999, 
national filings rose more than sixty percent (60%). In Pennsylvania 
where we are based, Chapter 7 bankruptcies grew by 90 percent in that 
same time period. Nationally, filings continue to exceed the one 
million filing record set in 1996. Last year there were nearly 1\1/4\ 
million bankruptcy filings, the overwhelming majority of which (more 
than 95 percent) were consumer filings. and the latest trends are up 
dramatically.
    At Boscov's, we have--credit. Between 1996 and 2000 we closed or 
reduced the credit limit or took other pre-emptive action on almost 
41,000 accounts in direct response to increased bankruptcies. Many of 
those people would have been good customers, but we had to restrict 
their access to credit because that is the only tool at our disposal. 
We did not want to do it. And yet despite these hesitations, if the 
current trend continued, Boscov's combined January and February 2001 
bankruptcy write off will be more than 40% higher than January and 
February of last year.
    Part of the problem is that higher income people, who do not really 
need Chapter 7 relief, are using that chapter to wipe out their debts 
regardless. These are not people at the margin. This is plain misuse. 
Tightening credit is a very blunt instrument. It hurts people at the 
margin-it limits their access to credit--but it does not get at the 
higher income individuals who are filing bankruptcies of convenience. 
That is why we need this legislation, to target bankruptcy misuse.
    Mr. Chairman, I would like to put these numbers in perspective. 
Bankruptcy filings are more than triple now than they were during the 
much worse economic conditions that existed in the 1980's. If the 
current rate of filings holds within the next decade, 1 in every 7 
American households will have filed for bankruptcy. The system is 
seriously flawed.
    It is estimated that over $40 billion was written off in bankruptcy 
losses last year, which amounts to the discharge of at least $110 
million every day. This money does not simply disappear. The cost of 
these losses and unpaid debts are borne by everyone else. When an 
individual declares bankruptcy rather than pay the $300 they may owe to 
Boscov's, or the thousand dollars they may owe in state taxes or other 
bills, they force the rest of us to pick up their expenses. Everyone 
else's taxes are higher, everyone else's credit is tighter, and 
everyone else pays more for merchandise as a result of those who choose 
to walk away. The nation's 100 million households ultimately pay that 
$40 to $50 billion. Last year, to make up for these losses, it cost 
each of our households several hundred dollars. Estimates suggest this 
year's number will be 10% higher and next years filings another 20% 
higher. If these bear out, bankruptcy will truly be out of control.
    Now I want to be clear. We cannot eliminate all of these losses. 
Some of them are unavoidable. Bankruptcy must remain an option for 
those who have experienced serious financial setbacks and who have no 
other means of recovering. The bankruptcy system exists to help those 
who have suffered a catastrophic accident, illness, or divorce, or 
those who have experienced the loss of a business or job from which 
they cannot otherwise recover. It is both the safety net and the last 
resort for people in trouble. The knowledge that the bankruptcy system 
exists to catch them in a financial fall, even though it might never be 
used, is important. Finally, most people who file for bankruptcy need 
relief. We must be very careful to distinguish the average filer, who 
uses the system properly, from that smaller, but important group of 
others who misuse the system for their benefit.
    It is this trend which we must be concerned. We believe changing 
consumer attitudes regarding personal responsibility and inherent flaws 
in our bankruptcy process have caused many individuals, who do not need 
full bankruptcy relief, to turn to the system regardless. They use it 
to wipe out their debts, without ever making a serious effort to pay. 
Some of this change in usage results from a decline in the stigma 
traditionally associated with filing for bankruptcy. Some of it results 
from suggestions by other who urge individuals to use bankruptcy to 
``beat the system.'' Whatever the cause, it must be stopped.
    My experience at Boscov's, and that of credit managers at other 
stores with whom I have spoken, convinces me of this fact. For example, 
for many years we tracked the payment history of those of our customers 
who carry and use the Boscov's card. The vast majority of our customers 
pay as agreed. In the past, however, we would occasionally see 
customers whose payment patters were more erratic. They might fall 
behind by a few months, make payments to catch up, fall behind again, 
attempt to recover, and so forth. This kind of payment history 
suggested to us that the customer was experiencing some sort of 
financial difficulty. We would monitor the account and intervene as 
necessary, perhaps by suggesting consumer credit counseling or by 
limiting their credit line to minimize the amount of damage, prior to 
their experiencing a financial failure.
    Today, however, we see a very different picture. Often the first 
indication we receive that an individual is experiencing financial 
difficulty is when we receive notice of his bankruptcy petition. In a 
1998/1999 study at Boscov's, almost half of the bankruptcy petitions we 
receive were from customers who are not seriously delinquent with their 
accounts. The first indication of a problem is the notice that they 
have filed for bankruptcy. It appears that bankruptcy is increasingly 
becoming a first step rather than a last resort.
    Individuals must have a good credit history to qualify for and 
continue to use a Boscov's card. Yet we, and other retail credit 
grantors, have been receiving bankruptcy filings without warning from 
individuals who have been solid customers for years. We all experience 
temporary financial reversals in life. Most of us learn that, if you 
grit your teeth and tighten your belt a notch, you can get through it. 
But many people no longer see it that way. The rising bankruptcy filing 
reflect this. Professor Michael Staten at Georgetown University 
analyzed thousands of Chapter 7 petitions in courts all over the 
country. His review of debtors' own financial statements gives a strong 
indication of what is going wrong.
    Individuals have a choice as to whether to file in Chapter 7, which 
generally wipes out all their unsecured debts, or to file in Chapter 
13, often known as a wage-earner plan. Instead of wiping out 
everything, a Chapter 13 filer attempts to pay as much as he or she can 
afford and the court discharges the rest. Not surprisingly, most people 
choose to file in Chapter 7.
    But many people who are filing in Chapter 7 do have the ability to 
pay some or all of what they owe. I understand that various studies 
have pegged this number as being anywhere from 30,000 filers per year 
to eight time that number. Whatever the figure, we should not treat 
bankruptcy as a ``get out of debt free'' card that can be used by tens 
of thousands of filers every month, with virtually no questions asked.
    Why are so many persons asking the court to make others pay their 
debts for them? Why aren't they ashamed to go into bankruptcy court? We 
think that there are a number of factors.
    Part of it is lawyer advertising. We have all seen the ads on TV by 
lawyers promising to make individuals' debts disappear. Some do not 
even mention bankruptcy--they talk about ``restructuring'' you 
finances. I question whether these aggressive advertisers inform their 
clients about the serious downsides of filing for bankruptcy. There are 
also bankruptcy petition preparers: clerk typists who simply fill out 
forms for filers. The client may never meet a lawyer. And with the 
widespread use of the Internet, websites that proclaim ``File 
bankruptcy for as little as $99'' are multiplying. I firmly believe 
these low costs ``bankruptcy mills'' are part of the problem.
    I also believe that part of the problem is the declining social 
stigma associated with filing for bankruptcy. At a time when 1 in every 
80 households files for bankruptcy, everyone knows someone, or knows of 
someone, who has recently declared. Many of these individuals keep 
their house and their car. They seem to have access to credit (although 
in many cases whet they actually line''). And their friends and 
neighbors, not seeing the details of their life that bankruptcy 
disrupts, assume that bankruptcy is not the devastating situation they 
always thought. There have also been a number of high profile celebrity 
bankruptcies in recent years. I cannot help but think that this sends a 
message tot he public that the stigma of bankruptcy is fast 
disappearing.
    Finally, these changes have revealed a flaw in the system itself. 
Out bankruptcy code allows individuals to choose the chapter they wish 
to file in, regardless of need. If shame will not keep the subgroup of 
filers who could pay from either filing, or from filing in the wrong 
chapter, Congress needs to establish a mechanism that will. It must be 
simple, fair and efficient.
    In 1998, we strongly supported the bill introduced by Mr. Gekas and 
Mr. Moran, H.R. 3150. It provided a very simple, up front needs-based 
formula that allowed the overwhelming majority of those who needed 
bankruptcy relief in Chapter 7 to have it with virtually no questions 
asked. But for that subgroup of filers, for those higher income 
individuals who would use Chapter 7 to push their debts onto other 
regardless of the filer's ability to pay, the up front, needs-based 
test would have said, ``No. Pay what you can afford, and society will 
wipe out the rest.'' Last year we supported the conference report that 
passed both the Senate and House, but died while Congress was out of 
session. We continue to support the both S. 220 and H.R. 333 which are 
identical to last years' conference report. However, we are deeply 
concerned that if these heavily negotiated bills are further ``watered 
down'' the intended benefits will be lost. We are also deeply concerned 
that some wish to attach amendments regarding essentially unrelated 
issues. While these issues may bear important, they should stand on 
their own merit. In the context of bankruptcy their primary effect is 
to derail the critical, needed changes to Bankruptcy law.
    In closing, I want to say that we offer credit to help our 
customers purchase our merchandise. Out typical retail balances are not 
large, but we have lots of customers. In fiscal year 2000 we received 
thousands of bankruptcy petitions amounting to 3\1/2\ million dollars. 
For a retailer of our size, that cannot continue. On behalf of the 
National Retail Federation, we urge members of Congress to take swift 
legislative action to address the problems confronting the nation's 
bankruptcy system. Otherwise, in the not too distant future, we may 
find that among a large segment of our society, bankruptcy filings will 
become the rule rather than the exception. If we are not careful, the 
costs of the rising tide of discretionary filings may tax society's 
compassion for those in genuine need. We must not allow that to happen. 
I believe that it is imperative for Congress to pass common sense 
bankruptcy reform legislation in the form of S. 220 without amendment, 
now.

    Chairman Hatch. Ms. Vullo?

  STATEMENT OF MARIA T. VULLO, PARTNER, PAUL, WEISS, RIFKIND, 
            WHARTON AND GARRISON, NEW YORK, NEW YORK

    Ms. Vullo. Thank you, Mr. Chairman and Senator Leahy and 
Senator Schumer, for inviting me to appear before this 
committee today. My name is Maria Vullo and I am a partner with 
the law firm of Paul, Weiss, Rifkind, Wharton and Garrison. I 
was the lead counsel for the plaintiffs in the case in 
Portland, Oregon, in which a jury rendered a $100 million 
verdict against anti-choice extremists who had threatened my 
clients' lives.
    I am here in support of the Schumer-Leahy amendment to the 
Bankruptcy Code which would make violence and threats of 
violence against family planning clinics non-dischargeable in 
bankruptcy. This amendment is needed to prevent further abuse 
of the bankruptcy system.
    Senator Sessions mentioned before Mobile, Alabama, and 
Pensacola, Florida, on a different issue. But what is 
significant, in my view, about those two locations is that an 
abortion doctor was killed in Mobile, Alabama, and two were 
killed in Pensacola, Florida, in 1993 and 1994. Those who 
perpetuate that type of violence and who threaten similar 
violence should not have the benefit of this Nation's 
bankruptcy laws.
    I speak to this issue from extensive personal experience as 
a lawyer involved in litigating this precise issue for more 
than a year. Although I certainly do not seek out this honor, I 
suspect I might be the legal expert on the current willful and 
malicious injury exception to discharge under the current 
Bankruptcy Code, and why the existence of that exception simply 
is not a sufficient answer to the problem that the Leahy-
Schumer amendment seeks to remedy.
    I have litigated this issue in six different bankruptcy 
courts resulting from the judgment that my clients obtained in 
Portland, Oregon, in February 1999. I filed that case on behalf 
of those clients in October 1995. After 3 1/2 years of delays 
and other tactics, the jury, in February 1999, awarded over 
$100 million in damages under the FACE statute which Congress 
passed and the President enacted in 1994.
    My clients were two reproductive health care clinics and 
four individual physicians. They have faced constant attack by 
anti-choice extremists who have threatened their lives and who 
believe that they are not required to follow the laws of this 
country. As a result, my clients had to spend hundreds of 
thousands of dollars for security devices to protect themselves 
from violent attack. That included bullet-proof vests, bullet-
proof windows, wigs, disguises, and motion detection devices at 
their homes.
    The jury's damage award included full compensation for 
those out-of-pocket losses, as well as significant punitive 
damages to deter future violations. However, my clients have 
not collected a single cent of that award, and the tactics 
continued after trial by an abuse of the bankruptcy system.
    There were 12 individual defendants in the case, and 6 of 
them filed for bankruptcy after the verdict in 6 different 
places across the country. I have litigated in Baltimore, 
Maryland; Greenbelt, Maryland; Norfolk, Virginia; Jackson, 
Mississippi; Chattanooga, Tennessee. The last one is escaping 
me at the moment, but I have litigated in six different 
bankruptcy courts the exact same issue that I tried in a jury 
trial that lasted a month and that I tried after 3\1/2\ years 
of pre-trial proceedings in that court.
    The proposed amendment, in my view, would do a lot to 
prevent further abuse of the Bankruptcy Code. Unfortunately, 
the current Code, however, allowed the defendants the 
opportunity to abuse the system. The actions of these 
defendants are totally inconsistent with the objectives of the 
Bankruptcy Code to give honest debtors a fresh start.
    There was no question in my case that every one of the 
defendants who filed for bankruptcy did so precisely to avoid 
my clients' collection efforts. Five of them filed on the eve 
of their depositions. One of them filed on the day of his 
deposition, and he is Michael Bray, who has also served time in 
Federal prison for bombing abortion clinics, seven of them.
    These defendants have vowed never to pay any award obtained 
by an abortion provider. They claim not to be subject to the 
laws of this Nation. Unlike the honest debtor whom the 
Bankruptcy Code is intended to protect, these defendants never 
sought to work out a payment plan to pay any part of the 
judgment. They simply sought a discharge in bankruptcy so that 
the jury's verdict would be a complete nullity and they would 
be able to thumb their noses at the system. This is an abuse of 
the bankruptcy laws.
    I litigated it in six different bankruptcy courts. 
Fortunately, I have been successful. We have won in four of 
those bankruptcy courts on the dischargeability question, on 
the willful and malicious injury concept. We have won that, 
however, over a year of litigation, where I had to relitigate 
and relitigate over and over again the exact same issues that 
were tried in the Oregon case. This is standing the doctrines 
of res judicata and collateral estoppel on their heads.
    My firm did all of this for free. We volunteered our time, 
over 3,000 lawyer hours, just in these bankruptcy cases over 
the course of a year, not to mention the out-of-pocket 
expenses. However, it is unfortunate that few private lawyers 
would be willing to undertake this task, and my clients, who 
are individual physicians, cannot do this themselves. It simply 
costs too much.
    I expect that critics of the amendment will ask why it is 
needed, given that I have won in four of the bankruptcy cases. 
To this, I have two brief responses. First, an amendment that 
will make clear what the law already provides should not be 
controversial.
    Secondly, the amendment is needed so that people will not 
be able to abuse the Bankruptcy Code again by invoking the 
automatic stay, by causing the relitigation and relitigation 
over and over again. This is sanctionable conduct and it should 
not be permitted to happen again.
    The FACE statute was passed overwhelmingly by Congress in 
1994 to protect women and their physicians from violence and 
intimidation. The statute has been effective in reducing clinic 
violence. My clients have further protection because of that 
statute, and the judgment and the injunction that they obtained 
under the FACE statute has gone a long way to ensure their 
personal safety.
    The Senate passed the Schumer-Leahy amendment just last 
year with 80 votes in favor of its passage. My personal 
experience both before and since that vote only confirms that 
the Senate was absolutely correct then in voting in favor of 
this amendment and it should do so again now. Those who commit 
acts of violence should not be permitted to perpetuate their 
illegal conduct by abusing the bankruptcy system.
    Abortion clinic bombers should not be able to even argue 
the willful and malicious injury issue. Like those convicted of 
driving while intoxicated or failure to pay child support, 
sound public policy compels that those who commit violence 
against abortion clinics must be held accountable without 
recourse to bankruptcy. The amendment will also reinforce the 
utmost importance of protecting women's reproductive health.
    I ask that my full written statement be made a part of the 
record, and I thank you, Mr. Chairman.
    Chairman Hatch. Without objection, we will put it in the 
record.
    [The prepared statement of Ms. Vullo follows:]

    Statement of Maria T. Vullo, Paul, Weiss, Rifkind, Wharton and 
                      Garrison, New York, New York

    I appear before this Committee today because of my involvement in 
opposing the efforts by extremists to abuse the bankruptcy process and 
avoid paying judgments obtained under the Freedom of Access to Clinic 
Entrances Act (FACE). I was lead counsel for the plaintiffs in Planned 
Parenthood of the Columbia/Willamettee, Inc., et al. v. American 
Coalition of Life Activists, et al., No. 95-1671-JO (D. Or.), a case in 
which a Portland, Oregon jury, on February 2, 1999, awarded $109 
million against the defendants for their illegal treats against the 
plaintiffs' lives. The jury's verdict was rendered under FACE and the 
Racketeer Influenced and Corrupt Organizations Act (RICO), and included 
compensatory damages for plaintiffs' out-of-pocket security expenses 
plus punitive damages and treble RICO damages.
    After the verdict, the federal district judge, the Hon. Robert E. 
Jones, issued an injunction to prevent further threats threats against 
the plaintiffs and the judge included findings of fact to support that 
injunction. Among other findings, the trial judge found as follows:
I conclude from my independent review of the evidence produced at trial 
        that plaintiffs have proven by clear and convincing evidence 
        that each defendant, acting independently and as a co-
        conspirator, prepared, published and disseminated the ``Deadly 
        Dozen'' Poster, the Poster of Dr. Robert Crist and the 
        ``nuremberg Files'' with specific intent and malice in a 
        blatant and illegal communication of true threats to kill, 
        assault or do bodily harm to each of the plaintiffs with the 
        specific intent to interfere with or intimidate the plaintiffs 
        from engaging in legal medical practices and procedures.
                        41 F. Supp. 2d at 1154.
    At a one-month trail, the jury and the judge found that three 
separate items constituted illegal threats under the Face statute and 
extortion under RICO. Briefly, defendants threats consisted of 
``wanted'' style posters that followed a pattern of similar posters 
targeting three physicians--Drs. David Gunn, George Patterson and John 
Bayard Britton--who were murdered following the distribution of the 
``wanted'' posters naming them. These ``wanted'' poster threats are 
addressed in the legislative history of the FACE statute.
    The RICO enterprise, and the organization through which the 
defendants issued their illegal threats, was called the American 
Coalition of Life Activists (ACLA), an organization that required its 
leaders to be ``judgment proof.'' Following the enactment of FACE, in 
January 1995, ACLA released the first threat involved in the Oregon 
case, which was called the ``Deadly Dozen List.'' The Deadly Dozen List 
issued by ACLA contained the names and home addresses of thirteen 
physicians from around the nation--three of whom were plaintiffs in the 
Oregon suit. Immediately after the issuance of this threat, the FBI and 
the United States Marshal's Service contacted the physicians on the 
List, informing them that they should consider this a serious threat to 
their lives, advising them to take security measures, and offering them 
24-hour federal marshal protection.
    At an event later that year in August 1995 held in St. Louis, 
Missouri, the defendants issued their second direct threat, again under 
the ACLA name. This ``wanted'' style poster targeted another of our 
physician clients and included his photograph and other personal 
identifying information. Again, the doctor named on this ``wanted'' 
poster was contacted by law enforcement and undertook significant 
precautions to ensure his and his family's personal safety.
    The third threat involved in the Oregon case was called the 
``Nuremberg Files.'' After unveiling these Files in hardcopy form at an 
ACLA conference held in January 1996, ACLA arranged for this material 
to be posted on the Internet. Amidst images of dripping blood, the 
``Nuremberg Files'' website contained the names and addresses of 
doctors and other health care workers around the country who provide 
reproductive health services, some including their children's names. 
Doctors who are still working appear in plain text; those who have been 
wounded are ``greyed out''; and those who have been murdered--have a 
line crossing out their names. After learning of this website, the FBI 
again contacted the named physicians and advised them accordingly.
    As the jury learned during the course of trial, my clients no 
longer enjoy the basic freedoms that most of us take for granted. 
Although they are medical professionals who live and work in relatively 
safe communities around the country, they have been forced to live as 
if under constant threat of imminent attack: they have purchased and 
regularly wear bullet-proof 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 teaches of 
the threats by defendants; they have developed emergency plans should 
they come under attack, Including instructing a young child to hide in 
the bathtub should he hear gundshots; 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; and they are ever-vigilant in 
public. They are not secure in their homes or in their offices. They do 
not sit by windows in restaurants. And they even refrain from hugging 
their children in front of open windows.
    The passage of FACE has had a significant impact on the lives and 
safety of reproductive health care workers. But FACE and other statutes 
that are intended to combat violence of all forms will not be fully 
enforceable if those who are found liable for clear violations of the 
law are able to evade their obligations by filing for bankruptcy and 
avoiding the consequences of their illegal actions. The proposed 
amendment to the Bankruptcy Code is one important way to ensure that 
FACE is not rendered a nullity because of defendants' continued efforts 
to violate the law.
    I have been extensively involved in litigating the very issue 
before this Committee in six different bankruptcy courts across the 
country. Following the jury's verdict in February 1999, my firm faced 
the important task of enforcing the judgment that our clients had 
obtained after years of litigation and a month-long trial. Following 
the jury's verdict, several of the defendants announced that they did 
not intend to pay any of the amount awarded by the jury. For example, 
defendant Timothy Dreste--from St. Louis, Missour--announced to the 
press that he would not pay any part of the judgment against him. He 
stated: ``I have no means of paying it, and even if I did, I would 
never pay it.'' Later that year, Dreste pleaded the Fifth Amendment to 
every question regarding his assets during this judgment enforcement 
deposition.
    These statements are consistent with defendant's own Constitution, 
which specifically required the organization's leaders to be judgment 
proof. At page 4 of the document, under the heading ``Doctrine and 
Character,'' the ACLA Constitution states that members of the 
organization ``must. . .have their assets protected form [sic] possible 
civil lawsuits (judgment-proof).'' Thus, the members of ACLA, including 
the defendants in our lawsuit, intentionally have made themselves 
judgment proof precisely to avoid having to pay any part of the 
judgment that my clients obtained. These are not honest but 
disfortunate debtors who find themselves in dire financial straits 
through acts beyond their control. They are not the individuals that 
the Bankruptcy Code was enacted to protect.
    Defendant Michael Bray--who served time in federal prison for 
multiple clinic arson attacks--was one of the six defendants to seek 
bankruptcy protection following the jury's verdict in the Oregon case. 
Bray responded to the Judge's injunction by saying, ``I have no plans 
to submit to those kinds of unconstitutional edicts.'' Bray also stated 
that ``there's no money to be had'' and that he has no intention of 
changing his behavior although, he said, ``I may have to get creative 
about it, though.'' In a newsletter written by Bray after he filed for 
bankruptcy in December 1999, Bray discussed the deposition for which he 
never appeared and noted with respect to the Court's discovery orders 
requiring the production of documents, ``I am good with matches.'' Bray 
sought relief in bankruptcy court--and I submit he, too, has abused the 
Bankruptcy Code well beyond Congressional intent.
    Despite the jury's verdict, and the District Court's explicit 
findings of specific intent and malice, the defendants expected to 
obtain a ``discharge'' in bankruptcy--and thus not pay a single cent to 
the plaintiffs in satisfaction of the judgment. After months of trying 
of trying to obtain discovery of their assets, and after both the 
District Court and the Ninth Circuit denied defendants' motions for a 
stay of the judgment and injunction pending appeal, six defendants 
filed for chapter 7 bankruptcy in six different bankruptcy courts. 
These filings, themselves, were a mockery to the bankruptcy laws and 
the FACE statute. Fortunately, their efforts have been in vain, as we 
have won the dischargeability question thus far in four of the 
bankruptcy cases. But the process of litigating and relitigating the 
same issues in each of the bankruptcy courts demonstrates precisely why 
the proposed amendment is necessary.
    In the two years since the jury's verdict, my firm has committed 
enormous resources to enforcing the judgment, including by representing 
the plaintiffs in the six different bankruptcy courts. With the 
District Court entering discovery orders requiring full disclosure of 
their assets on risk of sanctions, six defendants filed for bankruptcy 
in different venues, precisely to trigger the automatic stay of the 
Bankruptcy Code and thus put a hold on our collection efforts. Five of 
these six defendants filed for bankruptcy on the very eve of his 
scheduled deposition, with one (Michael Bray) filing on the day of the 
deposition itself. In connection with these bankruptcy proceedings, the 
defendants' lawyers have taken the position that the jury's verdict is 
fully dischargeable in bankruptcy, despite the ``willful and malicious 
injury'' exception to discharge that currently exists in the bankruptcy 
Code. These filings, and the litigation we have endured, demonstrate 
the utmost importance of the proposed amendment to the U.S. Bankruptcy 
Code.
    Donald Treshman was the first defendant to file for bankruptcy, and 
he did so on November 2, 1999, just two days before his ordered 
deposition. Treshman had previously filed for bankruptcy in Texas in 
1995, after another Planned Parenthood clinic obtained a judgment 
against him following a full trial and after Treshman transferred his 
house to an acquaintance. Treshman's earlier bankruptcy petition was 
dismissed when he abruptly moved to Maryland. This time, Treshman filed 
for bankruptcy on the heels of a series of rulings by the District 
Court in Oregon requiring full disclosure of his assets and compliance 
with the Court's injunction.
    Three additional defendants filed for bankruptcy in the same week 
in December 1999 on the heels of court orders requiring full financial 
disclosure. Charles Wysong filed in the Eastern District of Tennessee 
(Chattanooga) on December 6, 1999; David Crane filed in the Eastern 
District of Virginia (Norfolk) on December 8, 1999; and Michael Bray 
filed in the District of Maryland (Greenbelt) on December 9, 1999. Each 
of these defendants was scheduled for a deposition that same week, but 
filed for bankruptcy to avoid that deposition and frustrate our 
legitimate collection efforts. Similarly, on January 18, 2000, right 
before his and his wife's depositions were to take place in Jackson, 
Mississippi, triggering the automatic stay. The last defendant to file 
for bankruptcy protection was Joseph Foreman, who filed in Roanoke, 
Virginia in February 2000 after we garnished his bank account but 
before we could collect on that garnishment in Virginia.
    Because the proposed amendment does not currently exist, the 
defendants were able to invoke the protection of the automatic stay of 
the Bankruptcy Code, and force litigation and relitigation of the 
``willful and malicious injury'' issue in the various bankruptcy courts 
across the country. This has been a lengthy and expensive process, 
involving a separate trustee and a separate judge in each case--each of 
whom has had to familiarize himself with this case. Because these 
defendants live in different parts of the country, my law firm has had 
to proceed against them in six different bankruptcy courts. In each 
case, we have had to commence an adversary proceeding in bankruptcy, 
file motions for summary judgment setting forth the prior proceedings 
and legal principles, and appear in those courts for multiple hearings. 
To date, my firm has expended over 3,200 attorney hours in litigating 
these bankruptcy proceedings, in addition to the time spent by local 
counsel in each jurisdiction and the substantial expense of filing 
fees, service fees, and travel around the country.
    Thus far--after extensive litigation and considerable expense--we 
have won the ``willful and malicious injury'' issue in four of the 
bankruptcy courts. Despite these victories, enactment of the proposed 
amendment to the Bankruptcy courts. Despite these victories, enactment 
of the proposed amendment to the Bankruptcy Code is necessary because 
defendants should not have been given the opportunity to litigate the 
issue of their discharge in bankruptcy when they have clearly violated 
the FACE statute as intended by Congress. There is no doubt that these 
defendants did not seek relief from the bankruptcy courts as part of 
the good faith effort to work with plaintiffs on a payment plan for the 
judgment. Rather, defendants made it clear that they intended to seek a 
full ``discharge'' in bankruptcy and thus not pay one cent to their 
creditors. Without enactment of the proposed amendment, this type of 
abuse will continue.
    As this Committee knows, Section 523(a)(6) of the U.S. Bankruptcy 
Code currently provides for an exception to discharge for debts 
resulting from ``willful and malicious injury.'' As we have 
demonstrated to four of the bankruptcy courts thus far, the jury's 
findings of intention to intimidate and its punitive damages award, 
coupled with the trial judge's findings by clear and convincing 
evidence that the defendants acted with malice and with specific intent 
to threaten, satisfy the ``willful and malicious injury'' standard of 
the current Bankruptcy Code. We have argued successfully that those 
findings are entitled to collateral estopped effect, and that the 
defendants cannot relitigate those findings in Bankruptcy Court. 
although we have been victorious, defendants' filings constitute an 
abuse of the bankruptcy system that needs to be corrected--and which 
can be corrected in the future by an amendment tot he Bankruptcy Code. 
The fact that my case--with express findings going directly to the 
willful and malicious standard--still has required protracted 
litigation to determine again and again that these debts were 
nondischargeable underscores the important of the amendment. Not every 
FACE case will yield such explicit findings. Indeed, the specter of 
endless bankruptcy litigation in even the most straightforward cases 
will deter aggrieved physicians and other victims of abortion clinic 
violence from bringing FACE case will yield such explicit findings. 
Indeed, the specter of endless bankruptcy litigation in even the most 
straightforward cases will deter aggrieved physicians and other victims 
of abortion clinic violence from bringing FACE cases in the first 
instance.
    Thus, it is my considered position, based upon my personal 
experience litigating the current law of ``willful and malicious 
injury,'' that the Bankruptcy Code should be amended so that the 
bankruptcy process is not abused again as it has been abused by the six 
defendants in my case who filed for bankruptcy. Whatever one's position 
on abortion, we all can agree that anit-abortion extremists should not 
get away with their violence and threats of violence in violation of 
the FACE statute. My clients are entitled to compensation for their 
injuries--which include the purchase of bulletproof vests and other 
security devices. Defendants have continued to resist every effort to 
obtain satisfaction of any part of the money judgment--and they have 
abused the bankruptcy process as part of this improper effort.
    I am confident that no defendant in my case will ultimately obtain 
a discharge in bankruptcy for my clients' judgment. Nevertheless, we 
should not be in the position of relitigating the matter over and over 
again because the current Bankruptcy code contains a loophole that 
permits this type of abuse. While defendants relitagate the ``willful 
and malicious injury'' exception to discharge in six different 
bankruptcy courts, judicial resources are expended to address these 
issues six times and who knows how many appeals will follow. The 
evidence at trial was undisputed that, upon the release of defendants' 
threats, with the advice of law enforcement, my clients purchased 
bulletproof vests, installed extensive security systems at their homes 
and offices, and took other security precautions because of defendants' 
actions. The jury awarded my clients their security costs as 
compensatory damages, and also awarded punitive damages under FACE 
against each of the defendants to prevent and deter further illegal 
activities. Allowing these defendants to abuse the bankruptcy process 
to dalay enforcement of the judgment totally undermines the effective 
enforcement of the FACE statute and the true purposes of the Bankruptcy 
Code.
    The many months of litigation that I have endured in these 
bankruptcy courts confirms the need for an amendment to the Bankruptcy 
Code that precludes further litigation over the meaning of the words 
used in the current statute. The amount of time and expense necessary 
to relitigate these issues has been extraordinary, and the risk of 
inconsistent results has been real, despite my victories. The only way 
to prevent this from happening again is for an amendment to the 
Bankruptcy Code to be enacted that unambiguously provides that FACE 
violations are nondischargeable in bankruptcy. Without such a clear 
statement, future defendants in FACE actions will continue to file for 
bankruptcy in order to delay any efforts to hold them responsible for 
the illegal actions. The proposed amendment to the Bankruptcy Code is 
therefore necessary so that Congressional intent in enacting the FACE 
statute is fully effectuated and the bankruptcy process is not abused.
    Thank you for you consideration.

    Chairman Hatch. Mr. Zywicki, we will take your testimony.

   STATEMENT OF TODD J. ZYWICKI, ASSISTANT PROFESSOR OF LAW, 
   GEORGE MASON UNIVERSITY SCHOOL OF LAW, ARLINGTON, VIRGINIA

    Mr. Zywicki. Thank you, Mr. Chairman and distinguished 
Senators. I want to thank you for moving this legislation so 
quickly this term and placing it with such a high priority 
because I think it really is an important piece of legislation 
and I am pleased that it is moving forward.
    I have attached to my statement a time series that really 
sort of blows the mind when you look at it. The upward spiral 
in bankruptcy filing rates just since 1980 is really quite 
striking. We have seen a brief respite in recent years, but I 
haven't talked to anybody who thinks that that really means 
anything but a brief respite, and nobody seriously expects that 
the upward trend is going to end unless we do something to 
address the upward trend. In fact, all the data indicates that 
the upward trend has started again already.
    Moreover, few believe that even a small part of the fraud 
and abuse that is in in the system is caught. There are some 
very poor mechanisms in place currently to try to ferret out 
fraud and abuse. But under the current system with 1.4 million 
people a year filing bankruptcy, it is simply impossible for 
judges to try to locate the fraud and abuse that is going on in 
the system without some sort of procedural mechanisms of the 
type that are provided for in this bill.
    As a result, the efforts that have been attempted to try to 
hit fraud and abuse are haphazard. They are applied unequally, 
unfairly. They really mock the rule of law and there is really 
no sense in which the Bankruptcy Code is being applied 
consistently, fairly, or equally throughout the country.
    Moreover, the fact that there really is abuse going on has 
created a widespread perception in the public that the 
bankruptcy system is really just a place where you go to scheme 
your creditors. The public really thinks of the bankruptcy 
system as a big game these days, and I think in the long run 
that is really detrimental in that it will undermine faith in 
the bankruptcy system generally. So I think it is important to 
get a hold of the fraud and abuse, both to ferret out fraud and 
abuse, but also to reinstill faith in the public that the 
bankruptcy system is working the way it is supposed to.
    This bill does that. This bill is an incremental, common-
sense, experienced-based attempt to come to grips with the 
fraud and abuse that is in the system, and to rebalance the 
bankruptcy system to try to get a rein on some of the things 
that have really manifested themselves increasingly in recent 
years.
    It preserves the fresh start. It doesn't deny anybody the 
right to file bankruptcy, but it targets the abuses that we see 
in the system, whether it is high-income people shirking debts 
they can repay, whether it is the scheme of fractional 
interests that are used to prevent banks from exercising their 
legitimate foreclose rights, whether it is hiding assets, all 
the different sorts of things that are going on.
    I think the bill shows a striking amount of common sense 
and grounding and experience of what is going on everyday in 
the bankruptcy courts, while at the same time preserving the 
integrity of the bankruptcy system for those who need it.
    I think it is important to recognize that being pro-debtor 
in bankruptcy is not the same thing as being pro-consumer. Most 
consumers pay their bills, so that taking it easy on debtors 
who don't pay their bills, for instance, doesn't help consumers 
who do pay their bills. Being pro-debtor is not the same thing 
as being pro-consumer.
    Bankruptcy losses for a business are a business expense. 
They are the same thing as paying the electric bill, paying 
salaries, paying rent, paying taxes. To the extent that they 
have bills that they can't collect, that is a cost of business, 
and just like rental payments, electricity payments, all these 
other expenses, get passed on to consumers.
    It is inevitable that some bankruptcy losses get passed on 
to consumers, and they get passed on in a variety of ways. It 
is not just interest rates. It is also higher down payments, 
say, on a car because creditors are unwilling to extend as much 
credit and risk.
    There was a story on bankruptcy in Fortune magazine, 
bankruptcy in Memphis, Tennessee, which is the bankruptcy 
capital of America. The story reports that in Memphis, where 
the bankruptcy filing rate is 4.5 percent of the families every 
year file bankruptcy in Memphis, the down payment on a used car 
in Memphis is the wholesale price of the car. Why? Because 
nobody is willing to extend any credit that they could be left 
hanging out on, so the down payment allows them to recover what 
they have to pay.
    Creditors suffer, and in particular small creditors suffer. 
What has been striking about this bill is from the very 
beginning, it is small businesses, it is credit unions like we 
heard from today, it is small department stores like Boscov's 
who are trying to run credit operations. It is small furniture 
companies who are trying to sell furniture on credit.
    Throughout the entire process, these small creditors are 
the ones who have supported it. Why? Because they have the most 
difficulty passing these losses on to other consumers because 
they simply don't have the revenue base to spread it in the way 
that other people might.
    Finally, I think this sends an important moral message that 
people should pay their debts if they can pay their debts. And 
it doesn't expect the impossible; it doesn't expect people to 
pay what they can't pay. It says if you can pay 50 percent or 
60 percent or 70 percent of your debts, if you can do that and 
you can pay a substantial portion of your debts and you make 
above the median income, you should do that as a condition for 
discharge. You will not be denied the right to file bankruptcy. 
It simply places a condition on your ability to file bankruptcy 
to keep your promises to the extent that you can.
    I have identified about 7 to 10 percent of filers who would 
be affected by the means test. There is one study that purports 
to find otherwise, but it is methodologically flawed. I could 
talk about that more. It claims to only find 3 percent, but it 
is a fundamentally flawed study. We are talking about 
recovering $3 billion, roughly, that would otherwise be 
discharged.
    I see that I am out of time. I would be happy to address 
some of the other things that have come out in the testimony, 
but I want to add one last message, which is this has been 
going on for a few years. When the bankruptcy bar starts 
attacking the bankruptcy bill and that sort of thing, it seems 
like they get you in the catch-22.
    When the economy is good and filings are falling off a 
little bit, they say, look, we don't need bankruptcy reform, 
filings are tapering off on their own. When there is a 
recession on the horizon, they say, well, bankruptcies are 
going to rise and now is not the time to tighten up the 
bankruptcy laws.
    Is there ever a time? If you can't tighten them in good 
times and you can't tighten them in bad times, when is the time 
to think about reforming the bankruptcy system? I think now is 
the time to do it, and it is the time to do it in a balanced, 
common-sense, experienced-based kind of situation like we have 
here, which is it does not deny people the right to file 
bankruptcy, but targets the fraud and abuse in the system.
    Thank you.
    [The prepared statement of Mr. Zywicki follows:]

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

    Distinguished Senators, it is a privilege to appear before you 
today to speak on the subject of ``Bankruptcy Reform.'' At the end of 
the last congressional session this body passed by an overwhelming 
majority a bankruptcy reform bill that would bring balance and sanity 
to a bankruptcy system that is threatening to spiral out of control. It 
has been reintroduced this session as S. 220 (the ``Bill''). Recent 
reports indicate that bankruptcy filing rates have begun to rise again 
after a brief respite in recent years. Clearly the time is right to 
address some of the problems with the bankruptcy system. Recognizing 
this, I am pleased to see that this Committee has acted promptly to 
introduce a bankruptcy reform Bill and to hold hearings on the issue. I 
am pleased to provide my views on the matter. I hold both a J.D. and a 
Master's Degree in Economics. I was also a John M. Olin Fellow in Law & 
Economics at the University of Virginia and am a tenured member of the 
faculty at George Mason University School of Law, one of the premier 
centers for the study of economic analysis of law. In addition to my 
publications in law reviews, I have also published several articles in 
peer-reviewed economics journals. As such, I believe that I am in a 
sound position to discuss both [Lc legal and economic aspects of the 
current bankruptcy system as well as the probably effects of the 
bankruptcy reform Bill.
    This Bill represents a thoughtful and well-considered effort to 
address many of the problems that are manifest in the bankruptcy system 
today. The Bill makes incremental reforms to the consumer bankruptcy 
system to address many of the loopholes and technicalities that 
opportunistic debtors have found to evade their financial and personal 
responsibilities. The reforms provided for by this Bill are grounded in 
commonsense and experience derived from the observation of the day-to-
day operation of the bankruptcy system in practice.
    The current system has been little-changed since its enactment in 
1978. Since that time the number of personal bankruptcies is roughly 
five times larger than when the Code was enacted. Today, some 1.4 
million Americans troop through the bankruptcy courtrooms every year. 
This growth in numbers has been matched by a growing sophistication 
among lawyers and the public about the opportunities for fraud and 
abuse-both legal and illegal-in the bankruptcy system. Few reasonable 
observers believe that even a small fraction of the fraud and abuse 
present in the system is caught. As a result, similarly-situated 
debtors and creditors throughout the country suffer from dissimilar and 
unpredictable treatment on the basis of accident of geography or 
judicial whim. By guaranteeing unequal treatment for similarly-situated 
individuals, the system mocks the rule of law. In turn, this undermines 
public confidence that the bankruptcy system is operating fairly and 
efficiently. Instead, it is increasingly viewed as a system prone to 
cynicism and manipulation, and a free-ride for debtors lacking in 
conscience and personal responsibility.
    Thus, the current system suffers from a crisis of both real and 
perceived abuse. This Bill addresses both of these problems. This Bill 
rebalances the bankruptcy system, by taking sensible steps to address 
many of the most prominent abuses by both debtors and creditors that 
have been manifested in recent years. At the same time, it preserves 
the commitment to the fre;'i start for all debtors who need it. By 
preserving the fresh start but also addressing abusive behavior, this 
Bill will restore fairness and efficiency to the bankruptcy system and 
thereby restore public confidence in the system. A failure to act in a 
sensible and rational way today will lead to continuing abuse and 
continuing public frustration. Acting sensibly today will head-off more 
drastic and ill-considered action later.
    Being pro-debtor is not the same as being pro-consumer. When some 
people get a free-ride in bankruptcy, the rest of us are forced to pick 
up the slack. The overwhelming majority of Americans pay their Bills 
and live up to their financial responsibilities. But it should not be 
forgotten that those who pay their Bills inevitably have to pay more to 
make up for those who do not. Bankruptcy losses are a cost of business. 
Like all other business expenses, when creditors are unable to collect 
debts because of bankruptcy, some of those losses are inevitably passed 
on to responsible Americans who live up to their financial obligations. 
Every phone bill, electric bill, mortgage, furniture purchase, medical 
bill, and car loan contains an implicit bankruptcy ``tax'' that the 
rest of us pay to subsidize those who do not pay their bills. We all 
pay for bankruptcy abuse in higher down payments, higher interest 
rates, and higher costs for goods and services. I can see no good 
reason why a schoolteacher earning $30,000 a year should have to pay 
more for a mortgage or more for a new couch because some other guy 
making $100,000 a year finds it inconvenient to pay his debts. I can 
see no good reason why a nurse earning $40,000 a year should have to 
pay more for a car loan because some doctor earning $250,000 doesn't 
want to pay for his Mercedes.
    This bankruptcy ``tax'' takes many forms. It is obviously reflected 
in higher interest rates. But it is also reflected in higher down-
payment requirements, as creditors desire greater up-front payments to 
reduce the risk of nonpayment. It is reflected in shorter grace-periods 
for paying bills and higher penalty fees and late-charges for those who 
miss payments. Finally, it is reflected in fewer benefits to consumers, 
whether the co-branding benefits offered by credit cards today or such 
things as greater customer service or extended business hours. 
Retailers raise their prices or close their credit operations. 
Regardless of which of these forms it takes, it is evident that the 
rest of us suffer when some people choose not to pay their bills.
    Moreover, it is lower-income and fixed-income Americans who suffer 
the most, as it is they who have the fewest credit choices and the 
least ability to absorb increased credit and other costs. When 
furniture stores are forced to close their credit operations because of 
bankruptcy losses, this further restricts the options of low-income 
creditors. When credit card issuers find it infeasible to issue credit 
to low-income borrowers, those borrowers are not made better-off by 
having their choices reduced. Instead, if they need a new transmission 
or new suit, they are forced to turn to pawn shops and high-interest 
``payday'' lenders who offer terms far more abusive than any credit 
card issuer. See Todd J. Zywicki, The Economics of Credit Cards, 3 
CHAPMAN L. REv. 79 (2000). Consumers as a whole, and especially low-
income consumers, are not made better-off when bankruptcy losses 
increase prices and decrease service.
    Creditors also lose from a runaway bankruptcy system. Smaller 
businesses and small creditors suffer the most from a runaway 
bankruptcy system, as they tend to have the narrowest margins and the 
least ability to spree those losses among their customers. The small-
town furniture store selling couches and end tables on credit suffers a 
lot when his customers don't pay up. As do independent car salesmen, 
jewelers, contractors, and other small businesses who extend credit to 
their customers. Thus, it is not surprising that support for bankruptcy 
reform comes from across the full spectrum of creditors, but small 
creditors, such as small retailers and credit unions, are among the 
strongest supporters of bankruptcy reform.
    The Bill will also reinforce the lesson that bankruptcy is a moral 
as well as an economic decision. Filing bankruptcy reflects a decision 
to break a promise made to reciprocate a benefit bestowed upon you. The 
moral element of bankruptcy is reflected in the observation that the 
English word ``credit'' comes from the Latin word for ``trust.'' 
Parents seek to teach their children values of personal and financial 
responsibility, and promise-keeping and reciprocity provide the 
foundation of a free economy and healthy civil society. Regrettably, 
the personal shame and social stigma that once restrained opportunistic 
bankruptcy filings has declined substantially in recent years. We have 
``defined bankruptcy deviancy downward'' such that it has become a 
convenient financial planning tool, rather than a decision freighted 
with moral and social significance. Requiring those who can to repay 
some of their debts as a condition for bankruptcy relief sends an 
important signal that bankruptcy is a serious act that has moral as 
well as economic consequences. Moreover, reducing the number of 
strategic bankruptcies will reduce the bankruptcy tax paid by every 
American family on goods and services, giving them more money for 
groceries, vacations, and educational expenses.
    The Bill establishes a much-needed system of means-testing to force 
high-income debtors who can repay a substantial portion of their debts 
without significant hardship to do so. Under current law, there are few 
checks on high-income debtors seeking to walk away from their debts and 
few safeguards to prevent bankruptcy fraud. Current law requires a 
case-by-case investigation that turns on little more than the personal 
predilections of the judge. The Bill narrows the judge's discretion by 
establishing a presumption of abuse where a high-income debtor has the 
ability to repay a substantial portion of his debts, as measured by an 
objective standard. At the same time, the judge will retain discretion 
to override this presumption in cases of hardship. Means-testing is not 
a panacea for all of the ills of the bankruptcy system. But by focusing 
judicial discretion on the existence of real hardship and reducing 
procedural hurdles to challenging abuse, the Bill's reforms will 
vindicate the rule of law and reduce abuse.
    By targeting high-income bankrupts with substantial repayment 
capacity, it is estimated that means-testing will recover roughly $3 
million of the $40 million discharged in bankruptcy every year. 
Although means-testing will affect only 7-10% of bankruptcy filers, but 
focusing scrutiny on those high-income debtors who can repay a 
substantial portion of their debts without significant hardship, the 
Bill makes possible the recovery of substantial losses with minimal 
administrative cost. Equally important, means-testing will have no 
efect on those making less than the minimum income threshold provided. 
Thus, for the 80% of filers whose income lies beneath the state median, 
means-testing will have no effect whatsoever.
    It should also be stressed that means-testing will not prevent 
anyone from filing bankruptcy and receiving a bankruptcy discharge. 
Instead, it will simply condition the discharge for affected filers to 
pursuing a chapter 13 repayment plan rather than going into chapter 7. 
In fact, the means-testing rules will simply govern eligibility for 
chapter 7 relief; it has no impact on the confirmation of the debtor's 
chapter 13 plan. In approving the debtor's plan the court will still 
apply the budgetary processes provided for under current law without 
any consideration of the means-testing eligibility rules.
    The means-testing provisions also provide an excellent example of 
the incremental and balanced approach to this issue. Under current law, 
it is already the case that the primary factor for courts to consider 
in deciding whether to dismiss a debtor's case for substantial abuse 
under Sec. 707(b) is whether the debtor can repay a substantial portion 
of his debts without significant hardship. Overwhelmed by the number of 
cases they confront and lacking the will to enforce its provisions 
consistently, however, it has been observed by one scholar that many 
perceive Sec. 707(b) to be a ``dismal failure.'' Jack F. Williams, 
Distrust: The Rhetoric and Reality of Means-Testing, 7 AM. BANKR. INST. 
L. REv. 105 (1998). The Bill simply creates a more formal and reliable 
mechanism for implementing the goals that bankruptcy courts are already 
seeking to apply, but will do so in a way that more efficient and fair 
than the current system. See Edith H. Jones and Todd J. Zywicki, Its 
Time for Means-Testing, 1999 BRIGHAM YOUNG UNIVERSITY L. REV. 177.
    The Bill also targets a whole range of other abuses of the 
bankruptcy system, including such things as the use of ``fractional 
interests'' to prevent legitimate foreclosures and abuse of the 
cramdown provisions of the Code by filing bankruptcy simply to strip 
down the value of a secured creditor's claim. It creates new 
protections from bankruptcy ``mills'' and ensures that bankruptcy 
filers undergo credit counseling to try to workout a consensual 
solution to their financial problems. The Bill also eliminates abuse of 
unlimited homestead exemptions, a reform advocated by even. the Bill's 
critics. In short, it reflects practical solutions grounded in common-
sense experience regarding the problems in the bankruptcy system. 
Contrary to the selective outrage of its critics, however, the Bill 
does not limit itself to reducing abuse of the homestead exemption but 
takes a comprehensive approach to rooting out all forms of bankruptcy 
abuse.
    It has been claimed by some that the Bill would negatively impact 
the ability of divorced spouses to collect spousal and child support. 
This claim is based on vague, speculative, and inaccurate accusations 
about how the nondischargeability of certain debts will impact post-
petition efforts to collect these obligations. In contrast to these 
speculative accusations, the Bill offers concrete assistance to non-
intact families in several ways. Among its numerous provisions 
protecting the rights of former spouses and children are the following 
protections: (1) Extends the scope of nondischargeability of spousal 
support obligations to make nondischargeable certain property 
settlements, (2) excepts state child support collection authorities 
from the reach of the automatic stay, (3) elevates the priority level 
of child support to first priority, (4) makes exempt property available 
for the enforcement of domestic and child support obligations. These 
speculative claims about the negative effects of the Bill appear to be 
simply a concerted effort by the Bill's opponents to distract attention 
from the real reforms and protections included in the Bill.
    Moreover, the Bill's provisions on credit card nondischargeability 
merely rationalizes some exceptions to discharge and closes loopholes 
in the current law relating to the misuse of credit cards. Given this 
modest aim of simply closing loopholes in the already-existing 
exception to discharge for credit card fraud, it is difficult to see 
how `his reform could have more than a trivial effect on collection of 
spousal support payments. Nor have the Bill's opponents supplied any 
details about the size of this purported effect. Assuming the effect is 
non-trivial, it is also not unique to make certain debts 
nondischargeable on the basis of public policy. Current law already 
makes a multitude of exceptions to discharge, including such things as 
tax obligations, fraudulently incurred debts, student loans, and 
victims of drunk drivers. As a result, the Bill would no more ``pit'' 
postpetition child support obligations against credit card issuers than 
current law ``pits'' child support obligations against the victims of 
drunk drivers, the victims of fraud, student loan obligations, or tax 
obligations. Indeed, the burden on a debtor from nondischargeable 
credit card debts will be substantially smaller than the financial 
burden on a debtor from the inability to discharge fraud liabilities, 
tax liabilities, student loan debts, and drunk-driving judgments. That 
opponents of the Bill have instead singled-out credit card issuers for 
criticism says more about their desire to demonize the credit card 
industry and less about their commitment to protecting women and 
children or to real bankruptcy reform.
    In contrast to the broad-based support for the Bill, opposition 
primarily has come from one isolated comer--lawyers. Certainly the 
opposition of some lawyers is based on sincere, albeit mistaken, 
beliefs about the content and impact of the legislation. But it is 
ironic that bankruptcy lawyers have been quick to question the motives 
of creditors in seeking reform, while remaining slow to acknowledge 
their own stake in opposing reform. James Shepard, a member of the 
National Bankruptcy Review Commission, estimates that bankruptcy is now 
a $5 billion a year industry for lawyers and others. By reducing 
filings among high-income filers and reducing the cost of bankruptcy 
cases by making them more predictable and less expensive, means-testing 
will reduce both the volume and expense of bankruptcy cases. By closing 
loopholes, the Bill reduces the need for lawyers to find those 
loopholes. The Bill also will reduce bankruptcy filings by requiring 
bankruptcy lawyers to inform their clients of availability of non-
bankruptcy alternatives, such as credit counseling, and by cracking 
down on bankruptcy ``mills'' that mass-produce bankruptcy petitions 
with little regard to the welfare of their clients. Put simply, more 
bankruptcies means more money for bankruptcy lawyers, and fewer 
bankruptcies means less money for bankruptcy lawyers. Also to the 
dismay of bankruptcy lawyers, the Bill elevates child support 
obligations to the first administrative priority--a position currently 
occupied by attorneys' fees obligations. Efforts in the bankruptcy bar 
to downplay the importance of this protection for divorced mothers 
appear to be little more than a cynical effort to hide the self-
interest of bankruptcy lawyers behind the skirts of divorced mothers.
    Balanced bankruptcy reform preserves the protection of the 
bankruptcy system for those who need it, while limiting abuse by those 
who are preying on that generosity simply to evade their financial 
responsibilities. This Bill brings balance to a consumer bankruptcy 
system that has become a tool for rich and savvy debtors to evade their 
financial responsibilities. America has one of the most charitable and 
forgiving bankruptcy systems in the world and many of those who file 
bankruptcy truly need it as a consequence of personal trouble. But too 
many people today are preying on our charity and using the bankruptcy 
system not because they need it, but simply to evade their 
responsibilities or to maintain an unrealistic and extravagant 
lifestyle at the expense of those who live responsibly. Ignoring 
rampant abuse undermines public support for the bankruptcy system 
generally, which will eventually hurt those who legitimately need 
bankruptcy relief.
    There has been much talk in the media and elsewhere about the surge 
in consumer bankruptcies in recent decades. It should be noted that 
this discussion is largely beside the point in the current context. 
This Bill does not deny anyone the right to file bankruptcy, nor does 
it apportion blame for bankruptcy filings. It simply provides pragmatic 
solutions to identifiable problems in the current bankruptcy system. To 
the extent that larger bankruptcy issues are implicated, however, it is 
evident that this Bill is an appropriate response to the problem. Two 
identifiable factors present themselves as explaining the rise in 
consumer bankruptcy filings in recent decades. First is a change in the 
relative costs and benefits associated with filing bankruptcy. Second 
is a general decline in the personal shame and social stigma associated 
with bankruptcy.
    It has been estimated that almost half of Americans would benefit 
financially from filing bankruptcy after engaging in some basic pre-
bankruptcy planning. Moreover, because of the structure of property 
exemptions under bankruptcy and state law, wealthier individuals gain 
the greatest benefits from filing bankruptcy because they can protect 
larger amounts of property in bankruptcy. Given the financial benefits 
created by the enactment of the 1978 Code, it is little wonder that 
consumers have increasingly recognized and acted on the financial 
benefits of filing bankruptcy.
    At the same time, the costs of learning about and filing bankruptcy 
have decreased dramatically. Daytime television and the Yellow Pages 
are awash in bankruptcy advertisements. The mass production of 
bankruptcy petitions by bankruptcy lawyers have driven down prices for 
bankruptcy services. In fact, scholars have reported that one of the 
most difficult tasks confronting lawyers is persuading their clients 
that there really is no catch to filing bankruptcy, because clients 
routinely object that the whole things sounds ``too good to be true.''
    There is also little question that the social stigma associated 
with filing bankruptcy has declined over time. Singer Toni Braxton 
filed bankruptcy, despite having recorded two albums that had earned 
$170 million in sales at the time, and despite owning a baby grand 
piano, a Porsche, and Lexus. She later appeared on Oprah Winfrey, who 
questioned Toni on her purchase of $1,000 in Gucci silverware shortly 
before filing bankruptcy. Toni's response: ``I only spent about $1,000 
on it. If that made me broke, then I was truly in bad shape. It's 
Gucci-I love it. I'd buy it again. And now that I get a huge discount 
because I've given them so much pub, I can really shop.'' This 
attitude, of course, is not limited to pop music stars, as evidenced by 
the comments of one individual to CNNfn, ``When I found out-this was 
watching it on the news, in the newspapers--that more and more people 
are doing it [filing bankruptcy], and . . . it's not just a middle 
class you know, upper class too-rich people--everybody's doing it. And. 
. . I said: Why not me? You know, I'm just one more of them.''
    By contrast, there is no evidence that factors such as credit cards 
have contributed to the bankruptcy problem. It is evident that the 
growth in credit cards has largely been a substitution away from other 
even less-attractive forms of credit, such as pawn shops, loan sharks, 
personal finance companies, layaway plans, and retail store credit. As 
shown in the attached chart, since 1995 it is housing debt, not 
consumer debt that has been rising most rapidly for American 
households. In fact, credit card debt represents only some 3% of 
American household debt. Moreover, defaults on credit card loans have 
risen in tandem with defaults on other forms of consumer credit. This 
rebuts the claim that credit card lenders have contributed to the 
bankruptcy crisis by lending to noncreditworthy borrowers. It is true 
that consumers have increased their use of credit cards, but this has 
been offset by a reduction in the use of other forms of consumer 
credit. If credit card issuers were acting irresponsibly, then defaults 
on credit cards would be rising much faster than on other forms of 
consumer credit. Instead, they are rising at the same rate. Empirical 
studies have demonstrated that increasing bankruptcies have not 
resulted from increased lending to higher-risk borrowers. Instead, what 
has happened is that all borrowers have become more likely to file 
bankruptcy, holding financial risk characteristics constant. What has 
changed is not the structure of consumer borrowing; what has changed is 
the willingness of individuals to file bankruptcy as the preferred 
means of dealing with their financial obligations.
    There has also been substantial confusion about the competitiveness 
of the credit card market. Critics have argued that credit card 
interest rates have remained ``high'' and stable despite changes in 
other interest rates. This criticism is profoundly confused. First, it 
is meaningless to decry ``high'' interest rates without asking ``As 
compared to what?'' What is the ``correct'' interest rate on an 
unsecured line of credit that an individual can draw upon at his 
discretion? Unsecured credit lines at banks have much higher interest 
rates and much higher initiation fees than do credit cards. It is not 
clear what ``high'' interest rates means.
    Credit card interest rates are also much less responsive to changes 
in cost of funds rates than other forms of credit. This is because the 
cost of funds comprises a relatively small percentage of the cost of 
credit card interest rates. The administrative costs of processing a 
large volume of relatively small transactions is enormous, and this is 
completely unresponsive to changes in the cost of funds. Consider the 
following two graphs, reproduced from my article The Economics of 
Credit Cards:
        Chart 1: U.S. Consumer Commercial Bank Rates, 1972-1989

[GRAPHIC] [TIFF OMITTED] T6343.001

            Chart 2: Federal Funds Interest Rate, 1970-1989

[GRAPHIC] [TIFF OMITTED] T6343.002

    As these two Charts demonstrate, during the 1970s and 1980s the 
Federal Funds rate rose and fell dramatically over time. Moreover, the 
rates on mortgages and car loans rose and fell accordingly. 
Nonetheless, credit card interest rates remained relatively constant. 
The reason was not because of any collusion or improper behavior by 
credit card issuers, but simply because the cost of funds comprises 
only 25% of the cost of credit card interest rates, whereas it 
comprises 80-90% of the cost of a mortgage or car loan.
    Nonetheless, credit card interest rates have fallen dramatically in 
recent years:
             Chart 3: Credit Card Interest Rates, 1981-1998

[GRAPHIC] [TIFF OMITTED] T6343.003

    As this Chart indicates, from 1992 to 1998, credit card interest 
rates fell approximately 15% and have remained relatively stable since 
that time. Nor do we know how much credit card interest rates wou14 
have fallen had bankruptcy filing rates not risen so precipitously 
during this same time.
    Finally a fixation on credit card interest rates ignores the fact 
that the majority of credit card users use credit cards for 
transactional convenience and pay off their bills in full every month, 
rather than revolving balances. For those users, interest rates are 
irrelevant. They instead prefer a credit card that provides tangible 
benefits, such as frequent flyer miles or car rental insurance. They 
also prefer a card without an annual fee. Unsurprisingly, the market 
has responded by providing substantial consumer benefits and by 
eliminating annual fees on basic credit cards. To the extent that this 
is the course preferred by credit card users, this is a triumph of 
competition in the credit card industry, not a failure. In amending the 
bankruptcy code, this body should act very cautiously to make sure that 
it does not interfere with the operation of consumer and commercial 
lending markets.
    Now is the time to act to reform the bankruptcy laws. This Bill is 
a sensible, balanced, incremental, and well-considered attempt to deal 
with these problems before they become intractable.

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[GRAPHIC] [TIFF OMITTED] T6343.005

[GRAPHIC] [TIFF OMITTED] T6343.006

    Chairman Hatch. We will each have 5 minutes.
    Let me turn to you, Mr. Strauss. What does bankruptcy today 
do to women heading single-parent families who rely on regular 
support payments, and does the proposed legislation improve 
that situation, and if so, how?
    Mr. Strauss. Well, the first thing that happens frequently, 
inevitably, is when somebody files a Chapter 13 bankruptcy, one 
of the most useful means of collecting support is a wage 
assignment or an earnings withholding order. It is called many 
things. That stops, and all the debtor has to do is serve that 
on the employer and mom, who may be depending on that next 
check for rent or Christmas presents or shoes or whatever, 
doesn't get the money.
    When that is passed through our office, because we collect 
on cases in which women are not receiving public assistance--
they are just struggling and we are enforcing their divorce 
order--we have to tell them it has stopped and we will go do 
our best to start it again.
    I am in a wonderful district; the judges are very 
supportive of child support. But I talk to people all over the 
country whose judges are not the same and they say, look, you 
know, you want to get the support started again, seek relief 
from the automatic stay. It is expensive if you don't have a 
public agency helping you out, and it is time-consuming.
    Senator Biden. It is an automatic stay?
    Mr. Strauss. Pardon me?
    Senator Biden. Now, it is an automatic stay?
    Mr. Strauss. Well, the automatic stay goes into effect in 
all bankruptcies and one of the things that stops is that 
collection.
    Another thing that happens is that is fine for people who 
have wages, but what about the people who are self-employed 
individuals? This bankruptcy bill, whereas it doesn't have the 
immediacy of the last provision, will tell anybody who is 
filing a Chapter 13 that if you want to stay in there and you 
want to succeed in the Chapter 13, we have set up checkpoints. 
One of them is you are not going to get your plan confirmed 
unless you have paid all of your post-petition ongoing support 
obligations. Another checkpoint is you are not going to get 
your discharge unless you have done that.
    Last year, there was, I think, an amendment added by 
Senator Torricelli which I thought complemented both of those, 
and that is during this period if you are not paying it between 
confirmation and discharge, if you stop paying it we can 
dismiss your case. So these are the kinds of remedies, among 
many others, that women who really--and I say mostly women 
because there are men who are custodial parents who are in the 
same financial difficulties. These are the kinds of things that 
would help them out of it, I think, immensely.
    Chairman Hatch. Overall, could you indicate your view on 
how well this bill protects women and children, particularly 
those who are dependent upon regular child support payments?
    Mr. Strauss. Well, this bill would, first of all, create 
exceptions to the automatic stay for many things, but the most 
important one is it would put in an exception which means that 
the automatic stay would not stop a wage assignment, which is 
incidentally what Congress has mandated us to do anyway. Every 
single support order that is issued in any State in the United 
States is supposed to have a wage assignment.
    Senator Sessions. Just so we are all on the same page, let 
me ask you--a wage assignment means that the employer must send 
the money directly to the mother or the child, right?
    Mr. Strauss. Or to an agency like ours. We have done it and 
it is a system by which we collect about 56 percent of the 
child support. That is how important this is to make sure that 
is not stopped.
    Chairman Hatch. Thank you.
    Mr. Zywicki, I only have a few more minutes left, but let 
me just ask you this. Will means-testing mitigate the problem 
of bankruptcy abuse by high-income filers?
    Mr. Zywicki. Mr. Chairman, I believe it does. In 
particular, what it does is it shifts the presumption in cases 
involving high-income filers. Under the current system, you 
have to actually kind of go out and find these people, bring 
motions to dismiss their case and that sort of thing.
    What this does here is gives a nice gatekeeping approach. 
There is a safe harbor provision for those who make less than 
the median income. But above that, what it does is it just 
identifies those who make the above the median income, who have 
substantial repayment capacity without significant hardship. 
And it gives the presumption that they would have to repay some 
of their debts.
    The court would still have the discretion to look at every 
single case to determine whether or not there is some 
significant hardship present in that case that means they 
should not repay their debts. But by creating predictability 
and fairness, it will mitigate the problem of high-income 
filers.
    Chairman Hatch. Mr. Newsome, just a question for you. Do 
you believe that there are cases in the system which would 
qualify as, quote, ``substantial abuse,'' unquote, of the 
Bankruptcy Code?
    I understand you have been a bankruptcy judge for now, 
what, 15 years or thereabouts?
    Judge Newsome. It is going to be 19 in October.
    Chairman Hatch. Nineteen years. In all those years, how 
many cases have you dismissed for substantial abuse?
    Judge Newsome. Of the motions that are filed, I am probably 
running 50 to 60 percent.
    Chairman Hatch. You have dismissed about 50 percent for 
substantial abuse?
    Judge Newsome. That is right.
    Chairman Hatch. OK. Now, how can you blame Congress for 
wanting to bring more accountability to the system?
    Judge Newsome. I don't blame Congress at all, Senator, for 
wanting to bring more accountability to the system. Nobody 
hates bankruptcy abuse more than the judges who see it all the 
time. All I am saying is I think that the unintended effects of 
your bill are going to be very, very harmful to people who 
don't deserve this kind of treatment.
    Chairman Hatch. My time is up.
    Senator Biden?
    Senator Biden. Thank you very much. You know, there is an 
irony here. The bill has been stopped from passage basically 
based on four arguments against the bill.
    By the way, I want to thank all of you, every one of you 
for your testimony because you have all been very helpful. But 
let me try to narrow this down, as I see it.
    There have been four basic reasons why the bankruptcy bill 
has not been able to be passed. One is the argument by my 
friends on my side of the aisle that women receiving support 
and alimony will be damaged by this legislation. They will be 
put at a disadvantage, which you have put to rest here. I want 
anybody to tell me how that would be the case here.
    Number 2, we are told that the second argument is that the 
homestead provision is not sufficiently strong. The third thing 
we are told is that the poor generally will be disadvantaged by 
this bill. And the fourth thing is that those who engage in 
clinic violence will be able to get out from under their 
obligations somehow.
    Now, the irony I find here is two of those four provisions 
that the critics have are positions held by those who support 
the bill, including the creditors. I don't know a single 
creditor who wants somehow to be able to get out of paying a 
debt because they buy a $2 million home. I don't know a single 
creditor who has come forward who has suggested that anyone who 
bombs an abortion clinic, violates a stay-away order at a 
clinic, et cetera, should be able to discharge in bankruptcy. 
There is a real irony here. The creditors support the two 
provisions that some of us want to change.
    I think we should have the stronger language of the FACE 
legislation in the bill. I support that. I also think that we 
should have a flat limit nationwide on how much you can protect 
your home. I think the limit should be around $100,000, maybe 
$250,000, I don't know, but not where it is now, although as 
the Senator said, we have tightened this up a lot. He and I 
both think we could go much further. So there is an irony here.
    I am going to focus on the two things where creditors and 
debtors disagree, or at least those purporting to represent 
debtors disagree. The first one is the argument that the poor 
and disadvantaged or the women receiving alimony or support 
payments are disadvantaged.
    The only legitimate criticism I have heard based on any 
fact is what you have put forward, Judge Newsome, and that is 
the real problem is the burdensomeness of getting out from 
under this legislation, making safe harbor work.
    Does anyone on this panel think that any truly poor person 
is, on the face of the legislation, subject to a more onerous 
test than they are now? Anyone?
    Judge Newsome. Yes.
    Senator Biden. I don't mean burdensome. I mean just on the 
face of the legislation.
    Judge Newsome. Not burdensome, but the fact that you have 
eliminated the ability to get rid of debts under certain 
provisions of 523--you have eliminated the ability to do that 
in Chapter 13--yes, I think that that could impact very 
negatively upon people of very modest means.
    Senator Biden. Well, how about people on the--
    Judge Newsome. Senator, if I could just interrupt you for a 
second, that is also the argument about child support. What you 
have done by way of amendment to Chapter 13 is that you have 
made it possible for credit card companies and others who might 
allegedly hold, not necessarily, but allegedly hold a non-
dischargeable debt based upon 523(a)(2) to--
    Senator Biden. Explain what 523(as)(2) is.
    Judge Newsome. 523(a)(2) deals with fraud, and at this 
point at least it requires a creditor to bring a complaint 
against the debtor alleging that he committed fraud when he ran 
up his credit cards. It is not just credit cards; it is any 
kind of secured debt.
    Senator Biden. So if there is fraud proven, your point is 
that creditor goes to the head of the line, above alimony?
    Judge Newsome. No, sir. What it does is it does two things. 
By making it impossible to wipe out credit card debts, unless 
you pay a hundred percent in a Chapter 13 the debtor comes to 
the other end of the line, comes out of bankruptcy still owing 
those credit card debts to the extent he didn't pay them in the 
13. That is going to compete with child support.
    Senator Biden. But under the law, child support has to be 
paid.
    Judge Newsome. That is right, but you can't get blood out 
of a turnip. If a guy gets garnished too much or if he gets too 
many payroll orders, his employer is going to fire him. It is 
very easy to do that in some States; Georgia, for example, I 
understand from my friends in Georgia.
    Senator Biden. Mr. Strauss, you look like you wanted to 
comment.
    Mr. Strauss. Well, I hate to disagree with a judge before 
whom I may have to appear sometime, but the bottom line is that 
if it was an even playing field and the credit card companies 
and the child support creditors had the same remedies, I would 
say, yes, the child support creditors may have a problem 
because of the resources of these credit card agencies, but the 
playing field is not level at all. For example, if you are 
collecting from wages--and we have discussed these wage 
assignments--it has to be served on the employer and it takes 
precedence no matter when served and it collects the debt 
first.
    Also, the consumer credit protection law says that when you 
are collecting from a person's wages, only 25 percent of it can 
go to non-child support stuff. But if it is a child support 
thing, it can take as much as 50 to 65 percent, wiping out the 
ability of the other people to collect at all.
    Senator Biden. That is right. Really, what you are saying, 
isn't it, Judge, is that it may cost them their job, it may 
cost them other things, but if they are wage-earner it is not 
going to get in front of collecting the child support?
    Judge Newsome. No, but then the possibility is nobody gets 
anything.
    Senator Biden. Whoa, whoa, whoa, not true. If the wage is 
garnished, the child support gets it first. You are saying if 
it causes them to end up being fired, then no one gets 
anything.
    Judge Newsome. Or if they just give up and run away.
    Senator Biden. Right, which happens all the time now.
    Judge Newsome. All the time now.
    Senator Biden. That happens all the time now.
    Judge Newsome. And you wouldn't want to encourage that, 
would you?
    Senator Biden. No, you wouldn't want to encourage that, but 
I find it a real stretch to figure out how this increases the 
very mentality that already exists in there.
    By the way, Ms. Vullo, I compliment you on your work.
    Ms. Vullo. Thank you.
    Senator Biden. One question. How would the new amendment 
prevent the abuse of process that exists now? There is not a 
single court in America that has ruled that a violation of any 
order relating to a bankruptcy that relates to doing anything 
at an abortion clinic is dischargeable. Not one has ever done 
that, correct?
    Ms. Vullo. To my knowledge, that is correct. There are just 
five cases.
    Senator Biden. I understand that, but there is not one that 
has done that yet. Notwithstanding what my friend from New York 
tells me every once in a while, there is not one that has done 
it yet.
    Now, you make a very valid point. You say the ability to 
abuse the existing law as to contesting what willful means 
allows this process to go on. It is costly, and thereby delays 
your clients and people who should be recompensed from being 
paid, and it costs them to stay in the game, right?
    Ms. Vullo. Yes.
    Senator Biden. How would the new legislation--I am not 
arguing with you, but it is a serious question--how would that 
prevent the same abuse of process?
    Ms. Vullo. The new legislation focuses on the existence of 
an action or a judgment under a particular type of statute. So, 
for example, in my case I have a judgment under the FACE 
statute.
    Senator Biden. Correct.
    Ms. Vullo. The new legislation says that judgment is non-
dischargeable. We don't get into the question of what willful 
means, what malicious means. It is an automatic non-
dischargeable, and I would submit that a bankruptcy lawyer 
would have a very, very difficult time signing on to any 
document in bankruptcy court with that statute, whereas now, 
because of the case law that is out there under the willful and 
malicious injury exception, there are hundreds of cases going 
different ways with a lot of different nuances.
    With that, as I have seen in my case, lawyers are arguing 
what those words mean. Despite the fact that there are cases 
out there on our side on the willful and malicious injury 
question, it does not mean that the risk of inconsistent 
results is not real. It is real.
    Senator Biden. The way things are going, the likelihood is 
you are building case law. I support what you want to do, but 
the likelihood is, for example, the very cases you have taken 
in the various district courts, and now circuit courts probably 
in those--have you gotten there yet?
    Ms. Vullo. I haven't gotten there. I am still in bankruptcy 
court. I have got several levels of appeal.
    Senator Biden. They are, at a minimum, building the case 
law that suggests that these do not fall under that exception. 
In other words, I am not suggesting it shouldn't be cauterized 
now. I agree with you. I just want to make we don't put 
ourselves in a position of hyping this beyond what is real.
    What is real is it is a costly process to have to appeal, 
to fight an appeal against a judgment that was warranted in the 
first instance. That is really the problem, right?
    Ms. Vullo. There is more than that, Senator. With all due 
respect, there is much more than that because in my case I had 
specific findings from a trial judge that said specific intent 
and malice, and even then I was in court because I didn't have 
a statute that simply said judgment under FACE, non-
dischargeable. So they litigated the issue.
    In many, many other cases which will happen in the future--
the FACE statute is not very old and in many cases that will 
happen in the future. I suspect all there will be will be a 
judgment without specific findings, and you are going to have 
judges all across the country interpreting what the elements of 
the statute are against willful and malicious injury, and they 
may interpret it differently, Senator.
    Senator Biden. My time is up. Maybe I can come back to you 
later or personally talk to you about this. I am not suggesting 
you are wrong. I don't know. I find it hard to see how a 
judgment under the FACE Act, not in bankruptcy now--you 
litigate under the FACE Act. I find it hard to figure how a 
court would render a judgment on behalf of the client without 
specifying what, in fact, was the conduct. I don't know how you 
get there.
    Ms. Vullo. It will happen, and I can give an example. The 
current law says willful and malicious injury requires 
intention to commit the injury, not simply intention to do the 
act. If I bomb an abortion clinic and as a result of that 
bombing someone dies, the intention was to do the act of the 
bombing, not to commit the killing.
    And I would submit--and I think this would be absurd, but 
the current law logically would say that that debt to the 
victim, the dead person, as opposed to the bombed building, 
would be dischargeable in bankruptcy. I don't think we should 
debate over whether or not--
    Senator Biden. That is an absurd reading and it would take 
absurd judges. We don't have that many absurd judges, except 
the ones that the other guys appoint, but I don't know.
    [Laughter.]
    Senator Biden. That is a joke, that is a joke. That was a 
bad joke. I would like to ask unanimous consent to strike that 
from the record because I will have 731 judges calling me and 
wondering if I am talking about them.
    I thank my colleagues for their indulgence. Thank you very 
much.
    Senator Sessions [presiding]. Thank you, Senator Biden.
    I really want to get off this subject, and you have had a 
good day in the sun. If the Schumer amendment is made law, 
someone still would be able to file bankruptcy and delay paying 
your debt until such time as you went to that bankruptcy court 
and overcame their objection still, even though it would be 
easier to overcome the objection. Am I wrong about that?
    Ms. Vullo. An abuser will again abuse the system 
potentially, but it makes--
    Senator Sessions. But the ultimate remedy for a court is 
sanctions for contempt or things of that nature, it seems to 
me.
    Senator Schumer. Frivolous--
    Senator Sessions. Yes, frivolous or that sort of thing.
    Senator Schumer. It could be a frivolous suit and subject 
them to sanctions and would be dismissed right away, which 
happened in none of these cases, as I understand it.
    Ms. Vullo. That is correct. A lawyer would be hard-pressed 
to sign that bankruptcy petition if this amendment were in the 
Code.
    Senator Sessions. Well, I would just say this about this 
subject, which has never been lost and is not a critical matter 
in the world of commercial bankruptcy: If there are other 
similar problems, such as extreme environmental violence that 
results in spikes being put in trees or union attacks on small 
businesses, it seems to me that we ought to consider the same 
type rule as is being urged upon us with regard to abortion 
clinics. That is all I am saying.
    It does strike me that you represent abortion clinics and, 
as such, you want to protect those clinics from violence. But 
others may sue people who roll back odometers and they would 
like to have their cases proceed, too. So there are a lot of 
different issues here, and I think quality and fairness of 
treatment across the board is what I would favor as opposed to 
just targeting one issue.
    Senator Biden. Mr. Chairman, can I ask a question?
    Senator Schumer. Would the Chairman yield?
    Senator Sessions. No. You will have your time.
    Ms. Vullo. May I respond?
    Senator Sessions. I am using my time up right now.
    Senator Biden. I apologize.
    Senator Sessions. You and I have talked about it, Senator 
Schumer, and I respect your concern over this issue. There are 
a lot of abuses in the bankruptcy court, unfortunately, such as 
debtors delaying just adjudication and trying to frustrate 
payment of debts, and that is what this reform effort is trying 
to correct. Sadly, this is just one example of what is going on 
daily in bankruptcy courts across America.
    Senator Schumer. But I would say--
    Senator Sessions. Thank you Senator, but I am claiming my 
time.
    Ms. Vullo. Senator, may I respond to that, please?
    Senator Sessions. No. I am just having my say.
    Senator Schumer. Give her the courtesy of a response, Mr. 
Chairman.
    Senator Sessions. She has had a chance to respond.
    Senator Schumer. I would ask unanimous consent it not be 
taken from my good friend from Alabama's time and let Ms. Vullo 
respond.
    Senator Sessions. On what subject?
    Ms. Vullo. Can I grant that consent?
    [Laughter.]
    Senator Schumer. No, unfortunately you can't. It is up to 
him.
    Senator Sessions. I will not object. If it doesn't cause me 
to lose my time, I would be glad to hear you.
    Ms. Vullo. All I would want to say, Senator, is that there 
is documented abuse here in a particular area. All pieces of 
legislation deal with particular items when this committee 
determines and learns of some element of abuse.
    Senator Sessions. I understand that is your view.
    Ms. Vullo. The fact that there might be other abuse does 
not mean that documented abuse should go unremedied, and that 
is all we are asking with respect to this piece of legislation. 
It is documented and it is a group of people who do not believe 
they have to follow the laws of this country. People who don't 
believe they have to follow the laws of this country should not 
have the benefits of the Bankruptcy Code when they have 
demonstrated that abuse.
    Senator Schumer. And I would say to my friend, just to have 
an analogous example, some animal rights people started 
shooting scientists who were experimenting on animals and then 
somehow claimed bankruptcy as a shield. I would support an 
amendment to do that.
    Senator Sessions. Well, I think there are other problems 
that we could deal with and I certainly do not object. I think 
you make the best point, which is if you have got a documented 
case of abuse, you are more justified in asking for relief.
    Judge Newsome, you mentioned that you granted discharges in 
bankruptcy for abuse.
    Judge Newsome. No, no, I didn't grant discharges in 
bankruptcy for abuse.
    Senator Sessions. Excuse me, dismissals of bankruptcies.
    Judge Newsome. Right.
    Senator Sessions. How many, in terms of actual numbers, 
have you granted throughout your career?
    Judge Newsome. Senator, I don't know.
    Senator Sessions. You said 50 to 60 percent of the motions.
    Judge Newsome. And I can't tell you--
    Senator Sessions. Less than ten?
    Judge Newsome. Oh, no. It has been more than ten.
    Senator Sessions. Less than a hundred?
    Judge Newsome. Less than a hundred.
    Senator Sessions. So it is not many. It would probably be 
less than 1 percent of the cases you have presided over.
    Judge Newsome. Oh, much less.
    Senator Sessions. In my view, the abuse procedure has 
failed.
    Judge Newsome. I agree.
    Senator Sessions. It is not an effective mechanism.
    Judge Newsome. Not as written.
    Senator Sessions. That is why we think, instead of having 
it filed in every court, having judges determining from their 
own feelings what ought to be granted and what not granted, 
that it would be preferable to have a fair, objective statutory 
scheme including bright-line rules based on size of family and 
median income. That would be an improved approach to the 
current problems.
    Judge Newsome. May I respond?
    Senator Sessions. Yes, sir.
    Judge Newsome. The rule you have proposed is anything but 
bright line. There are as many ways of interpreting the means 
test as there are people looking at it. And if you think that 
there has been inconsistency interpreting substantial abuse, 
wait until the judges get a hold of this one.
    Senator Sessions. Well, let me ask you this.
    Judge Newsome. And let me just also say this. The problem 
with the test that is in the statute right now is that the only 
person who can file a motion is the U.S. trustee. The creditors 
can't even bring it to the trustee's attention.
    So if you opened this up, if you opened the test and you 
got rid of the word ``substantial'' and just said if you commit 
an abuse of the Bankruptcy Code, a creditor can bring a motion 
to have the case dismissed for an abuse--contrary, I think, to 
popular belief, there is an objective set of standards under 
the substantial abuse test for when you should dismiss a case 
for substantial abuse. It has been developed in the case law 
and it basically is can the debtor afford to pay something in 
Chapter 13.
    Senator Sessions. Well, it strikes me that it is not very 
difficult. If, for example, a family of four's median income is 
about $50,000, and that same family of four seeks to file for 
bankruptcy with an income of $40,000 they still get to go in 
Chapter 7 and would not, under S. 220 or current law, be put in 
Chapter 13. That is not a very difficult concept for a judge, 
in my view, to understand.
    Now, let me ask you a question, Mr. Strauss. If a person is 
moved from chapter 7 to 13 because they have income above the 
median, and have been found to be capable of paying some of 
their debts they are required to repay those debts over a 5-
year period, isn't that correct?
    Mr. Strauss. Yes.
    Senator Sessions. And during that 5-year period, you have 
got a Federal bankruptcy judge basically ensuring that they pay 
the child support first out of every single debt that is paid.
    Mr. Strauss. Exactly.
    Senator Sessions. Isn't that a great protection for a 
mother with children?
    Mr. Strauss. Yes. We obviously prefer debtors in Chapter 13 
for those reasons, especially if these other provisions are 
enacted.
    Senator Sessions. Senator Feingold?
    Senator Feingold. Thank you, Mr. Chairman. I am pleased 
that we are having a hearing in committee this year. We didn't 
do that at the beginning of the 106th Congress, in 1999, and I 
thought that was a mistake. I certainly want to thank all the 
panelists.
    In fact, the process we followed in the last Congress and 
in the Congress before that led to a bill that the President 
wouldn't sign and that a majority of the Democratic caucus 
wouldn't support. I am afraid we are heading down that exact 
same road again this year.
    Of course, we have a new President, and most observers 
expect that he would sign the bill that the Chairman and 
Senators Grassley and Sessions have introduced if it gets to 
his desk. But, my colleagues, that doesn't make the bill any 
better or more fair or more balanced, or worthy of this 
committee or this Congress, than the one we passed last year.
    Amending the Bankruptcy Code, as my friend Brady Williamson 
indicated, used to be a non-partisan exercise, where the 
Congress listened to experts, practitioners, law professors, 
judges and trustees, and made careful, considered judgments 
about how the law would work. Now, it seems we ignore the 
experts and, instead, do what the credit industry wants us to 
do. And we use parliamentary tactics to avoid reasoned 
consideration that harm the bill and I think actually discredit 
the Senate.
    We all know how the procedures of the Senate were abused to 
pass the bankruptcy bill last year. This year, the bill has 
been sent right to the calendar for floor action. We have a new 
Judiciary Committee this year with four new members and a 50/50 
split in party affiliation. I strongly believe this committee 
should have the opportunity to fully consider and amend the 
bill.
    I just want to say for the record that our Leaders' 
agreement to have evenly divided committees is really pretty 
much meaningless if major legislation like bankruptcy reform 
doesn't really go through committee, and so there is agreement 
to have equal budget for staffs if major legislation is marked 
up in this committee before that agreement is implemented. This 
is a new Senate with an unprecedented power-sharing 
arrangement, and I think this committee should start operating 
on that basis, in fact, not someday, but now.
    Mr. Chairman, I have a longer statement for the record that 
spells out my concerns about S. 220. I would like to note here 
that this committee should be cognizant of the extent to which 
bankruptcy reform has come to be seen across the country as a 
gift to special interests.
    In that regard, I would like to ask unanimous consent that 
recent studies by Common Cause and the Center for Responsive 
Politics concerning the campaign contributions made by 
supporters of bankruptcy reform legislation be included in the 
record of this hearing.
    Mr. Chairman, I am asking unanimous consent.
    Senator Sessions. Without objection.
    Senator Feingold. In light of the appearance that these 
free-spending industries have created, we have a very heavy 
burden to make sure that we are serving the public interest 
with this kind of far-reaching legislation. We cannot meet that 
burden unless we slow down and open our minds to the kinds of 
criticisms expressed by witnesses at this hearing and by non-
partisan experts in this field. For two straight Congresses, we 
have ignored the experts. We need to step back and take another 
look.
    Mr. Chairman, I want to welcome in particular the two 
witnesses from Wisconsin, Brady Williamson and Mr. Beine, who 
hail from my State. Senator Kohl very much wanted to be here 
and extends his apologies. He is doing what we in Wisconsin 
consider the Lord's work. He is with Agriculture Secretary 
Venemen talking about the dairy industry.
    We are glad you are here to provide a little Wisconsin 
common sense to this debate. I will hopefully be able to ask 
more questions in another round, but let me just use the time 
here remaining in my round to ask Mr. Williamson to comment 
briefly on whether the efforts of the National Bankruptcy 
Reform Commission that he chaired are reflected in the bill 
that passed the Senate last year and that is before the Senate 
again.
    Brady, if you could start by recounting how the Commission 
went about its work and attempted to study and accommodate all 
the competing views and tried to come up with a balanced bill 
with regard to this law.
    Mr. Williamson. Thank you, Senator. The Commission was 
created by the Congress in 1994. It had 9 members, 3 appointed 
by the President, 4 appointed by Congress, the House and the 
Senate, and 2 by the Supreme Court. It conducted hearings 
across the country, more than 25 hearings, heard from more than 
300 witnesses, received more than 3,000 submissions, and 
attempted to come up with a balanced set of recommendations.
    The Commission submitted its report to the Congress and the 
Supreme Court on October 20, 1997. It had 172 recommendations 
and a 1,300-page analysis of the bankruptcy law which remains 
available today on the Net and I still think is the single most 
comprehensive assessment as of 1997 of American bankruptcy law.
    This legislation includes some of the Commission's 
recommendations. I would single out the Sessions-Kohl provision 
on homestead as an example of that. I would also single out 
direct appeals as an example of that. I would note that the 
Commission found no need for a needs test, as such. The 
Commission addressed the question of abuse in a variety of 
ways, we think with a little more precision and sophistication 
than the legislation does.
    The Commission endorsed the notion of flexibility for 
judges. We have heard a discussion this morning about a family. 
I believe, Senator Sessions, you mentioned a family of four 
with $50,000 of income, and shouldn't it be easy to tell 
whether they get to go in Chapter 7 or Chapter 13. The answer 
is, yes, it should be if it were a normal family. But if the 
family had an autistic child, if the family had economic 
consequences, circumstances that didn't fit readily into IRS 
guidelines, then you have a different story. And then I think 
you need the flexibility and the discretion that the Code today 
affords bankruptcy judges.
    Senator, if I could just take a minute to respond to the 
Senator from Delaware's friendly challenge on his four issues, 
first, Senator Biden, I would note that the people in the 
credit industry who support this legislation have been 
remarkably silent on the importance of the Sessions-Kohl 
amendment.
    Senator Biden. That is not true, by the way. That is simply 
not true. That is simply not true.
    Mr. Williamson. Well, Senator, then I would like to see the 
evidence of that.
    Senator Biden. I will give you the evidence.
    Mr. Williamson. Thank you.
    Senator Biden. It is simply not true.
    Mr. Williamson. Second, with respect to the question of the 
impact of this legislation--
    Senator Biden. You mean homesteading, right?
    Mr. Williamson. Yes, sir.
    Senator Biden. OK.
    Mr. Williamson. With respect to the Senator's comments 
about women and children, bankruptcy law is fundamentally about 
values, and this country and this Congress long ago decided 
that taxes, child support and student loan obligations should 
be non-dischargeable, and the reason was because we as a 
society place a value on that.
    One of the disturbing things about the bill in the 
aggregate, Senator, is that it increases the categories of non-
dischargeable debt. And by doing that, it places that new non-
dischargeable debt in competition, inevitably, with the other 
non-dischargeable debt.
    Senator Biden. You are good, Brady.
    [Laughter.]
    Senator Biden. I forgot how much I liked working with you 
over the years. You are so good.
    Mr. Williamson. Senator, Chapter 7's only last a brief 
amount of time and during that period, of course, a bankruptcy 
judge can insist that child support be paid. Chapter 13's may 
last 3 years or 4 years, but one thing we haven't talked about, 
a dark secret here, is that 3 out of every 4 Chapter 13's fail. 
And when they fail and when the debtor is sent out of the 
courtroom into the world, each of that debtor's creditors with 
a non-dischargeable debt--it is passed through bankruptcy 
whether it is 7 or 13--is on the same footing.
    They can go to the single mother or single father with 
children and say we want you to pass. And during the bankruptcy 
process, they can go to that same single mother and say, look, 
we will let you keep your credit card, you just have to 
reaffirm the debt.
    Now, we haven't talked about reaffirmations here, and I 
think we are all aware of the instances in the last 3 years 
where major credit institutions have abused the reaffirmation 
system. This legislation needs to pay more attention to that 
issue.
    The system is about balance, Senator, and it has to be 
balanced and it has to prevent abuse. Bankruptcy judges can 
provide balance if they have the discretion. I associate myself 
with Judge Newsome's remarks because we need to give bankruptcy 
judges flexibility, not put them in straightjackets, and that 
applies as well to the means test.
    Senator Sessions. Senator Schumer?

 STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR FROM THE 
                       STATE OF NEW YORK

    Senator Schumer. Thank you, Mr. Chairman. I thank everyone 
here. I think this is an excellent hearing, no matter what side 
of the issue you are on, because we are really discussing the 
issues. This is our committee, I think, at its best and I 
appreciate everybody being here.
    We were not allowed to make opening statements. I am going 
to make part of my opening statement now and then ask that the 
rest be put in the record, and then I will ask a few questions 
if I have time. Otherwise, I will wait for the second round.
    First, I want to thank everybody, all the witnesses for 
being here, and especially Maria Vullo, who is an attorney from 
New York. As we know now, she litigated the Nuremberg Files 
cases.
    Ms. Vullo, I can say to you that in the ante room there, 
two of my colleagues were talking and one said to the other I 
wouldn't want to be litigating against her--the ultimate 
compliment to a litigator.
    Mr. Chairman, bankruptcy law and bankruptcy legislation is 
complicated. It is sometimes archaic, and I can safely say that 
when I walk into, say, O'Halloran's Pub on Clinton Road and see 
my constituents, they are not saying what is new with the 
homestead exemption, the means test and safe harbors, Charlie.
    The fundamental idea behind bankruptcy law and bankruptcy 
reform is actually a fundamental and very simple one. Good 
bankruptcy reform means strengthening the protections for the 
neediest debtors by giving them a safety valve to deal with 
misfortunes that may befall them, while at the same time 
shoring up the system to prevent abusive filings by debtors who 
do not need bankruptcy protections. It is that simple, Mr. 
Chairman, balance the need to protect vulnerable Americans with 
the need to prevent abuses.
    Last year, I opposed the bill that ended up emerging from 
the shadow conference because I think the bill got the wrong 
balance. I am hopeful that this year we will work to achieve 
truly balanced bankruptcy reform, something that is going to 
cure abuses but doesn't throw out the baby with the bath water.
    I hope we are not going to try to jam the same bill through 
that came out of the shadow conference. That bill, which had 
been unilaterally stripped of the FACE amendment, the so-called 
now Schumer-Leahy amendment, had passed 80 to 17.
    By now, I think everyone involved in bankruptcy knows that 
the FACE amendment prevents those who engage in violence and 
intimidation at abortion clinics from hiding behind the 
Bankruptcy Code to escape their court-imposed debt. This 
provision makes clear to those who would harm women and doctors 
that bankruptcy is no escape from accountability for their 
heinous acts. They have tried to use the bankruptcy courts for 
that.
    Now, what could be wrong with that purpose, as my good 
colleague and friend from Delaware said? Probably everyone on 
this panel agrees with that, and the issue frankly is not pro-
choice or pro-life; it is pro-law. That is why Harry Reid, who 
is pro-life, joined as a cosponsor immediately. That is why 
when I first passed the FACE law in the House we had a 
coalition of pro-choice and pro-life Congress members 
supporting it.
    That is why last year Senators Jeffords, Snowe, Collins and 
Specter made this a wholly bipartisan effort. And that is why, 
when they heard bankruptcy was bring brought up again this 
year, Senators Reid and Jeffords quickly approached me to 
stress their support and desire to cosponsor the amendment.
    And that is why our new Attorney General was so outspoken 
both publicly and privately at his confirmation hearings about 
his support for the FACE amendment. In the last Congress, the 
Justice Department was a strong supporter of FACE. In fact, I 
would like to ask unanimous consent that the DOJ letter I 
received last year showing DOJ's position which outlines why 
this law is so important be placed in the record.
    Senator Sessions. Without objection.
    Senator Schumer. Given Attorney General Ashcroft's pledge 
to enforce FACE and his explicit support of the FACE amendment, 
I hope that this year it will be included in the bankruptcy 
bill.
    Let's not kid ourselves. Attacks on clinics and clinic 
workers are often planned by sophisticated individuals and 
organizations. Violent activists who hide their assets to avoid 
financial repercussions are quite capable of working bankruptcy 
into their schemes to commit violence without accountability if 
they believe it will work.
    Ms. Vullo testified about the Nuremberg Files case. It is 
not fiction. Your testimony was riveting. What happened there 
was appalling and offensive. What is happening now in the 
bankruptcy courts is equally appalling and offensive. We need 
to shut it down. If we don't, there is a substantial risk that 
others will pervert the Bankruptcy Code and it will become a 
widespread tactic used by those who believe that their message 
is more important than our American law and the Bankruptcy Code 
will be perverted.
    Can any of us really doubt that the groups that Ms. Vullo 
has litigated against, if given the chance, will not continue 
to force clinics and doctors, and relitigate and relitigate and 
relitigate? That is my dispute with my good colleague from 
Delaware. He is right that if these little clinics had free 
lawyers--they don't even have to be as good as Ms. Vullo--they 
would win. But they don't. The opponents have huge amounts of 
money and go to court after court after court. And we all know 
in practical effect what the consequence will be. It will be 
that bankruptcy will be a shield from judgment.
    Now, some have argued--we hear this argument a lot--about 
the willful and malicious standard. They say FACE debts would 
be covered. First, I have never argued that FACE debts would 
never be covered. Certainly, some would be if they were proven 
to fall under the willful and malicious injury exception. But 
this in no way means that all FACE debts are covered by that 
exception.
    In the Nuremberg case, the judge made explicit findings of 
maliciousness and intentionality that made it easier in the 
bankruptcy cases to argue that the willful and malicious injury 
exception applies. But even in these cases which should be slam 
dunks, Ms. Vullo and the plaintiffs have spent more than a year 
litigating in bankruptcy court.
    What about cases where there are settlements and part of 
the stipulation of the settlement is we are not going to find 
willful and malicious and there is a judgment? Then what do we 
do? Many, many, many cases end in settlement, probably more 
than actually end in judgment. So it is vital that we make 
perfectly clear that FACE debts are non-dischargeable. If we 
don't, the individuals and organizations seeking to shut down 
clinics will continue to force clinics, doctors and other 
victims of clinic violence into a world of perpetual 
litigation. By doing so, they may well deter victims of clinic 
violence from ever bringing a case in the first instance.
    Mr. Chairman, I have a lot more to say on this subject, but 
I am going to ask unanimous consent that my entire statement be 
put into the record.
    Senator Sessions. We would be glad to. Once again, ably 
delivered.
    Mr. Zywicki, would you respond to Judge Newsome's 
suggestion or statement that judges would find it difficult to 
interpret the means test language in this bill? How hard and 
complex would that be?
    Mr. Zywicki. It is much less complex than under current 
law. Basically, what happens under current law is judges just 
kind of make it up as they go along, just sort of an open-ended 
inquiry. If you read the cases, you see cases all over the 
place. He says it is being refined by case law. That is simply 
not the case. The cases are all over the place, and what this 
does is brings order to it.
    Senator Sessions. Cases on abuse?
    Mr. Zywicki. Yes, cases on abuse. There is no consistency.
    Senator Sessions. But under the proposed language of this 
bill, to what extent is that ambiguous or unclear?
    Mr. Zywicki. This is much less ambiguous or unclear. It 
identifies things very clearly, and most importantly it 
provides a list of expenses and that sort of things. And then 
what it does is cabins at the end a judge's discretion and 
says, look, here is your discretion, here is a simple list to 
follow and here is your discretion; apply your discretion, but 
subject to guidance, not just according to willy nilly 
preferences. So I don't think there is any problem with 
applying the means test as it is drafted.
    Senator Sessions. With regard to the legislation, I think 
it has previously been noted, but this bill passed the House in 
June 1998, 306 to 118, essentially this bill with the means 
test in it. In the Senate, it passed in 1998, 97 to 1. In the 
House, it passed again in May 1999, 313 to 108. In the Senate, 
it passed February 2, 2000, 83 to 14. In the House, it passed 
again on voice vote virtually unanimously, I suppose, without 
even a roll call vote. It passed 70 to 28 in the Senate.
    There have been six different times this bill has been up 
and passed by overwhelming majorities. We don't want to not 
have hearings and let everybody talk, but sometimes it is time 
to stand up and vote and I think we are about at that point 
now.
    Senator Biden, I will let you go now and if I have any 
follow-ups, I will follow you.
    Senator Biden. One of the reasons I think this hearing is 
important is that there has been so much misinformation that 
has been out there across the board. I would argue initially 
the misinformation was on the part of the creditors 4 years 
ago. Now, I would argue the misinformation is on the part of 
those opposing this legislation.
    I start off with sort of just a common-sense notion here. 
Why are there so many more bankruptcies? Why has that happened? 
Part of what our ethic was was that bankruptcy was something 
that was an absolute last resort and was something that you 
really tried to avoid because it had a social stigma related to 
it, beyond a financial stigma related to it. That isn't the 
case anymore. It is not working that way anymore. People still 
need bankruptcy protection. That is why we got rid of debtor 
prisons.
    The irony here is I have been for my 28 years in the Senate 
characterized by the business community as too much of a pro-
consumer Senator. I have found it kind of ironic that one of 
the things that has been argued here today is that--and I might 
add, Mr. Manning, without any data to support it; I have seen 
no hard data. I read your entire report. I have no hard data 
where you support the idea that you state that you have a 
direct connection between bankruptcy and credit card debt. I 
have not seen that data that you have supported here.
    One of the things I heard today was the autistic child; 
what about the person with the autistic child? Doesn't the 
judge need discretion for that? Well, that is a medical 
expense. Under this legislation, that is set aside. Where the 
heck does that come in? I don't get that. Obviously, I don't 
want to hurt people who have autistic children, but you all 
make it seem like the autistic child is in trouble, you know, 
the parent with the autistic child.
    Brady, I don't think we have been on the opposite of an 
issue, except this one. I can't think of it. How long have we 
known each other, 25 years?
    Mr. Williamson. Twenty-8 years.
    Senator Biden. As a matter of fact, I tried very hard to 
hire you to be my main guy. You were making too much money to 
come work for me.
    Mr. Williamson. Senator, it was your first day in the 
Senate that we met.
    Senator Biden. Well, that is 28 years, and I really have 
overwhelming respect for you and you know that. We have been 
old friends. You have supported me.
    Now, reaffirmation. Are you alleging that for a creditor to 
insist on reaffirmation is easier under the new proposal we are 
making than it is under the old?
    Mr. Williamson. I would not suggest, Senator, that the 
legislation you are holding in your right hand is a model of 
good draftsmanship.
    Senator Biden. I didn't say that. Brady, stop playing games 
with me. Is reaffirmation, as poorly drafted as your brilliant 
drafting capability may discern--is it tighter or looser than 
the existing bankruptcy law? Remember, your legal reputation is 
part of this.
    [Laughter.]
    Senator Schumer. But if he demolishes it, you could always 
get a job with him.
    Senator Biden. I want him any time he is willing to come.
    Mr. Williamson. Senator, I would say that the intent of the 
folks who put that together was to make it slightly tougher.
    Senator Biden. Not intent. Does it make it tougher, Brady, 
or not?
    Mr. Williamson. Senator, I don't think so.
    Senator Biden. I will get back to you on that. The second 
thing I want to ask you about is what new non-dischargeable 
category of debt do we have in this legislation?
    Mr. Williamson. The category of unsecured debt that can be 
non-dischargeable is increased significantly.
    Senator Biden. How?
    Mr. Williamson. The time limits.
    Senator Biden. Right, but no new category, right?
    Mr. Williamson. Well, if you--
    Senator Biden. That is what you said. You said new category 
of debt.
    Mr. Williamson. If you expand the category of non-
dischargeable unsecured debt incurred within 30 days--
    Senator Biden. Let's go like when we were in grade school, 
you know, file them. Do you mean category in that if you put 
more of a debt within a category subjected to non-
dischargeability--if you increase the number or lower the 
number, that is a new category. Is that what you are saying?
    Mr. Williamson. It is certainly an expanded category.
    Senator Biden. OK, then that may be more accurate, wouldn't 
it be, because there is no new category?
    Mr. Williamson. Actually, there are.
    Senator Biden. Name me one.
    Mr. Williamson. I believe the drunk driving penalty 
exception is a new category of non-dischargeable debt.
    Senator Biden. You are right. That is a good one. You agree 
with that, don't you?
    Senator Sessions. Abortion clinics. How about that?
    Senator Biden. We want to make abortion clinics non-
dischargeable, too. But there is no new category of debt that 
the creditors are seeking, is there, that you are aware of?
    Mr. Williamson. Senator, I don't want to be involved in 
semantics with you because of your caution about games. But if 
you expand from 30 days to 90 days--
    Senator Biden. OK, but it is not a new category. It is a 
time limit. You argue that that makes somebody more 
susceptible, but it is not a new category. I mean, that is the 
part I am trying to get at here. I wish you would all be a 
little straightforward with this. You are opposed to this flat 
out.
    Mr. Williamson. That is not correct, sir.
    Senator Biden. Oh, give me a break.
    Mr. Williamson. Senator, whether it is a category or not, 
it is whale of a lot of new debt.
    Senator Biden. OK, that I buy. Just try to be straight with 
me. If you were staffing me and you did that to me, then I 
would fire you because you would not be telling me the straight 
stuff. Just give the straight scoop. That is all I want to 
know, that is all I am trying to figure out. I really mean 
this. That is all I am trying to figure out because a lot of 
games are being playing here, not by you, but everybody out 
here is playing games with this stuff.
    What gets communicated to the press--there was a Time 
magazine article--I think it was Time magazine, wasn't it, that 
was riddled with absolute, total, complete fabrications, not 
because I think the guy writing the article was, in fact, 
somebody who tried to fabricate it, but because he heard things 
like new categories. He heard things like the autistic child, 
he heard things like be able to escape from debt on the 
abortion clinic. No one has escaped yet.
    Ms. Vullo makes an incredible case, I think. I hope the 
credit card industry and I hope the creditors out there are 
listening because she is making a very strong point. Now is the 
time to put pressure on my conservative friends to accept her 
position.
    Senator Schumer. Hear, hear.
    Senator Biden. But the point is she said it straight, she 
said it straight. It may be someday that somebody will be 
discharged in bankruptcy. It may be that someone is convicted 
under FACE and, in fact, gets discharged, but none of that has 
happened yet. But what has happened is it is costly. I am just 
trying to get my arms around this a little bit here.
    Your statement, Brady--any reasonable person listening to 
what you said earlier would walk away thinking that 
reaffirmation is easier to do under this legislation than 
exists today. I doubt whether any honest person would conclude 
that that wouldn't be the conclusion. Maybe that is not what 
you intended, but the way you state it, it makes it sound that 
way.
    Creditors are not people I am crazy about because I am 
listed as--I am not, but I am listed as the poorest Member of 
Congress, literally. I mean, I am not.
    Senator Schumer. Wait a minute.
    Senator Biden. No, no. Seriously, the Washington Post four 
or 5 years ago listed me as the poorest Member of Congress 
because I refinanced my home to pay for Yale, Penn and 
Georgetown. That is what happened. And I am not because the guy 
who does my financial disclosure didn't list the equity in my 
home, because under our stupid rules in order to list the 
equity in your home you have to have a current assessment. It 
costs $500 to get one done. I didn't want to spend $500. I 
would rather pay it to Georgetown than do that.
    To make a long story short, I am not the poorest, but I am 
not a debt-free guy. I am not like a lot of our colleagues here 
who the last thing they have ever seen is having to take that 
lazy susan and spin it around and decide who gets paid this 
month. Some of us still do that who have this job. So I don't 
come at this like we are going to go out there and squeeze 
every penny out of folks out there.
    But I start off with the proposition that something is 
rotten in Denmark, as the old expression used to be. An awful 
lot of people are discharging debt who shouldn't. This 
voluminous increase in filings--it is exponential what has 
happened. Something is up, and that happened when the economy 
was booming, absolutely booming.
    Now, I am not a real smart fellow maybe, but there is 
something wrong. Something is going on here, and it says to me 
it has got to be tightened, for a simple reason, and the 
gentleman on the end made the comment, as did Mr. Sheaffer. 
Guess what? People who come from my economic class where I grew 
up pay more now; they pay more. They pay more in the cost of 
the product at Boscov's and other places where we shop, not 
where a lot of the people who are getting out of the big 
bankruptcies shop. Nobody who has a big bankruptcy shops at 
Boscov's.
    [Laughter.]
    Senator Biden. I am not joking. I am not trying to be funny 
here. This is serious, this is serious.
    So what happens? I ask my colleagues, try to think back to 
the time when you were just starting. You just got out of law 
school, you just got out of college and you are trying to buy 
the car and you are trying to get the first bit of credit. All 
that is going on here is the people it is hurting is not the 
wealthy people. As bankruptcies increase astronomically like 
this and in geometric proportion, it is hurting people where I 
come from.
    So I am so sick of this self-righteous sheen put on anybody 
who wants to tighten up bankruptcy is really anti-debtor. 
People are getting hurt, people are getting hurt. Again, I very 
much want to work out the two big provisions relating to 
Chuck's initiative--and I give him great credit for that--and 
also on your initiative, which is homesteading. We ought to be 
able to force this issue.
    So my message to the creditors out there who want this 
tightened up is get on the team, join the band wagon, put as 
much pressure on the folks who won't do that as you put on 
people who are opposed to any change. I hope that message goes 
out clearly.
    The second piece of this is there has got to be a way--
Brady, if you are right, and if you are right, Judge, that on 
the extreme, at the end of the day, even though we put women 
and children first, like in sinking ships--even if they are 
first, there ought to be a way where we can make them the first 
among equals.
    And we are not putting any new categories of debt in here, 
but maybe as we expand categories, and marginally, I might add, 
marginally--as we expand those categories, maybe we can still 
come up with a provision that says women and children cannot, 
even after they fail in 13, be subject to it, or even after 
they lose their job.
    I find that one a hard one, Judge. I was a family court 
lawyer. I did these things. I wasn't a big-time lawyer. I was 
just a plain old trial lawyer, and I spent a lot of time as a 
public defender and a lot of time in family court going after 
those support payments and going after that stuff.
    I didn't know anybody I ever ran across in my experience 
who would quit their job, because this legislation exists, in 
order to spite their circumstances than would do it now. I 
mean, I find that a real leap. But I hope there is a good-faith 
way we can try to fine-tune this, if you still think you have 
got to fine-tune it.
    But something is wrong with a system that allows guys like 
me getting out of law school discharging our law school debt 
front-end, guys like me getting out of medical school 
discharging their medical school debt.
    Judge Newsome. You would never be able to do that.
    Senator Biden. Like heck you can't.
    Judge Newsome. Not under this system you can't, not the one 
we have got right now. You can't get out of a medical debt. It 
is a HEELS loan most of the time, and you can't get out of 
those for love or money.
    Senator Biden. By the way, that is not the only debt people 
acquire going through school.
    Judge Newsome. And as to the law school debt, if those are 
educational loans, those are presumed non-dischargeable.
    Senator Biden. No, no, they are not educational loans. I 
graduated $100,000 in debt and they were commercial loans. I 
didn't get one of those. I didn't qualify. My sons still have 
$120,000 they are paying off. You are full of malarkey, Judge.
    Judge Newsome. They probably still would be under the 
statute.
    Senator Biden. Well, then I had better let my sons know 
that. Maybe they can get moving before this gets changed.
    [Laughter.]
    Senator Biden. Anyway, I just think this is--
    Judge Newsome. By the way, there is a new category of debt. 
It is 523(a(19) and it deals with loans that you take from your 
pension plan.
    Senator Biden. Protected?
    Judge Newsome. No, non-dischargeable.
    Senator Biden. Non-dischargeable. That is what I mean.
    Judge Newsome. OK.
    Senator Biden. And that wasn't pushed by creditors, by the 
way.
    Judge Newsome. I think it is a good provision.
    Senator Biden. I do, too, and the other one, drunk driving, 
is too, and this one is, too. Anyway, I just hope we get a 
little bit of sanity into this debate here and stop the games.
    Senator Sessions. I thank the Senator.
    Senator Biden. Thank you.
    Senator Sessions. The Senator from New York.
    Senator Schumer. Thank you, Mr. Chairman. First, I want to 
thank my colleague from Delaware not only for the passion which 
he brings to this--we disagree on some of the issues--but 
particularly for his understanding of why the amendment I am 
proposing is so important, which you brought out, Ms. Vullo.
    I certainly would hope that we could get people to accept 
at this time his call for the creditor community to use their 
suasion with people who have opposed this amendment. It would 
be very helpful because we do have majority support. It is 
simply that we couldn't get it through because a few people 
didn't want it to be part of it.
    Coming from New York, of course, I get lots of calls from 
people who want this bill, heads of big financial institutions, 
and they say can't you withdraw your amendment? I say, well, if 
you get your wife to call me, I might consider that. Not a 
single wife has called me because they know that our amendment 
is the right amendment.
    I just wanted to clarify a couple of things with Ms. Vullo. 
Let's just go over the sense of time that it has taken you to 
do this. First, how long did it take you to litigate the 
Nuremberg Files case, start to finish?
    Ms. Vullo. From October 1995--the jury verdict was February 
2, 1999, so 3\1/2\ years before trial and verdict.
    Senator Schumer. OK, and now how many more years has it 
taken with bankruptcy?
    Ms. Vullo. It is now 2 years, last week.
    Senator Schumer. Have your plaintiffs collected a nickel?
    Ms. Vullo. A little bit more than that, a couple of 
thousand dollars by a garnishment of a corporate entity, not 
from any of the individuals because the individuals filed for 
bankruptcy when the--
    Senator Schumer. So in none of the individual cases have 
they gotten any money yet?
    Ms. Vullo. That is correct.
    Senator Schumer. And if this group whom you represented--if 
the plaintiffs didn't have a top-notch pro bono lawyer, what do 
you think would have happened?
    Ms. Vullo. I don't think the case would have been brought 
in the first instance, which is another reason, Senator, for 
why the amendment to the Bankruptcy Code relates very directly 
to the importance of the FACE statute itself, because you won't 
bring the FACE claim if you know that they are just going to, 
after the verdict, file for bankruptcy.
    Senator Schumer. Right, and the amount of money in most of 
the settlements and judgments so far--yours is a particularly 
notorious case--would not compensate a lawyer even on a 
contingency fee basis in general. Is that right?
    Ms. Vullo. That is correct.
    Senator Schumer. Thank you, Mr. Chairman.
    Senator Sessions. On the question of reaffirmations, I was 
asked to meet, Mr. Williamson, with Senator Reid, the White 
House and the Department of Justice. We hammered out 
reaffirmation language that did have some political give-and-
take in it. It is not perhaps law review style, but it 
satisfied the Department of Justice and the Clinton White 
House, and it provided more protections, as Senator Biden said, 
clearly than were in existence before the law.
    Senator Biden. Would you yield for a question? Didn't the 
White House push this?
    Senator Sessions. Yes, they pushed this kind of language 
and we agreed to it.
    Senator Biden. Brady has always been to the left of Clinton 
anyway, so it doesn't matter.
    Senator Sessions. But more than that, reaffirmation is 
nothing but one of these arguments, in my view, that has 
nothing to do with it of importance here fundamentally. A 
person can go out and buy a room full of furniture or a washing 
machine and he or she signs a note at whatever interest rate 
the parties agree to. There is no lawyer present most of the 
time under those circumstances. Instead they sign it, and that 
is it.
    But under bankruptcy law, they do have lawyers and the 
lawyer signs off on the reaffirmation. So at least they have 
had legal counsel. But that is not enough. They want to have 
the judge approve it. So we provided a method in which the 
information is provided to the judge and some standards that 
would say that if it was unfair or abusive to the debtor who is 
reaffirming the debt so they could keep the washing machine, 
there would be less problems. I think we made a good stop 
without creating a hearing for every doggone reaffirmation that 
goes on.
    Mr. Williamson, the Bankruptcy Commission never formally 
voted on a means test, is that correct?
    Mr. Williamson. That is correct, Senator.
    Senator Sessions. And they didn't take a formal position on 
it one way or the other?
    Mr. Williamson. That is correct, Senator.
    Senator Sessions. With regard to homestead, it is an area 
of abuse, in my view, and I believe that bankruptcy law is 
Federal law. It is provided for in the U.S. Constitution and 
bankruptcy court judges are Federal judges.
    Now, I am a States'-righter, and sometimes Senator Biden is 
a fierce States'-righter, too. This is a Federal law that is 
litigated in Federal court, but somewhere along the line 
Congress decided it couldn't reach an agreement on what the 
homestead limitations ought to be, so they punted it to the 
States and let the States decide what homestead limits would 
be. Some said none, and as a result people have the ability of 
abusing the system, while other States have set varying limits.
    I don't think it violates States' rights to do so, but our 
Senators from Kansas and Texas and Florida and some other 
States have even agreed to the homestead fix contained in this 
bill--note that these laws override their States' laws, even 
their constitutions. Despite that's though, we were able to 
work out a solution that they were amendable to and that was 
fairer to everyone involved. So we have made substantial 
progress in eliminating abuses. If somebody ran from Mobile to 
Pensacola, and filed bankruptcy within 2 years, they could not 
protect but $100,000 of equity in their home.
    Also, we provided that you could go back 7 years if you 
could establish an abuse scheme--and it is not always 
impossible to establish an abusive scheme--and then take that 
equity, except for $100,000.
    Senator Biden. Mr. Chairman, I wonder how many people plan 
2 years ahead of time they are going to declare bankruptcy 
before they declare it and that is why they buy the home. I 
mean, that is a lot of foresight. That is pretty good.
    Senator Sessions. But if they did it by calculation and 
deviousness and delayed it for 2 years, then you could still go 
back under the fraud exception. So I think we made real 
progress in homestead.
    I think the benefits for children and alimony are clearly 
superior, and I believe that justice in America must hold that 
a person who is making an average income in America and who can 
pay at least a part of his or her debts ought to pay them. Some 
say, well, we don't want to pay medical debts, but hospitals 
are people, too, in a sense. They serve people, they have 
needs.
    Why should somebody who is capable of paying a part of 
their hospital bill, pay nothing? Other people work very hard 
to pay their hospital bills and sacrifice to maintain good 
insurance. Oftentimes, it is an irresponsible person who wants 
to ride on the responsible person.
    I think bankruptcy, at its core, has the potential to be 
unfair to the responsible American citizen. That is who we most 
should affirm, the one who does right. We do allow, however, 
historically--and there will be no problem in this quarter--to 
maintain the right of a person in need who cannot pay his or 
her debts to wipe them out completely. That is not being 
changed. The needs-based issue is important for justice, basic 
morality and fairness. If a person can pay, they should pay.
    Senator Biden. Mr. Chairman, would you yield me 60 seconds?
    Senator Sessions. Yes.
    Senator Biden. I want to make two points. With regard to 
the safe harbor provisions in here, just to set the record 
straight, I didn't draft this bill. This is not my 
subcommittee. I did not get involved in this. But when it was 
pointed out to me over a year ago that there was concern about 
poor people being subject and women and children being at the 
end of the line, I asked for a meeting with some of the largest 
creditors out there.
    I told them that I wouldn't support this legislation unless 
there was a safe harbor provision put in and women and children 
went to the head of the line, expecting there to be an 
argument. Not one single bit of opposition; total, immediate 
support; zero opposition, none. One of them representing a 
large non-Delaware credit card company made the following 
comment: we don't want to be put in the position where we are 
going after so little money for so high a public relations 
cost, we don't want any part of that. So I just hope people 
understand that piece.
    The second piece is I want to make the point I was for 
States' rights in Bush v. Gore and I don't know what happened.
    Thank you.
    Senator Sessions. Let me say this. Thank you all. It was an 
excellent discussion. As you can tell, we have discussed many 
of these issues before. They have been wrestled with, and 
sometime in the sausage-making process of laws being passed, 
certain compromises get made.
    I must say, finally, Dr. Manning, on credit cards, that is 
really a banking issue. What kind of regulations should be 
placed on a credit card company offering credit to a poor 
person is really, I think, not part of creating a Federal 
system of bankruptcy law. I think we should be cautious about 
what we do in that regard.
    In fact, the Chairman of the Banking Committee has asserted 
aggressively his belief that this is outside of our 
jurisdiction. So I think fundamentally concerns about credit 
cards should be directed to that committee. I would not want to 
pass a law that made it more difficult for a poor person to be 
able to get a credit card, because if they don't have ready 
cash and they are on the margin--anytime they have a flat tire, 
for example, and can't afford to fix their care without credit, 
that would be a bad thing. Credit cards are not evil things, 
per se. They have great advantages in many circumstances for 
poor people, and I would just caution everyone to remember 
that.
    Senators Grassley and Kennedy have submitted written 
statements which we will include in the record.
    [The prepared statements of Senators Grassley and Kennedy 
follow:]

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

    Senator Sessions, thank you for chairing this hearing on bankruptcy 
reform, which we all consider to be unfinished business from the 106 
th Congress. As you know, the issue of bankruptcy reform is 
familiar to all of us here in the Senate. For the past 4 years, we've 
debated the fundamental rights of both borrowers and creditors, for the 
greater good of individuals, society, and the economy. We've looked at 
this issue at great length an in excruciating detail. The Judiciary 
Subcommittee on Administrative Oversight and the Courts held, I 
believe, eleven hearings over the past two Congresses, and heard 
testimony from almost 90 witnesses on all aspects of bankruptcy. We 
debated bankruptcy reform extensively on the floor in both the 105 
th and 106 th Congresses, and last December we 
passed a bipartisan, compromise bill by a vote of 70 to 28. That piece 
of legislation received overwhelming support of Senators on both sides 
of the aisle.
    Unfortunately, President Clinton pocket-vetoed that good 
legislation, and we here in the Senate did not have the opportunity to 
override it. We had the votes to do so. That was too bad, because we 
need bankruptcy reform. But I'm hopeful that we'll be able to move 
swiftly in this Congress and get the job done. That is why Senators 
Hatch, Sessions and Johnson joined me in reintroducing the exact same 
conference report that was approved by the Senate with overwhelming 
bipartisan support. I know many other members on both sides of the 
aisle support this bill and want to see it passed into law.
    I repeat, this bill is unfinished business. This is not new stuff. 
We are not covering new ground. In fact, we don't even need to be in 
Committee. But in the interest of addressing Senator Leahy's concerns 
that new Senators on the Committee have a chance to familiarize 
themselves with this issue, we're holding this hearing today with the 
hope of proceeding quickly to this bill on the floor.
    The current bankruptcy system needs to be reformed. Presently, when 
individuals file for bankruptcy under Chapter 7, a court proceeding 
takes place, and their debts are simply erased. We must realize that 
every time a debt is wiped away through bankruptcy, someone loses 
money. When someone loses money in this way, he or she has to decide to 
either assume the loss as a cost of business, or raise prices for other 
customers to make up that loss.
    When bankruptcy losses are infrequent, lenders can just swallow the 
loss. But when they are frequent, lenders need to raise prices to other 
consumers to offset their losses. These higher prices translate into 
higher interest rates for future borrowers. You'll recall that former 
Treasury Secretary Larry Summers--a liberal Democrat--testified before 
the Senate Finance Committee that bankruptcies tend to drive up 
interest rates. With the possibility of the economy slowing down, we 
need to fix a bankruptcy system that inflates interest rates and 
threatens to make a slowdown even worse. Bankruptcy reform will help 
the economy.
    So, the result of the bankruptcy crisis is that hardworking, law 
abiding Americans have to pay higher prices for goods and services. S. 
220 would make it harder for individuals who can repay their debts from 
filing bankruptcy under Chapter 7, thus lessening the upward pressure 
on interest rates and higher prices. It's only fair to require people 
who can repay their debts to pull their own weight. But under current 
bankruptcy law, one can get full debt cancellation in Chapter 7 with no 
questions asked. Our bill asks the question of whether repayment is 
possible by an individual, and if it is, then he or she will be 
channeled into Chapter 13 of the Bankruptcy Code, which requires people 
to repay a portion of their debt as a pre-condition for limited debt 
cancellation.
    Let me be clear, people who don't have the ability to repay their 
debt can still use the bankruptcy system as they would have before. S. 
220 specifically provides that people of limited income can still file 
under Chapter 7. But the bill makes it so that people who have higher 
incomes and who can repay their debts, their free ride is over.
    Personal responsibility has been one of the main themes of the 
bankruptcy reform bill. I say this because since 1993, in the midst of 
prosperity and with a booming economy, the numbers of Americans who 
declared bankruptcy has increased over 100 percent. While no one knows 
all the reasons underlying the bankruptcy crisis, the data shows that 
bankruptcies increased dramatically during the same time frame when 
unemployment was low and real wages were at an all-time high. I believe 
that the bankruptcy crisis is a moral crisis. We need to stop people 
from looking at bankruptcy as a convenient financial planning tool 
where honest Americans will have to foot the bill.
    So, it is clear to me that our lax bankruptcy system must bear some 
of the blame for the bankruptcy crisis. A system where people are not 
even asked whether they can pay off their debts obviously contributes 
to the fraying of the moral fiber of our nation. Why should people pay 
their bills when the system allows you to walk away with no questions 
asked? Why should people honor their obligations when they can take the 
easy way out through bankruptcy? I think the system needs to be 
reformed because this is fundamentally unfair. Our bankruptcy reform 
bill will promote personal responsibility among borrowers and create a 
deterrence for those hoping to cheat the system.
    Our bill does more than just provide for a flexible meanstest that 
gives judges discretion to consider the individual circumstances of 
each debtor to determine whether they truly belong in Chapter 7. It 
also contains tough new consumer protections, like new procedures to 
prevent companies from using threats to coerce debtors into paying 
debts which could be wiped away once they are in bankruptcy. The bill 
requires the Justice Department to concentrate law enforcement 
resources on enforcing consumer protection laws against abusive debt 
collection practices. The bill contains significant new disclosures for 
consumers by mandating that credit card companies provide key 
information about how much they owe and how long it will take to pay 
off their credit card debt by only making a minimum payment. Consumers 
will also be given a toll-free number to call where they can get 
information about how long it will take to pay off their own credit 
card balances if they make only the minimum payments. This will educate 
consumers and improve consumers' understanding of their financial 
situation. And credit card companies that offer credit cards over the 
internet will be required for the first time to fully comply with the 
Truth in Lending Act.
    Moreover, our bill makes changes which will help particularly 
vulnerable segments of our society. Child support claimants are given 
the highest priority when the assets of a bankruptcy estate are 
distributed to creditors. Bankruptcy trustees and creditors of 
bankrupts will be required to give information about the location of 
deadbeat parents who owe child support.
    I also want to touch on another important section of the bill. S. 
220 makes Chapter 12 of the Bankruptcy Code permanent. This means that 
America's family farms are guaranteed the ability to reorganize. But 
the bill goes further. It makes improvements to Chapter 12 so it will 
be more accessible and helpful for farmers. For example, the definition 
of the family farmer is widened so more farmers can qualify for Chapter 
12 bankruptcy protection. S. 220 also reduces the priority of capital 
gains tax liabilities for farm assets sold as a part of a 
reorganization plan, which will allow cash-strapped farmers to sell 
livestock, grain, and other farm assets to generate cash flow when 
liquidity is essential to maintaining a family farm operation. These 
reforms will make Chapter 12 even more effective in protecting 
America's family farms during difficult times. I think it's a crying 
shame that the opponents of bankruptcy reform have prevented Chapter 12 
from being reauthorized and modernized. It was an outrage that 
President Clinton pocket-vetoed the bankruptcy bill and denied the 
farmers in my state of Iowa and across the country the bankruptcy 
protections they really need.
    Over the last ten years our economy has enjoyed unprecedented 
success. But as we have seen, economic stagnation can occur just as 
quickly as an upswing. On a macro-economic level, enacting bankruptcy 
reform will help stimulate the economy by lessening upward pressure on 
interest rates. So, by passing meaningful bankruptcy reform, we can 
help our economy and simultaneously contribute to rebuilding our 
nation's moral foundations. I look forward to hearing from our 
witnesses this morning.

                                

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

    I welcome this hearing to consider this important issue once again.
    In the past four years, supporters and opponents of bankruptcy 
legislation have disagreed many times about this legislation. Many of 
us feel strongly that Congress should not pass sweetheart legislation 
for the credit card industry. We do need to pass a bill to reduce fraud 
and abuse--but it should also maintain the long-standing safety net for 
vulnerable Americans who deserve it. Scores of bankruptcy scholars, 
advocates for women and children, labor unions, consumer advocates, and 
civil rights organizations agree with our position.
    For weeks, President Bush has warned the nation about the potential 
problems of the current economic downturn. Pointing to layoffs and 
rising unemployment, decreasing consumer confidence, and low economic 
growth, President Bush is urging Congress to pass legislation to 
strengthen the economy. But punitive bankruptcy reform legislation 
doesn't fall in that category. Now more than ever, we need to ensure 
that Americans losing their jobs or struggling with medical debt have 
the second chance for economic security that bankruptcy laws are 
intended to provide. This is especially no time to pull the rug out 
from under them.
    We know the circumstances and market forces that often push middle 
class Americans into bankruptcy.
    A rising unemployment rate and company layoffs are a major part of 
the problem. The slowing economy led to an unemployment rate of 4.2% in 
January--the highest level in 16 months--and every week brings reports 
of new layoffs that may well lead to bankruptcy for many families in 
coming months.
    Divorce is another major cause of bankruptcy. Divorce rates have 
soared in recent decades--and the financial consequences are 
particularly devastating for women. Divorced women are four times more 
likely to file for bankruptcy than married women or single men. In 
1999, 540,000 women--540,000--who head their own households filed for 
bankruptcy to try to stabilize their lives. 200,000 of them were also 
creditors trying to collect child support or alimony. The rest were 
debtors struggling to make ends meet.
    Another major factor in bankruptcy is the high cost 43 million 
Americans have no health insurance, and many more are under-insured. 
Each year, millions of families spend more than 20 percent of their 
income on medical care. Older Americans are hit particularly hard. A 
1998 CRS Report states that even though Medicare provides generally 
good health coverage for older Americans, half of this age group spend 
14 percent or more of their after-tax income on out-of pocket health 
costs, including insurance premiums, co-payments and prescription 
drugs.
    These Americans are not cheats and frauds--but they do constitute 
the vast number of Americans in bankruptcy. Two out of every three 
bankruptcy filers have an employment problem. Two out of every five 
bankruptcy filers have a health care problem. Divorced or separated 
people are three more likely than married couples to file for 
bankruptcy. Yet, the credit card industry and the Republican Congress 
determined to deny them the bankruptcy safety. net in order to ensure 
larger and larger profits for itself.
    This legislation is an undeserved windfall for one of the most 
profitable industries in America. Credit card companies are engaged in 
massive and unseemly nation wide campaigns to hook unsuspecting 
citizens on credit card debt. They sent out 2.87 billion--2.87 
billion--credit card solicitations in 1999. In recent years, the 
industry has even begun to offer new lines of credit targeted 
specifically at people with low income--even though the industry knows 
full well that these persons cannot afford to pile up such debt.
    Supporters of the bill argue that it is not a credit card industry 
bill. But, to deal effectively and comprehensively with the problem of 
bankruptcy, we have to deal with the problem of debt. We must see that 
the credit card industry does not abandon fair lending policies to 
fatten its bottom line, or ask Congress to become the collector for its 
unpaid credit card bills.
    Proponents of the bill also say that it ensures that alimony and 
child support will be the number one priority in bankruptcy. That 
rhetoric hides the complexity of the bankruptcy system--but it doesn't 
hide the fact that women and children will be the losers if this bill 
becomes law.
    Under current law, an ex-wife trying to collect support has special 
protection. But under the pending bill, credit card companies are given 
a new right to compete with women and children for the husband's 
limited income after bankruptcy.
    It is true that the bill moves support payments to the first 
priority position in the bankruptcy code. But that only matters in the 
limited number of cases where the debtor actually has assets to 
distribute to a creditor. In most bankruptcy cases--over 95 percent--
there are no assets, and the list of priorities has no effect.
    As 116 professors of bankruptcy and commercial law have stated, 
``Granting `first priority' to alimony and support claims is not the 
magic solution the consumer credit industry claims, because `priority' 
is relevant only for distributions made to creditors in the bankruptcy 
case itself. Such distributions are made in only a negligible 
percentage of cases. More than 95% of bankruptcy cases make NO 
distributions to any creditors because there are no assets to 
distribute. Granting women and children first priority for bankruptcy 
distributions permits them to stand first in line to collect nothing.''
    Similarly, thirty-one organizations that support women and children 
have stated, ``Some improvements were made in the domestic support 
provisions . . . however, even the revised provisions fail to solve the 
problems created by the rest of the bill, which gives many other 
creditors greater claims--both during and after bankruptcy--than they 
have under current law.''
    This legislation unfairly targets middle class and poor families--
and it leaves flagrant abuses in place. Any credible bankruptcy reform 
bill must include two important provisions--a homestead provision 
without loopholes for the wealthy, and a provision that requires 
accountability and responsibility from those who unlawfully--and often 
violently--bar access to legal health services. The current bill 
includes neither provision.
    The bill does include a half-hearted loophole-filled homestead 
provision that will do little to eliminate fraud. With a little 
planning--or in some cases, no planning at all--wealthy debtors will be 
able to hide millions of dollars in assets from their creditors.
    Last year, the Senate passed a worthwhile amendment to eliminate 
this inequity. But that provision was stripped from the conference 
report. Surely, a bill designed to end fraud and abuse should include a 
loophole-free homestead provision.
    I urge my colleagues to stop peddling legislation to increase the 
profits of the credit card industry--already one of the most profitable 
industries in the country--at the expense of working families. It's 
time to pass true bankruptcy reform legislation that fairly balances 
the needs of both creditors and debtors.
    I look forward to the testimony of today's witnesses.

    Senator Sessions. We also have several letters and 
statements which have been submitted and we will include those 
in the record at this point.
    The record will be open for further statements until 
Friday.
    [The prepared statement and attachments of Senator Durbin 
and the prepared statement of Senator Thurmond follow:]

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

    Mr. Chairman, thank you for holding today's hearing on bankruptcy 
reform. Although we have debated bankruptcy legislation for several 
years, the last time I participated in hearings on the subject was in 
the 105 th Congress, when I first served on this Committee. 
That was approximately three years ago. A lot has changed in three 
years.
    Three years ago, bankruptcy filings were not only up, they had 
reached record setting levels. According to the Administrative Office 
of the U.S. Courts, there were 1,436,964 bankruptcy filings in fiscal 
year 1998, of which 1,389,839 (96.7%) were consumer bankruptcies. Now, 
three years later, bankruptcy filings are down.
    In fact, the 1998 numbers seemed to be the peak. Bankruptcy 
filings--especially personal filings--dropped significantly in 1999--
down to 1,315,751 personal bankruptcies--and dropped again in 2000, 
when the figure fell even further to 1, 226,037. That's 163,000 fewer 
personal bankruptcy filings in 2000 than in the peak year, 1998. This 
represents a 12% reduction in just two years.
    Chapter 7 bankruptcies--``fresh start'' filings--are coming down at 
an even faster pace, from 1,026,134 in 1998 to just under a million--
959,292--in 1999, with a further decrease to 870,805 in fiscal year 
2000--a 15% reduction in only two years.
    Three years ago, I worked with Senator Grassley to develop a 
bipartisan balanced bankruptcy bill that addressed both irresponsible 
debtors and irresponsible creditors.
    Ninety-seven Senators supported this bill and agreed to legislation 
that would have eliminated both debtor and creditor abuses while 
ensuring the availability of information that permits consumers to make 
informed financial decisions. Unfortunately, the bill was decimated in 
conference and I could not support it in the end.
    This year, we have before us last year's bankruptcy bill. It is the 
same bill that, as written last year, failed to meet the basic test of 
fairness and balance. I opposed this unbalanced bill last year.
    President Clinton recognized the lack of balance and wisely pocket 
vetoed the bill last Congress.
    Our bill in the 105 th Congress included debtor specific 
information that would enable cardholders to examine their current 
credit card debt in tangible terms, driving home the seriousness of 
their financial situation.
    The bill before us today permits banks with less than $250 million 
in assets to have the Federal Reserve provide its customers with a 
tollfree phone number to review their credit card balances for the next 
two years. It is unclear whether the banks would be required to provide 
the service themselves after the two years are complete.
    This exemption would cover 4,000 banks holding about $3 billion in 
consumer credit card debt. This is a departure from a balanced 
approach.
    The bill also fails to close the homestead loophole. Under this 
bill, a renter or someone with less wealth will get to keep nothing, 
but a homeowner who has equity in her home that existed prior to the 
two year cut off can keep all the equity. By failing to include a hard 
cap, this provision only benefits the rich.
    The current bankruptcy bill also fails to include an amendment 
sponsored by the senior Senator from New York, Senator Schumer, which 
would prevent documented abuse of the bankruptcy system by those who 
violate the Freedom of Access to Clinic Entrances Act (FACE) or an 
equivalent state law. In most cases where a defendant is held liable 
under the FACE Act, there is no finding that the action was ``willful 
and malicious'' and the FACE Act often includes acts which may not be 
classified as ``acts of violence'' (e.g., an act of intimidation or 
verbal harassment). Without Senator Schumer's amendment, this bill 
would continue to allow many perpetrators of clinic violence to seek 
shelter in the nation's bankruptcy courts.
    For these reasons, although I am all for bankruptcy reform, I 
cannot support the bankruptcy bill in its current form. It is 
unbalanced.
    One hundred and sixteen nonpartisan law professors also recognized 
this in their letter to Congress last year. In their letter, the law 
professors noted how ``deeply flawed'' the bankruptcy bill is and its 
adverse affect on women and children.
    Mr. Chairman, I ask for unanimous consent that the letter from the 
116 nonpartisan law professors be entered into the record.
    Mr. Chairman, I just received a letter from the American Academy of 
Matrimonial Lawyers, also expressing their ``deep concern'' about the 
reintroduction of this bankruptcy bill. In it they say, ``We believe 
that children should come before credit card companies.'' I ask 
unanimous consent that this letter also be entered into the record.
    ``Balance'' is certainly the order of the day. We're in a new 
Congress, with a balanced, 50/50 Senate. We also have a new President, 
faced with the challenge of uniting an evenly-divided electorate. And 
we have a new and real opportunity to work together and pass balanced 
and meaningful bankruptcy reform.
    While there are some positive aspects to this bill, we could, and 
we should, do much better. I look forward to working with my colleagues 
both here in this Committee and on the Senate floor to improve this 
bill and give all American people and businesses balanced meaningful 
bankruptcy reform.

                                

                                                HARVARD LAW
                                                   October 25, 2000

    Re: The Bankruptcy Reform Act Conference Report (H.R. 2415)

    Dear Senators:
    We are professors of bankruptcy and commercial law. We have been 
following the bankruptcy reform process with keen interest. The 75 
undersigned professors come to every region of the country and from all 
major political parties. We are not a partisan, organized group, and we 
have no agenda. Our exclusive interest is to seek the enactment of a 
fair and just bankruptcy law, with appropriate regard given to the 
interests of debtors and creditors alike, Many of us have written 
before to express our concerns about the bankruptcy legislation, and we 
write again as yet another version of the bill comes before you- This 
bill is deeply flawed, and we hope the Senate will not act on it in the 
closing minutes of this session.
    In a letter to you dated September 7, 1999, 82 professors of 
bankruptcy law from across the country expressed their gave concerns 
about some of the provisions of S. 625, particularly the effects of the 
bill on worsen clad children. We wrote again on November 2, 1999, to 
reiterate our concerns. We write yet again to bring the same message: 
the problems with the bankruptcy bill have not been resolved, 
particularly those provisions that adversely affect women end children.
    Notwithstanding tire unsupported claims of the bill's proponents, 
H.R. 2415 does not help women and children. Thirty-one organizations 
devotee! exclusively to promoting the best interests of Women; and 
children continue to oppose the pending bankruptcy bill. The concerns 
expressed in our earlier letters showing how S. 625 would hurt woman 
and children have not been resolved. Indeed, they have not event been 
addressed.
    First, one of the biggest problems the bill presents for worsen and 
children was stated in tile September 7, 1999, letter:
``Women and children as creditors will have to compete with powerful 
        creditors to collect their claims after bankruptcy,''
    This increased competition for women and children will come from 
many quarters: from powerful credit card issuers, whose credit card 
claims increasingly will be excepted from discharge and remain legal 
obligations of the debtor after bankruptcy; from large retailers, who 
will have an easier tinge obtaining reactions of debt that legally 
could be discharged; and from creditors claiming they bold security, 
even when the alleged collateral is virtually worthless. Atone of the 
changes made to S. 625 and none being proposed in H.R. 2415 addresses 
these problems. The truth remains: if H.R. 2415 is enacted in its 
current form, women, and children will face increased competition in 
collecting their alimony and support claims after the bankruptcy case 
is over. We have pointed out this difficulty repeatedly, but no charge 
has been made in the bill to address it.
    Second., it is a distraction to argue- as do advocates of the 
bill--that the bill will ``help'' women and children--and that it will 
``make child support and alimony payments the top priority--no 
exceptions.'' As the law professors pointed out in the September 7, 
1999, letter:
``Giving `first priority' to domestic support obligations does not 
        address the problem.''
    Granting ``first priority'' to alimony and support claims is not 
the magic solution the consumer credit industry claims because 
`priority'' is--relevant only for distributions made to creditors in 
the bankruptcy case itself. Such distributions are made in only a 
negligible percentage of cases. More than 95% of bankruptcy cases make 
NO distributions to airy creditors because there are no assets to 
distribute. Granting women and children a first priority for bankruptcy 
distributions permits them to stand first in line to collect nothing.
    Woman's hard-fought battle is. over reaching the ex-husband's 
income after bankruptcy. Under current law, child support and alimony 
share a protected post-bankruptcy position with only two other 
recurrent collectors of debt-taxes and student loans. The credit 
industry asks that credit card debt and other consumer credit share 
that position, thereby elbowing aside tile women trying to collect on 
their own behalf. The credit industry carefully avoids discussing the 
increased post-bankruptcy competition facing women if H.R. 2415 becomes 
law. As a matter of public policy, this country should riot elevate 
credit card debt to the preferred position of taxes and child support. 
Once again, we have pointed out this problem repeatedly, and nothing 
has been changed in the pending legislation to address it.
    In addition to the concerns raised on behalf of the thousands of 
women who are straggling now to collect alimony and child support after 
their ex-husband's bankruptcies, we also express our concerns on behalf 
of the more than half a million women heads of household who will file 
for bankruptcy this year alone. As the heads of the economically most 
vulnerable families, they have a. special stake in the pending 
legislation. Women heads of households are now the largest demographic 
group in bankruptcy, and according to the credit industry's owndata, 
they are the poorest. The provisions in this bill, particularly the 
many provisions that apply without regard to income, will fall hardest 
on them. Under this bill, a single mother with dependent children who 
is hopelessly insolvent and whose income is far below the national 
median income would have her bankruptcy case dismissed if she does not 
present copies of income tax returns for the past three years--even if 
those returns are in the possession of her ex-husband. A single mother 
who hoped to work through a chapter 13 payment plan would be forced to 
pay every penny of the entire debt owed on almost worthless items of 
collateral, such as used furniture or children's clothes, even if it 
meant that successful completion of a repayment plan was impossible.
    Finally, when the Senate passed S. 625, we were hopeful that the 
final bankruptcy legislation would include a meaningful homestead 
provision to address flagrant abuse in the bankruptcy system. Instead 
the conference report retreats from the concept underlying the Senate-
passed homestead amendment.
The homestead provision in the conference report will allow wealthy 
        debtors to hide assets from their creditors.
    Current bankruptcy law yields to state law to determine what 
property shall remain exempt from creditor attachment and levy. 
Homestead exemptions are highly variable by state, and six states 
(Florida, Iowa, Kansas, South Dakota, Texas, Oklahoma) have literally 
unlimited exemptions while twenty-two states have exemptions of $10,000 
or loss. The variation among states leads to two problems--basic 
inequality and strategic bankruptcy planning- The only solution is a 
dollar cap on the homestead exemption. Although variation among states 
would remain, the most outrageous abuses--those in the multi-million 
dollar category--would be eliminated.
    The homestead provision in the conference report does little to 
address the problem. The legislation only requires a debtor to wait two 
years after the purchase of the homestead before filing a bankruptcy 
case. Well-counseled debtors will have no problem timing their 
bankruptcies or tying-up the courts in litigation to skirt the intent 
of this provision. The proposed change will remind debtors to buy their 
property early, but it will not deny anyone with substantial assets a 
chance to protect property from. their creditors. Furthermore, debtors 
who are long-time residents of states like Texas and Florida will 
continue to enjoy a homestead exemption that can shield literally 
millions of dollars in Value.
    These facts are unassailable: H.R. 2415 forces women. to compete 
with sophisticated creditors to collect alimony and child support after 
bankruptcy. H.R. 241.5 makes it harder for women to declare bankruptcy 
when they are in financial trouble. H.R. 2415 fails to close the 
glaring homestead loophole and permits wealthy debtors to hide assets 
from their creditors. We implore you to look beyond the distorted 
``facts'' peddled by the credit industry. Please do not pass a bill 
that will hurt vulnerable Americans, including women and children.
    Thank you for your consideration.

Peter A Alces
Professor of Law
College of William and Mary
Williamsburg, Virginia

Peter C. Alexander
The Dickinson School of Law
Penn State University
Carlisle, Pennsylvania

Thomas B. Allington
Professor and Associate Dean for Technology
Indiana University School of Law
Indianapolis, Indiana

Allan Axelrod
William J. Brennan Professor Emeritus Of Law
Rutgers Law School
Newark, New Jersey

Douglas G. Baird
Harry A. Bigelow Distinguished Service Professor
University of Chicago Law School
Chicago, Illinois

Laura B. Batten
Associate Professor of Law
Wayne Sate University Law School

Andrea Coles Bjerre
Visiting Assistant Professor of Law
University of Oregon School of Law
Eugene, Oregon

Susan Block-Lieb
Professor of Law
Fordham University School of Law
New York, New York

Amelia H. Boss
Charles Klein. Professor of Law
Temple University School of Law
Philadelphia, PA

William W. Bratton
Samuel Tyler Research Professor of Law
The George Washington University Law School
Washington, D.C.

Jean Braucher
Roger Henderson Professor of Law
University of Arizona

Ralph Brubaker
Associate Professor of Laws
Emory University School of Law
Atlanta, Georgia

Mark B. Budnitz
Professor of Law
Georgia State University
Atlanta, Georgia

Daniel J. Bussel
Professor of Law
UCLA School of Lawn
Los Angeles, California

Marianne B. Culhane
Creighton Law School
Omaha, Nebraska

Jeffrey Davis
Professor and Louis G. Sohn Research Scholar
University of Florida Law School
Gainesville, Florida

Susan DeJarnatt
Assistant Professor of Law
Temple University School of Law
Philadelphia, Pennsylvania

Paulette J. Delk
Professor of Law
Cecil C. Humphreys School of Law
The University of Memphis
Memphis, Tennessee

A. Mechele Dickerson
Professor of Law
William & Mary Law School
Williamsburg, Virginia

Thomas L. Eovaldi
Professor of Law
Northwestern University School of Law

David G. Epstein
Professor of Law
University of Alabama Law School
Tuscaloosa, Alabama

Christopher W. Frost
Brown, Todd & Heyburn Professor of Law
University of Kentucky
College of Law
Lexington, Kentucky

Nicholas Georgakopoulos
Professor of Law
University of Connecticut School of Law
visiting Indiana University School Of Law
Indianapolis, Indiana

Michael A. Gerber
Professor of Law
Brooklyn Law School
Brooklyn, New York

Marjorie L. Girth
Professor of Law
Georgia State University College of Law

Ronald C. Griffin
Professor of Lain
Washburn University School of Law
Topeka, Kansas

Professor Karen Gross
New York Law School
New York, New York

Matthew P. Harrington
Professor of Law
Roger William University
Bristol, Rhode Island

Joann Henderson
Professor of Law
University of Idaho College of Law
Moscow, Idaho

Adam Hirsch
Professor of Law
Florida State University

Margaret Howard
Professor of Law
Vanderbilt University Law School
Nashville, Tennessee

Sarah Jane Hughes
University Scholar arid Fellow in Commercial Law
Indiana University School of Law
Bloomington, Indiana

Kenneth N. Klee
Acting Professor of Law
University of California at Los Angeles School of Law
Los Angeles, California

Don Korobkin
Professor of Law
Rutgers-Camden School of Law
Camden, New Jersey

Edward J. Jangar
Associate Professor
Brooklyn Law School
Brooklyn, New York

Lawrence Kalevitch
Professor of Law
Shepard Broad Law Canter
Nova Southeastern University
Fort Lauderdale, Florida

Allen Kemp
Professor of Law
John Marshall Law School

Professor Lawrence King
Charles Seligson Professor of Law
New York University School of Law
New York, New York

John W. Larson
Associate Professor of Law
Florida State University
Tallahassee, Florida

Robert M. Lawless
Professor of Law
University of Missouri-Columbia
Columbia, Missouri

Leonard J. Long
Professor of Law
Quinnipiac University School of Law
Hamden, Connecticut

Lois R. Lupica
Associate Professor of Law
University of Maine School of Law
Portland, Maine

William H. Lyons
Richard H. Larson Professor of Tax Law
College of Law
University of Nebraska
Lincoln, Nebraska

Bruce A. Markell
Professor of Law
William S. Boyd School of Law, UNLV

Nathalie Martin
Assistant Professor of Law
University of New Mexico School of Law

Judith L. Maute
Professor of Law
University of Oklahoma Law Center

Juliet Moringiello
Associate Professor
Widener University School of Law
Harrisburg, Pennsylvania

Jeffrey W. Morns
Professor of Law
University of Dayton School of Law

Spencer Neth
Professor of Law
Case Western Reserve University
Cleveland, Ohio

Gary Neustadter
Professor of Law
Santa Clara University School of Law
Santa Clara, California

Nathaniel C. Nichols
Assoc. Professor of Law
Widener at Delaware

Scott F. Norberg
Visiting Professor of Law
University of California
Hastings College of the Law
San Francisco, California

Dean Pawlowic
Professor of Law
Texas Tech University School of Law
Lubbock, Texas

Lawrence Ponoroff
Vice Dean and Mitchell Franklin Professor of Law
Tulane Law School
New Orleans, Louisiana

Doug Rendleman
Huntley Professor
Washington and Lee Law School
Lexington, Virginia

Alan N. Resnick
Benjamin Weintraub Professor of Law
Hofstra University School of Law
Hempstead, New York

Alan Schwartz
Professor of Law
Yale University
New Haven, Connecticut

Steven L. Schwartz
Professor of Law
Duke Law School
Durham, North Carolina

Charles J. Senger
Professor of Law
Thomas M. Cooley Law School

Stephen L. Sepinuck
Professor of Law
Gonzaga University School of Law
Spokane, Washington

Charles Shafer
Professor of Law
University of Baltimore Law School
Baltimore, Maryland

Melvin G. Shimm
Professor of Law Emeritus
Duke University Law School
Durham, North Carolina

Charles J. Tabb
Professor of Law
University of Illinois

Walter Taggert
Professor of Law
Villanova University Law School
Villanova, Pennsylvania

Marshall Tracht
Professor of Law
Hofstra Law School
Hampstead, New York

Bernard Trujillo
Assistant Professor
U. Wisconsin Law School
Madison, Wisconsin

William T--Vukowich
Professor of Law
Georgetown University Law Center
Washington, D.C.

Thomas M. Ward
Professor of Law
University of Maine School of Law
Portland, Maine

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

John Weistart
Professor of Law
Duke University School of Law
Durham, North Carolina

Elaine A. Welle
Winston S. Howard Distinguished Professor of Law
University of Wyoming
College of Law
Laramie, Wyoming

Jay L. Westbrook
Benno Schmidt Chair of Business Law
University of Texas School of Law
Austin, Texas

William C. Whitford
Emeritus Professor of Law
Wisconsin Law School
Madison, Wisconsin

Mary Jo Wiggins
Professor of Law
University of San Diego Law School
San Diego, California

Peter Winship
Professor of Law
SMU School of Law
Dallas, Texas

William. J. Woodward, Jr.
I. Herman Stein Professor of Law
Temple University
Philadelphia, Pennsylvania

                                

                                        American Academy of
                                        Matrimonial Lawyers
                                    Chicago, Illinois 60601
                                                   February 7, 2001

Senator Edward M. Kennedy
315 Russell Senate Office Building
United States Senate
Washington, DC 20510

Representative Jerald Nadler
B336 Rayburn House Office Building
United States House of Representatives
Washington, DC 20515

    Dear Senator Kennedy and Representative Nadler;
    As president of the American Academy of Matrimonial Lawyers (AAML), 
I am writing to express the deep concern of the Academy over the re-
introduction and fast-tracking of the bankruptcy ``reform'' legislation 
5.220 and H.R.333 and it's adverse effect on children and families 
receiving child support payments.
    The Academy believes credit card debts should retain their 
unsecured status, because their nondischargeability will affect the 
debtor's ability to pay child support, alimony and property 
settlements.
    The bill as written will change existing law in a way that is 
extremely harmful to women and children. While at first reading it 
appears that.support payments have ``priority,'' the reality is that 
protection exists only for a limited amount of time.
    In a Chapter 7 case the non-dischargeability of the credit card 
debt will mean that the debtor does not truly have a ``fresh start' and 
will be unable to pay all his remaining obligations; most specifically 
support obligations and potentially a property settlement payment.
    In a Chapter 13 case the credit card debts are treated equally with 
support obligations when devising a payment plan, .thus the support 
obligationreceives.a pro-rata payment only while under existing law 
they have a priority.
    We believe that children should come before credit card companies.
    We urge the defeat of this legislation.

            Respectfully yours,

                                       Charles C. Shainberg

                                

  Statement of Hon. Strom Thurmond, a U.S. Senator from the State of 
                             South Carolina

    Mr. Chairman:
    I am pleased that we are holding this hearing today on bankruptcy 
reform.
    There is a great need to reform our Bankruptcy Code to address the 
abuse of the system that is widespread today. At one time in America, 
the vast majority of people were determined to pay their debts and 
there was a stigma attached to filing for bankruptcy. However, today, 
filing for bankruptcy is much more accepted in society, and it has 
become much more routine, even in the booming economy of recent years.
    In 1999 alone, about 1.4 million Americans filed for bankruptcy. 
These numbers represent more than a four-fold increase in the past 
twenty years. The huge number of filings is a serious, national problem 
that effects all Americans. We cannot allow bankruptcy to be used as a 
tool for financial planning.
    The Bankruptcy Reform Act, which passed the Congress last year and 
has already been reintroduced, would target the abuses. The bill would 
require people to reorganize their debts when they can afford to repay 
them. It would prevent the much too common practice today of people 
choosing to discharge their debts in bankruptcy rather than repay what 
they can over time.
    In addition, the bill contains special provisions to protect women 
who depend on child support to provide for their families. It would 
make child support payments the top priority for payment in bankruptcy.
    Finally, the bill would reauthorize many important bankruptcy 
judgeships, including one in my home state of South Carolina, and make 
special bankruptcy protections for farmers permanent in the law.
    The problems in bankruptcy are not new, and neither are our efforts 
to solve them. In recent years, this Committee has held numerous 
hearings and has extensively debated legislation to provide 
comprehensive, needed changes to the current outdated system. The 
Bankruptcy Reform Act that we passed late in the last Congress was a 
good, compromise bill. It passed both houses of the Congress by wide 
margins with bipartisan support. Unfortunately, President Clinton chose 
not to sign the bill. However, I am confident that the current 
Administration will be more receptive to the Congress's bankruptcy 
reform agenda.
    I hope the new Congress can act quickly on this critical 
legislation. It is a serious problem that must be addressed without 
further delay.
    We are adjourned.
    [Whereupon, at 12:46 p.m., the committee was adjourned.]
    [Questions and answers, and submissions for the record 
follow:]
    [Additional material is being retained in the Committee 
files.]

                         QUESTIONS AND ANSWERS

     Responses of Philip L. Strauss to Questions from Senator Biden

                       Department of Child Support Services
                                            San Francisco, CA 94105

Hon. Joseph R. Biden, Jr.
Senate Judiciary Committee
U.S. Senate
Dirksen Senate
Building, Room 224
Washington, D.C. 20510

ATTN: Kristen A. Cabral, Esq.

    Re: Response to Memorandum of the National Bankruptcy Conference: 
Erosion of the Discharge and the Myth of ``Special Protection'' for 
Domestic Support Obligations

Dear Senator Biden:

    On February 21, 2001 a facsimile transmission was received by my 
office requesting a response to a memorandum of the National Bankruptcy 
Conference entitled ``Erosion of the Discharge and the. Myth of Special 
Protection'' for Domestic Support Obligations. I was attending a 
conference the week this request was received so I am submitting the 
answers somewhat late. I apologize for the delay.
    In three and one-half single spaced pages the memorandum made two 
points. One, that giving first priority status to domestic support 
obligations will have little effect on collecting support. The argument 
made is that to have an effect the estate must have assets and the vast 
majority of cases filed are no asset Chapter 7 cases. The second point 
was that support creditors would be severely hampered in their efforts 
to collect support after bankruptcy because of the existence of debt 
which was previously dischargeable
    In answer to the first issue I make three points:
    1. The ``vast majority of cases'' in general appears not to reflect 
the profile of domestic support cases. It has been said that 95% of 
bankruptcy petitions filed are no asset Chapter 7. cases. I ask whether 
anyone has attempted to profile the typical domestic relations debtor 
to determine what percentage of this population files Chapter 13 cases 
(which, by definition, have assets) as opposed to Chapter 7 cases?
    This morning I had our office run a report of all bankruptcy cases 
in the San Francisco Department of Child Support Services. The results 
indicated that 530 of the bankruptcy cases on our system are Chapter 13 
cases. Thus, among child support debtors, 53% of the cases have assets. 
I cannot believe that San Francisco differs that much statistically 
from the general support-debtor population which files bankruptcies.
    This result is not surprising to me since I see every bankruptcy 
case coming into my office and know that a very high percentage are 
Chapter 13 filings. Since support debtors have already been found to 
have the ability to pay support by a domestic relations court, it is 
not unreasonable to conclude such debtors have assets to protect and 
therefore file under Chapter 13 more frequently than the population at 
large. And, lest we forget, S. 220 will require a greater percentage of 
bankruptcy debtors to file Chapter 13 cases, thus substantially 
increasing the use of support enforcement enhancements of S. 220 to 
collect support.
    2. Priority for all child support debts is enormously important in 
Chapter 13 cases. Since a debtor in a Chapter 13 case must repay all 
arrears during the term of the Chapter 13 plan, unless the creditor 
agrees otherwise, the priority status will insure that, to the extent 
feasible, all debts in the nature of support will be paid. Thus, the 
distribution of assets to priority creditors is not illusory at all.
    In addition S. 220 makes all support debts enforceable against the 
debtor's exempt property. Thus, support creditors may be able to 
satisfy their support obligations even in no asset cases when the 
debtor has exempted property from the estate.\1\
---------------------------------------------------------------------------
    \1\ See the amendment to 11 U.S.C. Sec. 522(c)(1) contained in 
section 216 of the bill.
---------------------------------------------------------------------------
    3. Enormous benefits for support creditors, other than receiving 
first priority are contained in the bill. The National Bankruptcy 
Conference memorandum did not address the various and considerable 
benefits support creditors receive in other sections of the bill. 
Section 212 deals with priorities, but other provisions do a great deal 
more good than section 212.
        a. Section 213 prevents confirmation of plans and discharge of 
        debts when postpetition support is not paid in full.
        b. Section 214 excepts numerous support collection devices from 
        the reach of the automatic stay, thus allowing support 
        collection to proceed without interruption from the bankruptcy 
        stay.
        c. Section 215 prevents the discharge of non-support divorce 
        debts, which in far too many cases are necessary for the 
        maintenance and well-being of an exspouse.
        d. Section 216 prevents the debtor from removing liens securing 
        support from his property and subjects the debtor's exempt 
        property to the enforcement of support debts.
        e. Section 217 prevents the recovery by the trustee of support 
        payments actually paid by the debtor to the support creditor 
        before the bankruptcy was filed.
        f. Section 219 requires the trustee to provide important notice 
        to support creditors in order to insure that their debts will 
        be collected.
    All in all, criticizing this bill because the priority provision in 
section 212 in not helpful is like burning down a house because the 
chimney doesn't work. But the chimney does work here. While the 
priority status in Chapter 7 cases may not provide wide spread 
benefits, it certainly will in Chapter 13 cases.
    The second issue raised by the memorandum is that, with all 
this'newly nondischargeable-debt, support will be harder to collect. No 
professional support collector sees the existence of newly 
nondischargeable debt as an impediment to support collection! The 
argument advanced is that credit card companies ``are institutionally 
well suited to use the courts to collect their claims'' while the ex-
spouse is ``not institutionally established to collect these debts.'' 
One wonders, of course, how cost effective it will be for a credit card 
company to use the courts in the first place to commence the collection 
process.
    I submit, however, that if a support creditor wants the debt 
collected, this creditor will have to take some action to get the debt 
collected, unless the creditor wishes to rely on the good faith of the 
debtor to pay the debt voluntarily. In my experience this collection 
technique is nearly worthless.
    The federal child support enforcement program \2\ provides an easy 
solution to this problem for generally needy and dependent mothers. It 
is an institutionally established means to collect support debts after 
bankruptcy. It exists in every jurisdiction of every state in this 
country. It is provided free or for a nominal fee. And information 
regarding this service must, under section 219 of the bill, be provided 
to every support creditor by the bankruptcy trustee.
---------------------------------------------------------------------------
    \2\ Social Security Act, Title IV-D, Sec. Sec. 451-469 (42 U.S.C. 
99651-669).
---------------------------------------------------------------------------
    Once the support creditor obtains either private or government 
provided support collection assistance, the competitive advantages 
available to the support collector over financial institutions are 
staggering. For this reason I do not believe that credit card debt, 
either before or after bankruptcy, stands in the same. position as 
support debt with respect to its collectibility. Support collection 
advantages outside of (or after) bankruptcy competitively overwhelm 
financial institutions. For example the following post-bankruptcy 
collection advantages are available to support creditors, and not to 
credit card or other financial institutions:
        a. Priority wage withholding to collect support. This advantage 
        is stunning. It means that whenever a wage garnishment is filed 
        by a support creditor, it will assume immediate priority over 
        any other garnishment, no matter when filed. And since the S. 
        220 allows wage withholding to continue or be implemented after 
        the bankruptcy has been filed, the collection of support in the 
        normal case will never be held hostage to bankruptcy, before, 
        during, or after the case is completed.
        b. Interception of state and federal tax refunds to pay child 
        support arrears.
        c. Garnishment or interception of Workers' Compensation or 
        Unemployment Insurance Benefits.
        d. Free or low cost collection services, provided by the 
        government.
        e. Use of interstate processes to collect support arrearage, 
        including interstate earnings withholding orders and interstate 
        real estate liens.
        f. Revocation or suspension of driver's, professional and 
        recreational licenses of support delinquents.
        g. Criminal prosecution and contempt procedures for failing to 
        pay support debts.
        h. Federal prosecution for nonpayment of support and federal 
        collection of support debts.
        i. Denial of passports to support debtors.
        j. Automatic treatment of support debts as judgments which are 
        collectible under state judgment laws, including garnishment, 
        execution, and real and personal property liens.
        k. Collection of support debts from exempt assets.
    While this list is not exhaustive, it is certainly illustrative of 
the vastly superior advantages of support creditors over commercial 
creditors. For these reasons I do not consider S. 220 as a mechanism 
for aggravating the problem of collecting post-bankruptcy support 
debts.
    Agencies, such as mine, operating the federal child support 
enforcement program are funded in part by incentives based on 
collections. We would hardly be advocating a bill which had the 
potential of reducing post-bankruptcy collections and consequently 
funding incentives. It is for this reason that the following national 
organizations, whose membership consists mostly of persons employed in 
or funded by the federal support enforcement program, support this 
bill.
        a. The National Child Support Enforcement Association
        b. The National District Attorneys Association
        c. The National Association of Attorneys General
        d. The Western Interstate Child Support Enforcement Council
    The National Child Support Enforcement Association, alone, 
represents over 60,000 child support professionals in this country. I 
attach their letter of support asking the President to sign last year's 
version this bill.
    One final note. The National Bankruptcy Conference contrasts the 
96% success rate in collection by credit card companies with the rather 
dismal support collection rate for women. On its face this statistic is 
absurd because it deals with two distinct populations. To be fair we 
would have to ask what the credit card company collection rate is for 
persons already in economic trouble and not paying support. What 
percentage of people owing child support even have credit cards. And 
since support agencies must report support delinquents to credit 
reporting agencies, persons with significant support debt will not be 
issued credit cards in the first place. What's more, even as to those 
``deadbeats'' who could, but are not, paying support but who are paying 
credit card debt to retain their cards, I have the strongest doubts 
that they would commence paying their support debts simply because 
their credit card debt was extinguished. If history has any 
significance, those credit cards would simply be reloaded with consumer 
debt.
    Therefore I am not at all impressed by the significance that the 
general credit card population pays its bills. I am more concerned that 
this comparison makes tacit assumptions which are just illogical, if 
not, in fact, dead wrong. The most ill advised assumption being the 
supposition that the payment characteristics of the general credit card 
population have any relevance to the general support debtor population.
    I hope this letter answers the issues raised by the National 
Bankruptcy Conference. If you have any other questions please do not 
hesitate to contact me.
            Yours very truly,
                                         Philip L. Strausss
                                         Principal Attorney
                               Department of Child Support Services

    cc. Hon. Orrin Hatch, Chairman, Senate Judiciary Committee

                                

   Responses of K.H. Beine to Questions submitted by Senator Feingold

                                     Shoreline Credit Union
                                          Two Rivers, WI 54241-0233
Jane Butterfield, Committee Liaison
US Senate Judiciary Committee

FROM: K H Beine

Re: Written Questions from Senator Russ Feingold, Bankruptcy Abuse 
Prevention Legislation

    Question 1: Testimony focused on means test, reaffirmations and 
mandatory credit counseling. Reaction to other provisions of S. 220.
    While my testimony focused on three specific issues as CUNA's 
priorities in S. 220, we recognize that the bill is the product of many 
years of debate and compromise. Because it is balanced between many 
interests, it is not perfect for any particular group. And because of 
that balance, CUNA is reluctant to pick apart individual parts of the 
bill at this stage of the legislative process.
    I assume your question regarding the nondischargeability of credit 
cards refers to section 310 of the bill. This is a fairness issue. We 
are unusually careful with respect to granting credit including credit 
card limits. In addition we bend over backwards to assist members in 
trouble. Yet despite those efforts we often times loose along with 
everyone else when someone decides that it is no longer convenient to 
repay their debts. A debt is a debt. If the person has the ability to 
repay, then whether something was purchased on time payments or viii a 
check that bounces or via a credit card, the debt should be repaid.
    Regarding your question on section 311 of the bill, credit unions 
are sympathetic to the needs of housing for people. There are practical 
difficulties, however, with this issue. Experience has shown that some 
people, as a planning tool, file bankruptcy just to stop eviction 
proceedings. Somehow this doesn't seem fair.
    With respect to the provision on cramdowns, if it does not remain 
in the bill it would make auto credit terms for future borrowers that 
much tougher.

    Question 2: Testimony regards Shoreline Credit Unions banlauptcy 
experience.
    Before I answer your questions, I both have to commend you for your 
astute observation and apologize for an incorrect number on the Pact 
Sheet that accompanied the written testimony. Shoreline Credit Unions 
losses due to bankruptcy for the 2000 calendar year were $64,186.
    Shoreline's losses due to bankruptcy are very low and are not 
material at the present time. However they have never the less doubled 
each of the last three years. And yes, (and I thank you for your kind 
comments) that is despite the fact that indeed we are careful lenders 
and do evaluate our loan applicants with great care.
    So, doubling or not, if below the national average, why am I 
concerned? We can absorb one more doubling within our present operating 
cost structure. However if losses double twice rnore we will be at 
$250,000. That is hs1f our credit unions net earnings in recent years. 
Game over.
    We are a $50M credit union. Our deposit base on average grows about 
10% per year. Credit unions, like banks, have minimum regulatory 
capital requirements. However our earnings are our only source of 
additions to capital. We cannot sell stock to bring in outside capital 
as other financials. We therefore need to earn a ROA, Return on Assets, 
of approx 1.00% per year to maintain a reasonable 8-12% capital ratio. 
If losses reach the $250k mark as noted above, I will have no choice 
but to increase general loan interest rates to recover this ``cost of 
doing business''.
    Who will pay those increased rates? Everyone to a certain extent, 
which is not fair, but for the most part those members who can least 
afford it. How will it be done? By applying ``risk: lending'' 
procedures, i.e. charging higher rates to those debtors who because of 
past credit problems and already high debt ratios present a higher risk 
and have a propensity to generate losses.
    With respect to your position that perhaps the private sector could 
fix the current ``bankruptcy crisis'' with more careful lending, T do 
not believe that is possible. First of all the general ``tightening'' 
of credit across the country that would be necessary to accomplish that 
would, in my opinion, be detrimental to the economy. (And in all 
probability hurt many in the lower income areas who most need ready 
access to credit.) And second the comfortable and repeated use of 
bankruptcy as a financial management tool has become so pervasive that 
I do not think drat the private sector can stem the tide on its own.

    Question 3: Reaffirmation agreements.
    While credit unions continue to enjoy a substantially higher 
reaffirmation rate than other financial entities, the number of rations 
is on the decrease. For example, in our case, prior to the mid 1990's 
Shoreline enjoyed an almost 100% reaffirmation rate. Reaffirmations are 
now running approx 50%. Why the drop? Often times the debtor's anorney 
argues against reaffirmation or flat out refuses to sign the agreement. 
And it takes a rare individual, regardless of what we may have done for 
them; to voluntarily repay a debt that has been discharged.
    CUNA has no objection to a standardized form that assures debtors 
are getting full disclosure. And credit unions, like all other 
creditors, will be required by the bill to provide a reaffirmation 
disclosure to their members who agree to reaffirm a debt that would 
otherwise be discharged in bankruptcy. This provision was added at the 
insistence of the Clinton Administration to address concerns about 
abusive and coercive reaffirmations.
    But credit unions have not been found to be part of the problem, so 
S. 220 recognizes the unique relationship between credit unions and 
their members in negotiating reaffirmation agreements in good faith. 
Therefore, a reaffmnation agreement filed with the court between a 
member represented by counsel and the credit union will not have to 
include a specific schedule of income and expenses, and will never 
raise a presumption of an undue hardship for a credit union member 
reaffirming a credit union debt, which would be subject to review by 
the bankruptcy court. This exception for credit union reaffirmations is 
appropriate because credit unions don't seek reaffirmation agreements 
unless they feel the member is able to repay the loan and the member 
will benefit by receiving future financial services from the credit 
union, rather than have to seek them elsewhere at a steep premium.
    Regarding the inquiry of whether abusive reaffirmation agreements 
would put credit unions at a disadvantage, we are confident that with 
the changes in this bill and with the numerous laws already on the 
books, there is ample protection for the consumer in this area. There 
are legal firms as well as the various consumer watchdog groups that 
stand ready, willing and able to make any transgressor pay an onerous 
price for noncompliance.
    1 thank you for the opportunity to be able to assist you with 
respect to your position on this important legislation. Please contact 
me if you have any additional questions.
    [Note: Revised Fact Sheet attached.]

                     FACT SHEET [Revised 2-19-2001]

       Total Assets:          $50.5 million (data as of December 2000)
            Members:                                            11,700
              Total Loans:                                38.0 million

                        Losses Due to Bankruptcy:

          2000           522,375         s/b $64,186     [khb 2/19/01]
          1999           534,577
          1998            15,309
          1997             9,883
          1996             1,875

    Number of
     Filings:          Chapter 7          Chapter 13          Total

          2000                 10                  0               10
          1999                  7                  1                8
          1998                  5                  0                5
          1997                  3                  0                3
          1996                  1                  0                1

                                

   Responses of Randall J. Newsome to Questions submitted by Senator 
                                Feingold

                             United States Bankruptcy Court
                            Northern District of California
                                          Oakland, California 94612

Senator Russ Feingold
506 Hart Senate Office Building
Washington, DC 20510-4904

    Dear Senator Feingold,

    This letter will serve as my response to the written questions you 
submitted to me on February 20, 2001. Your first question asks whether 
S. 220 ``will essentially destroy Chapter 13 as an option for debtors 
who wish to keep their cars.  .  .  '' As I stated in both my written 
and oral testimony, I believe that the ``anti-cramdown'' provision in 
Sec. 306(b) of the bill will destroy the incentive for many debtors to 
file a chapter 13 case. When Sec. 306(b) is combined with Sec. 314(b), 
which eliminates the enhanced discharge presently afforded by chapter 
13, only those debtors seeking to save a home from foreclosure will 
find chapter 13 a reasonable option.
    A hypothetical will illustrate why Sec. 306(b) will hurt both 
debtors and creditors. Suppose in 1998 Mr. Jones, who is single and 
lives in an apartment, purchased a 1994 Dodge for $15,000 on credit. At 
the time he bought the car, its fair rnarket value was only $12,000, 
but because of his poor credit rating, he was forced to pay 
substantially over market Because he can't afford the payments on the 
Dodge along with his other monthly payments, he files a chapter 13 case 
in 2001. At the time he files, he still owes $10,000 on the car, and he 
has other unsecured debts totaling $4000. Without counting payments on 
his debts, his monthly income exceeds his monthly expenses by $240 per 
month. The real fair market value of the car at the time of filing is 
$5000. Under present law Mr. Jones could write down the value of the 
Dodge to $5000 in his chapter 13 plan. Assuming he proposes a plan to 
pay $240 a month over 36 months, be would be able to pay $5000 plus 
interest to the secured creditor, and repay a meaningful portion of his 
unsecured debt over the life of the plan. But under Sec. 306(b) of S. 
220, Mr. Jones would be forced to pay all $10,000 of the remaining 
contract price on the car, because he bought it within five years of 
filing his chapter 13 case. This is true even though the car is now 7 
years old, and the creditor would get substantially less than its 
present value of $5000 if the car were repossessed and sold. Depending 
on the interest rate on the Dodge debt and the chapter 13 trustee's 
commission, Mr. Jones might not even be able to propose a plan that 
would pay off the car, pay nothing to his unsecured creditors, and be 
completed within the 60-month time limit for chapter 13 plans. He would 
be much better off allowing the secured creditor to repossess the 
lodge, tile a chapter 7 case, and attempt to buy a newer car, even 
though the interest rate undoubtedly would be exorbitant. 'thus, 
neither the secured nor the unsecured creditors are paid what they're 
owed, and the debtor is back in a debt trap. No one benefits.
    Your second question concerns the problem of repeat filers. I view 
this as one of the most serious abuses of the bankruptcy system. It has 
been most severe in the Central District of California. Nonetheless, I 
would urge cautioxl in attempting to correct it. No one would seriously 
argue against amending the bankruptcy code to target those who file 
repeatedly just to stop a foreclosure or an eviction. But many repeat 
filers are forced to file a second petition because their first case 
was dismissed for reasons beyond their control, such as the 
incompetence of a bankruptcy petition preparer. I have read your 
proposed amendment to S. 220, and believe it strikes the appropriate 
balance. It protects the rights of imocent tenants, while preserving 
the right of a landlord to rid themselves of a bad tenant without the 
legal expense of seeking relief from the automatic stay in bankruptcy 
court.
    Please don't hesitate to contact me if I can be of further 
assistance.
            Very truly yours,
                                         Randall J. Newsome

                                

   Responses of Philip L. Strauss to Questions submitted by Senator 
                                Feingold

                       Department of Child Support Services
                                            San Francisco, CA 94105

Honorable Orrin G. Hatch, Chairman
Senate Judiciary Committee
U. S. Senate
Dirkson Senate Building, Room 224
Washington, D.C. 20510

ATTN: Jane Butterfield

Re: Questions Submitted By Senator Russ Feingold For Phillip L. Strauss

Dear Senator Hatch:

    A facsimile transmission was received by my office requesting 
answers to three questions submitted by Senator Feingold February 22, 
2001. I was attending a conference the week these questions were 
submitted so I am submitting the answers somewhat late.

    Question 1. Are you aware that in 95% of bankruptcy cases there are 
no distributions to any creditors at all because there are no assets to 
distribute?
    Answer: That statistic is generally considered to be accurate for 
Chapter 7 cases, which overall constitute about two thirds of all 
bankruptcy filings. However, in Chapter 7 the debtor's earnings, after 
he files bankruptcy, are not part of the distributions in the case. It 
is from those earnings that the spouse or children will normally 
receive their support payments. Therefore, that statistic is somewhat 
irrelevant for support collection purposes in Chapter 7 cases. In 
Chapter 13 cases, which comprise almost all of the remaining one third 
of bankruptcy petitions, the filings do directly affect the debtor's 
ongoing wages which are estate assets. The proposed amendments would 
specifically require that the debtor provide for full payment of 
ongoing support obligations and satisfaction of all arrears in order to 
have a plan confirmed, unless the spouse agrees otherwise.
    In San Francisco our actual experience is quite different from the 
statistic you cite. This morning I had our office run a report of all 
bankruptcy cases in the San Francisco Department of Child Support. The 
results indicated that 530 of the bankruptcy cases our system are 
Chapter 13 cases. Thus, among child support debtors, 53% of the cases 
have assets. I cannot believe that San Francisco differs that much 
statistically from the general support-debtor population which files 
bankruptcies.
    Chapter 13 cases give us the most trouble because of the severe 
collection limitations placed even on support creditors during 
bankruptcy. In Chapter 13 cases we truly are placed in unfavorable 
competition with other creditors and must wait until secured. creditors 
and administrative costs are paid before priority and then unsecured 
debts are paid. Much child support consists of general unsecured debts 
as of the petition date, and consequently it is the last paid, if paid 
at all. S. 220 will insure that all child support is treated as a 
priority debt, insuring its full payment during the term of a chapter 
13 plan, as set forth above.
    In addition, S. 200 would cause more debtors to file Chapter 13 
cases and thus give support creditors the additional protections 
afforded by many of the child support provisions of the bill.

    Question 2. Do you understand that this bill will elevate some 
unsecured credit card debt, namely a debt which is found to be 
nondischargeable and debt that is reaffirmed, to the same position 
after bankruptcy as child support and alimony?
    Answer: I do not believe that credit card debt, either before or 
after bankruptcy, stands in the same position as support debt. Also, 
this bill does not change the relative position of support debt and 
reaffirmed debt, since discharged debt can now be reaffirmed.
    In trying to determine whether the existence of postbankruptcy 
credit card debt will affect the collection of support debt adversely, 
I can only say that no professional support collector believes this to 
be a problem. Your question asserts that credit card debt will be 
``elevated'' to the same position as support after bankruptcy. If by 
this statement you mean that some limited additional amount of debt may 
be held nondischargeable, in addition to the amounts that may already 
be so held, then you are correct. But support collectors have enormous 
advantages in collecting their debts, compared to other unsecured 
creditors in the nonbankruptcy arena. Nonsupport debts will not, 
however, be elevated to an equal collection status with support debts. 
As I have said many times, professional support collectors are not 
concerned with the existence of other debt. Support collection 
advantages outside of (or after) bankruptcy competitively overwhelm 
financial institutions. For example the following post-bankruptcy 
collection advantages are available to support creditors, but not to 
credit card or other financial institutions:

        a. Priority wage withholding to collect support.
        b. Interception of state and federal tax refunds to pay child 
        support arrears.
        c. Garnishment or interception of Workers' Compensation or 
        Unemployment Insurance Benefits.
        d. Free or low cost collection services provided by the 
        government.
        e. Use of interstate processes to collect support arrearage, 
        including interstate earnings withholding orders and interstate 
        real estate liens.
        f. Revocation or suspension of driver's, professional and 
        recreational licenses of support delinquents.
        g. Criminal prosecution and contempt procedures for failing to 
        pay support debts.
        h. Federal prosecution for nonpayment of support and federal 
        collection of support debts.
        i. Denial of passports to support debtors.
        j. Automatic treatment of support debts as judgments which are 
        collectible under state judgment laws, including garnishment, 
        execution, and real and personal property liens.
        k. Collection of support debts from exempt assets.

    while this list is not exhaustive, it is certainly illustrative of 
the vastly superior advantages of support creditors over commercial 
creditors. For these reasons I do not consider S. 220 as a mechanism 
for ``elevating'' credit card debts to the position of support debts 
after bankruptcy in any sense of the word. Moreover, absent passage of 
the changes contained in S. 220, the government is currently precluded 
from using many of these techniques while a bankruptcy case is 
pending--a fact that currently makes bankruptcy a haven for 
recalcitrant spouses and parents.

    Question 3. Explain what is wrong with the position taken by 116 
law professors who wrote the Senate last year, that the most important 
issue for women and children raised by this bill is that it will make 
is much more difficult for them to reach an ex-husband's income after 
that ex-husband goes through bankruptcy?
    The short answer is that nothing about 5.220 makes it more 
difficult to reach the husband's income post-bankruptcy in that nothing 
about the bill affects post-bankruptcy activities in that regard. 
Rather, as described above in question 2, support creditors continue to 
enjoy substantial advantages in being able to collect from the former 
spouse's post-discharge income. Perhaps, a more salient question is how 
many of these law professors have ever actually enforced a support 
obligation? I, and thousands of my colleagues, do it every day and take 
pride in obtaining that support, under difficult circumstances, for the 
children who are entitled to it. We know where the problems lie and 
would hardly be supporting legislation which would make the collection 
of that support more difficult. The support provisions of this bill are 
supported by:

        a. The National Child Support Enforcement Association
        b. The National District Attorneys Association
        c. The National Association of Attorneys General
        d. The Western Interstate Child Support Enforcement Council

    With respect to the effect of this bill on support collection, if 
we are just counting numbers of supporters and adversaries, one need 
look no further than the National Child Support Enforcement Association 
which urged the President to sign it last year. This organization 
represents over 60,000 child support professionals in this country with 
the daily hands-on experience to know where the problems lie and what 
changes they would like to see made to address those problems. While no 
bill is perfect, we believe the changes made to the domestic support 
provisions of the Bankruptcy Code by this bill are an overwhelming 
improvement over the current law.
    If you have any other questions please do not hesitate to contact 
me.
            Yours very truly,
                                          Philip L. Strauss
                                                 Principal Attorney
                               Department of Child Support Services

                                

    Responses of Todd I. Zywicki to Questions from Senator Feingold

    Question 1: Concerning the proposed means test in S. 220, you 
stated that ``we've identified about 7 to 10 percent of filers who 
would be affected by the means test.  .  .  .We're talking about 
recovering $3 billion, roughly, that would otherwise be discharged [in 
Chapter 7].''
    (A) What is the source of your statement?
    Answer: My statement is based on a composite assessment of the 
various studies that have been done to try to estimate the impact of 
means-testing generally. It is difficult to establish a precise figure, 
as the various studies were conducted according to different versions 
of means-testing that have been proposed over the past several years. 
Nonetheless, the February 1998 Ernst & Young study using 1992-93 data 
concluded that about 15% of filers would be affected by means-testing. 
The March 1998 Ernst & Young study again concluded that about 15% of 
filers would be affected. A study by the Credit Research Center in 1997 
concluded that 5% of the filers in its study could have repaid 100% of 
their debts over five years and that approximately 25% of filers could 
have repaid 30% or more of their debts. A study by Marianne Culhanne 
and Michaela White that was sponsored by the American Bankruptcy 
Institute concluded that approximately 7% of the debtors in their 
sample would have been affected by means-testing. It has been reported 
that this last study found that only 3% of filers would be affected, 
but that conclusion was based on a patent misunderstanding of the IRS 
guidelines that will apply to means-testing. In particular, it is based 
on the erroneous belief that the IRS guidelines would actually allow a 
debtor to buy a new car while in bankruptcy, an interpretation of the 
IRS guidelines that is simply incorrect. Once this error in the 
interpretation of the automobile exception is corrected, the final 
figure, as noted rises to approximately 7% of the sample. Also, the ABI 
study was of substantially poorer quality than the other studies, as 
that study was smaller in size, drawn from fewer districts, and based 
on older data than the other studies. As a result, the results of the 
ABI study are not as probative as the other studies. Nonetheless, its 
conclusions are consistent with the findings of the other studies once 
its erroneous assumptions are corrected. I chose the figure of ``about 
7 to 10%'' as a conservative assessment to convey that the estimates 
were tentative but that most of them fell within this range or above.
    (B)  What did you do to ``identify'' the 7 to 10 percent of Chapter 
7 cases that would be ``affected by the means test''?
    Answer  As noted, I relied upon a composite of studies conducted by 
researchers and did not conduct my own study.
    (C)  Particularly, with respect to the $3 billion that you say 
would be recovered under the proposed means test, where can we find the 
statistical evidence for that claim?
    Answer: A 1998 study by the WEFA Group concluded that means-testing 
would recover $3.6 billion to $7.4 billion that is currently discharged 
in bankruptcy. The March 1998 Ernst & Young study concluded that the 
WEFA, study likely underestimates the amount of debt discharged in 
Chapter 7 and that is also underestimates the amount that would be 
recovered by means-testing. Those studies were both based on assuming 
that those. making 75% of the national median income would be eligible 
for means-testing, rather than the current standard of 100% of state 
median income. This adjustment might exclude a handful of filers with 
some modest repayment capacity, but would not likely have a large 
effect on the overall amounts recoverable. Given this, I chose the 
figure of $3 billion as a conservative estimate of what these studies 
suggest could be recovered in bankruptcy according to the current 
version of the means-test.

                                

 Responses of Dean Sheaffer to Questions submitted by Senator Feingold

    Dear Chairman Hatch:

    I am in receipt of your February 20, 2001 correspondence forwarding 
written questions submitted by Senator Feingold regarding my recent 
testimony in support of S. 220. My responses follow.
    Question 1: Your testimony on behalf of the National Retail 
federation focuses exclusively on abuse of the bankruptcy system by 
debtors and does not make any mention of the fact that quite a few 
retailers have admitted to committing bankruptcy fraud on a widespread 
basis.
    Question 1 A: Has your company engaged in any postbankruptcy 
collection acti vity without filing reaffirmation agreements?
    Answer: Boscov's maintains policies that require compliance with 
local, state and federal statutes and regulations, including federal 
bankruptcy taw.
    Question 1B: Do you think that the current laws suporvising 
reaffirmation agreements have been adequate?
    Answer: Yes. The sufficiency of the current supervision is 
evidenced by the fact that retailers accused of reaffirmation 
violations have been identified and fined up to approximately one-third 
of a Billion dollars.
    Question 1C: Do you have a problem with requiring court review of 
all reaffirmation agreements, rather than only those that are made by 
debtors who don't have counsel?
    Answer: With over one million bankruptcy filings each year, we view 
this is an unnecessary burden to the court system. Debtors' counsel 
have a clear obligation to protect their chonts' interests.
    Question 2: In your testimony you conclude that our current 
bankruptcy laws cost the average American family hundreds of dollars 
each year.
    Question 2A: How do you arrive at that figure?
    Answer: Total annual bankruptcy losses are more than $40 Billion. 
There are approximately 100 million U.S. households; thereforc, the 
average annual loss per household is approximately $400.
    Question 2B: Assuming that it is simply based on the amount of debt 
discharged in bankruptcy, do you agree that if the laws are changed and 
fewer Americans file for bankruptcy and less debt is dischargoablc, the 
cost the bankruptcy laws to the American consumer may not necessarily 
drop? In other words, do you recognize that them are other costs and 
effects of the laws that ought to be considered by policy makers?
    Answer: We recognize that there are other factors that may effect 
the ``net'' benefit of bankruptcy reform to American consumers. We 
believe that these have been--fully considered by Congress over the 
course of the last five years. S. 220 carefully balances these factors.
    Question 3: You said in your testimony that ``over $40 billion was 
written off in banlauptcy losses last year, which amounts to the 
discharge of at least $110 million every single day.'' Please provide 
us with the documentation or source for the statistics in your 
statement.
    Answer: It has been widely reported that annual bankruptcy losses 
are between $40 Billion and $45 Billion. $42.5 Billion divided by 365 
days is greater than $110 Million.
    Question 4: Your testimony focuses on the importance of the means 
test. As you know, S. 220 which you endorse in your testimony contains 
many other provisions.
    Question 4A: Are the bill's provisions that expand the 
nondischargeability of credit card debt important to your support of 
the bill?
    Answer: Retailers see many cases where unnecessary purchases of 
luxury goods are made in preparation for bankruptcy. The marginal 
changes in the existing nondischargeability provisions will prevent the 
costs of such abuse from being ``transferred'' to American consumers as 
a whole.
    Question 4B: Do you think that the bill's provision that deny the 
bankruptcy stay to tenants who are facing eviction and would actually 
be able to pay their rent during the bankruptcy are necessary to 
address the retailers' concem with the bankruptcy system?
    Answer: Retailers have not advocated in favor or against this 
provision. We understand that there are strongly felt, and well 
founded, views on both sides. The current provision is part of a 
heavily negotiated and carefully balanced bill which attempts to 
address the interests of debtors, creditors, and the public at large. 
The NRF supports swift passage of S. 220 without additional amendment.
    Question 4C: To get your support, does the bankruptcy reform bill 
have to contain the provisions of S. 220 that inflate the value of 
secured debt by denying cramdown or stripdown of car loans taken out 
within 5 years of a bankruptcy filing?
    Answer: This provision is part of a heavily negotiated and 
carefully balanced bill which attempts to weigh not only the interests 
of both debtors and creditors, but the competing interests among 
creditors as well. The NRF supports swift passage of S. 220 without 
additional amendment.
    Question 4D: Could you support a bankruptcy bill that includes a 
means test and reaffirmation provisions, even if it didn't contain all 
of these provisions mentioned above, about which consumer advocates and 
law professors have been so concerned?
    Answer: The provisions mentioned above address genuine misuses of 
the current law in a reasonable and balanced fashion. While some 
individuals believe that the final product does not go as far as they 
would like, others believe it goes too far. Retailers believe that 
whatever the bill's alleged shortcomings, it is a significant 
improvement over the present abuse-prone system.

                                

         Responses of Brady C. Williamson to Written Questions

    Question 1: How would the means test in the bill affect families 
with extraordinary medical expenses?
    Answer: The means test in the bill does not provide any flexibility 
in its application to take into account extraordinary medical expenses. 
The bill, in section 102, establishes a means test that applies 
regardless of the reason for a family's financial difficulty. It 
applies with equal force, in this regard, to the honest but unfortunate 
debtor and to the debtor determined to defraud creditors. The bill 
should be amended to provide an exemption from the means test for 
families forced into bankruptcy by extraordinary medical expenses.

    Question 2: What is your view of the reaffirmation provisions in S. 
220? Are there improvements to be made to these provisions that will 
make them more effective in combating creditor abuse?
    Answer: While the bill makes slight improvements in the 
reaffirmation process, it does not address the more fundamental, 
problems, problems that became painfully evident with the criminal and 
civil penalties imposed on several of the country's leading retailers 
for reaffirmation abuse. Some creditors use the ``carrot'' of 
additional credit to turn dischargeable debt into nondischargeable debt 
whether or not the debtor can afford to continue to make payments. 
Others use the ``stick'' by threatening to ask the court to declare the 
debt nondisehargeable, litigation the debtor cannot afford to defend.
    The reaffirmation process does not involve parties with equal 
bargaining power or equal sophistication. The 1975 bankruptcy 
commission recognized this when it recommended the abolition of 
reaffirmation agreements. The 1997 commission essentially reiterated 
this recommendation.
    Some of the provisions in the bill actually increase the need .for 
stronger reaffirmation protection. With more debt nondischargeable 
under the bill than under current law, the post-bankruptcy burdens of a 
debtor will be greater. That decreases the debtor's ability to make 
post-bankruptcy payments on debt that has been. reaffirmed, 
jeopardizing the prospects for a successful Chapter 13 proceeding. New 
provisions in the bill provide additional opportunities For aggressive 
creditors to threaten actions against debtors, which they can 
``settle'' by taking reaffirmation agreements. The bill's reaffirmation 
provisions, as written, do not curb abuses. Rather, they only 
standardize reporting and procedures.
    Yes, improvements can and should be made in the bill. The 
bankruptcy courts should have to evaluate reaffirmation agreements, as 
they did from the enactment of the bankruptcy code in 1978 through 
1984, asking whether the debtor has the capacity to meet his/her 
obligations and still give preferential treatment to one creditor in a 
reaffirmation agreement. The law should require the court particularly 
to determine if the debtor can make reaffirmation payments and still 
satisfy his or her obligations to a current or former spouse and their 
children. In addition, other creditors who are entitled to depend on 
the debtor's income for payment in a Chapter 13 or after a Chapter 7 
bankruptcy also should be protected.
    At the very least, the bill should be amended to require court 
approval for reaffirmation agreements with any debtor who has spousal 
or child support or other family obligations. While this would not 
restore the reaffirmation provisions of the code to their 1978 status, 
it would protect those most vulnerable to an improvident reaffirmation 
agreement and their other creditors.

                                

   Responses of the Administrative Office of the Courts to Questions 
                       submitted by Senator Leahy

    Question 1: I recall last year the Congressional Budget Office 
estimated that it would cost $218 million over the 2000-2004 period to 
implement the new bankruptcy--provisions of S. 625. Have you or the 
Administrative Office of the Courts made any estimates about how many 
millions of taxpayer dollars would be required to meet the mandates of 
this year's bill, S. 220?
    Answer: The Congressional Budget Office (CBO) estimate of $218 
million to implement the provisions of S. 625 is a government-wide cost 
estimate. We defer to CBO with regard to the estimate of government-
wide costs to meet the mandates of S. 220. Extrapolating from the 
analysis of S. 625 by the Congressional Budget Office, the 
Administrative Office has estimated that implementation of S. 220 would 
cost the judiciary approximately $104 during the five-year period 
following enactment of the bill, and in some instances, following a 
delayed effective date. This figure is obtained as follows:

Data collection....................   ...............  $30 million
Maintaining income tax returns.....   ...............  9 million \1\
New judgeships--...................
    discretionary costs............  $51 million.....
      (administrative costs).......
    mandatory costs................  $14 million.....
      (salaries and expenses)......
 ..................................   ...............  65 million \2\
                                    ------------------------------------
Increased cost.....................   ...............  $104 million

    Although your question does not specifically raise the issue of 
lost revenue, the bill as introduced would revise filing fees in 
chapter 7 and chapter 13 cases and re-allocate a portion of the 
revenues derived from those fees from the judiciary to the United 
States Trustee program. We estimate this loss in revenue to exceed $25 
million over the next five years. This is as ``real'' a cost as a 
required increase in outlays, When this figure is added to the direct 
cost imposed by the bill, our total cost approaches $130 million, all 
of which will require an increase of judiciary appropriations.
---------------------------------------------------------------------------
    \1\ The provision in S. 625 regarding the maintenance of tax 
returns would have required all chapter 7 and chapter 13 debtors to 
file three-years tax returns with the bankruptcy court. CBO estimated 
this cost to the judiciary to be approximately $34 million over five 
years. The analogous provision of S. 220 requires a debtor to file tax 
returns only upon request of a creditor. CBO estimates that.this 
provision, when compared to its predecessor, could result in savings of 
as much as $25 million, depending upon the number of cases in which 
creditors seek access to the returns. Thus, assuming a best case 
scenario, the pending bill would impose a cost of approximately $9 
million upon the judiciary.
    \2\ Analyzing the judgeship provision of S. 625, CBO determined 
that the creation of 18 new bankruptcy judgeships would cost $40 
million in discretionary spending and $11 million in mandatory spending 
over the next five years. Extrapolating these figures to determine the 
cost of 23 new judgeships, as would be created by S. 220, yields $51 
million in discretionary spending and $14 million in mandatory 
spending, for a total of $65 million.

    Question 2: Do you have any other legislative proposals to improve 
provisions in the current bankruptcy reform legislation besides the 
direct appeal provision?
    The bill as introduced would create 23 new temporary judgeships and 
extend the terms of four existing temporary judgeships. The Judicial 
Conference recommends creation of the 23 judgeships currently in the 
bill as well as two others--one in the district of Maryland and one in 
the district of South Carolina. It further recommends that 13 of these 
judgeships be created on a permanent basis and the other 12 on a 
temporary basis; that the existing temporary judgeships in the district 
of Delaware, district of Puerto Rico and northern district of Alabama 
be converted to permanent positions; and, that the temporary judgeship 
in the eastern district of Tennessee be extended for a period of five 
years.
    Reason: Creating temporary judgeships where permanent judgeships 
are clearly needed detracts from the most efficient administration of 
the bankruptcy code. Extending temporary judgeships for very short 
periods of time is also bad policy. The fact that South Carolina lost a 
judgeship in January 2000 although that judgeship is needed points up 
this problem. Congress has not created a new bankruptcy judgeship since 
1992. Future Congresses should not be ``forced'' to frequently pass 
``temporary judgeship extension'' bills, particularly when the failure 
to act is not in the public interest.
    We recommend deletion of the provision that would revise filing 
fees (which were revised only 14 months ago) and re-allocate revenues 
derived from those fees from the judiciary to the United States Trustee 
program. This provision would have the effect of depriving the 
judiciary of approximately $25 million over the next five years.
    Reason: The judiciary expends significant funds administering the 
bankruptcy code. In recognition of this fact, in 1999, Congress, acting 
on the decision of the Senate and House Appropriations Committees, 
increased certain bankruptcy filing fees and allocated the revenues 
derived from those fees with due regard to the costs of both the 
judiciary and the United States Trustee program. S. 220 re-opens that 
decision by again revising fees, reducing judiciary revenues, and 
significantly increasing income to the United States Trustee program. 
The decision to reduce judiciary revenues disregards the rationale 
underlying current law and ignores the $104 million five-year cost 
increase that the enactment of S. 220 will levy upon the judiciary.
    We recommend re-assigning the responsibility for collection of 
financial data on debtors from the judiciary to the United States 
Trustee program as an adjunct to its responsibility to conduct audits 
under the bill.
    Reason: Having financial data collected by United States Trustees 
would have two significant benefits. First, it would yield audited, and 
thus accurate, data. By contrast, having bankruptcy clerks collect the 
data from schedules and statements filed by debtors at the outset of 
cases will result in unreliable data. Data filed by debtors, in many 
instances without the assistance of a lawyer, frequently inaccurately 
values assets and liabilities; further, some debt simply cannot be 
valued definitively at the outset of a case because it is unliquidated, 
contingent or disputed. Second, since data would be collected by 
Trustees as part of its audit system, it would be collected at a 
fraction of the cost of C5tab11tshlng a new system for this purpose in 
each clerk's office.
    We recommend re-assigning the responsibility to maintain income tax 
returns from the bankruptcy clerks to the United States Trustees.
    Reason: In order for the courts to meet this new responsibility, it 
will be necessary to establish a new filing system in each clerk's 
office, separate and apart from public case files, in order to 
safeguard the security of the records and control access to them as 
required by the bill. Since the Trustees' files, unlike court files, 
are not publicly available, the Trustees would be able to meet this 
responsibility without the costs and administrative burdens associated 
with establishing and maintaining new filing systems.
    We recommend extending the date for initiating collection and 
reporting of case event statistics.
    Reason: Docket sheet information in bankruptcy cases is reported to 
the Administrative Office through the electronic case management 
systems of the courts. The current systems are nearing the end of their 
useful lives and are an a schedule to be replaced. These systems cannot 
collect additional information of the sort required by this bill 
without costly upgrades that would divert resources from the new 
replacement system that is in the process of being deployed in the 
bankruptcy courts. Since the new system will not be deployed in every 
court for three and a half years, this provision should be revised to 
take effect 48 months after enactment of the legislation.
    Finally, we recommend deletion of provisions regarding revision of 
bankruptcy rules.
    Reason: Two provisions of the bill, sections 102 and 319, 
inappropriately impact Bankruptcy Rule 9011 and, if enacted, would 
cause confusion and needless satellite litigation. Six other provisions 
require the Supreme Court or the Judicial Conference or the Advisory 
Committee on Bankruptcy Rules to promulgate a rule or official form. 
Directing the Judicial Conference or one of its committees to amend a 
particular rule or form bypasses the Rules Enabling Act process and 
needlessly undercuts the proper role of the Judicial Conference and its 
committees, the bench and bar, the public, and the Supreme Court in 
that process. Furthermore, these provisions are unnecessary because the 
Advisory Committee on Bankruptcy Rules automatically reviews any 
legislation amending the bankruptcy code to identify and prescribe 
necessary amendments to rules and forms.

                                

 Responses of Robert D. Manning to Questions submitted by Senator Leahy

    As per your request, the following is my response to your questions 
regarding recent trends in consumer bankruptcy. This information is a 
follow-up to my testimony before the Serrate Judiciary Committee on 
February 8, 2001. I respectfully request that these questions and 
answers be added as an addendum to my testimony.

    Question 1, Part A: ``Over the last 15 years, how have the 
marketing and lending practices of the credit card industry changed in 
regard to college students?''

    Question Part B: ``Have these policies contributed to greater 
student credit card debt? ''
    Answer: Due to the onset of banking deregulation (beginning in 
1980, e.g. elimination of Regulation Q) and massive loan losses of the 
major money center banks due to questionable underwriting policies with 
`third World countries as well as U.S. commercial/residential loan 
losses during the 1989-91 recession, the banking industry found that 
credit cards were one of their most profitable lending activities after 
doubledigit inflation subsided following the 1981-82 recession. As 
banks began expanding the marketing focus of revolving credit cards 
after the recession, such as soliciting lower income, blue-collar 
households that were coping with un- and underemployment during the 
restructuring of manufacturing industries, they realized that the most 
neglected and potentially profitable market niche was middle-class 
college students.
    Until the late 1980s, the standard industry practice required that 
students had to have their parents or guardians co-sign the credit 
cardholder agreement, unless the student demonstrated sufficient income 
to pay for the modest line of credit. At the same time, the first 
exclusive marketing agreements were being negotiated for modest sums 
with college administrators, beginning with MBNA and its agreement with 
Georgetown University in the early 198Os, but this was solely for 
employed alumni.
    As credit card and retail companies sought to expand from college 
alumni into the college student market, they began soliciting to 
college seniors who were 21 years old and soon to enter the job market. 
That is, the lending risk was relatively low with the assumption that 
college seniors had one foot in school and the other foot looking for a 
job. Typically, these student ``kiddie'' cards offered credit in the 
$200-$500 range, most were around $300. Hence, the industry was 
concerned about lending money to unemployed students based on the 
uncertainty of--the student cardholders' ability to repay. By ensuring 
repayment through parental co-signature, the industry faced the trade-
off of low risk in its underwriting standards and limited profits since 
students' consumption would be monitored by their parents and thus 
their behavior would still be influenced by ``family values'' and 
parental authority.
    By the late 1980s and especially during the 1989-91 recession, the 
credit card industry discontinued its requirement of parental co-
signature anal aggressively marketed credit cards on campus. In 1990, 
Citibank was nearly insolvent (low Tier 1 capital reserve levels) due 
to its unperforming.Third World and commercial/residential lending 
loans and end of cheap capital due to the phase-out of Reg Q. However, 
credit cards in general and college students in particular were 
yielding sharply rising profits. As a result, students were directly 
solicited through the mail, campus bulletin boards, inserts in book 
store bags, and the growing presence of direct marketers such as 
application booths or on-campus fundraisers such as fraternity and 
sorority programs. Significantly, my research shows that few students 
graduated in the early 1990s with high credit card debts; rare was a 
student with $5,000 in debt and most in the $500 to $2,000 range. These 
students were far more likely to accumulate their credit card debt 
after graduation while they encountered difficulty finding employment 
in a tight job market. So, the seeds of mounting credit card debt were 
planted during college but harvested after graduation.
    During the early 1990s, as credit card companies raised credit card 
lines of credit--due to rising debt levels--of students rather than hi 
student incomes, credit card companies sought to reduce their risk by a 
policy of having debt collectors contact parents and demand payment and 
even pursue legal suits for debt collection against parents of college 
students--even if they were not co-signatories of the cardholder 
agreement. The success of this policy emboldened credit card companies 
to continue to increase the lines of credit to students as parents and 
family members found themselves unexpectedly paying off student credit 
card debts. Also, as the cost of college education rose with the sharp 
decline in public financial support, student loans routinely replaced 
federal grants axed family loans in the 1990s.
    The increasingly common strategy of financing one's college 
education with borrowed money contributed to the credit card industry's 
realization that its risk was further reduced by students paying their 
credit card debts with student loans. This trend also minimized the 
perception of the growing problem of student credit card debt since 
reports focused on current credit card balances rather than total, 
accumulated credit card debt that was amassed through private bank 
lows, family loans, and shifting credit card debt into student loans. 
As a result, students that charged up to their limits on their credit 
cards were actually rewarded with higher lines of credit or even 
additional credit cards. This policy continued even after the credit 
card industry lost its law suits in the early 1990s in an effort to 
force parents to repay their children's credit card debts even though 
they were not co-signers of the credit card agreement. The credit card 
industry's response, which continues today, is to have debt collectors 
pressure the parents of college students to repay the credit card debts 
of their children. The punitive threat is that the failure to pay 
delinquent credit card debts will lead to serious consequences for 
their children in the future: bad credit reports/scores, much higher 
interest rates and insurance premiums, loan denials such as auto and 
mortgages, and even job rejection.
    By the mid-1990s, credit card companies began to double their 
marketing budgets, including more aggressive campaigns on college 
campuses. This was because the risk of defaults diminished for banks 
(due to student loans, family loans, greater available of part--time 
jobs during economic expansion) while the demand for credit cards on 
campus soared due to escalating consumption pressures on campus and the 
rising cost of college matriculation which led to greater reliance on 
borrowed money to finance college expenses. With the optimism of the 
economic expansion of the 1990s spurring the consumer-driven economy, 
the highly profitable student credit card portfolios led banks to an 
intensifying competition over prize college accounts. Indeed, banks 
began to realize that credit cards provided entire to middle class 
households during their most formative years and thus offered future 
additional, lending/proft opportunities: auto, home mortgage, 
investment, insurance, and even college loans. With the end of the 
recession, the consolidation of the credit card. industry began to 
accelerate which. led to more lucrative exclusive marketing agreements 
with universities and their alumni associations (especially the largest 
250 universities). In, addition, this expanded marketing campaign 
resulted in a larger on-campus presence through sponsored events 
(spring fairs, athletic events, spring break activities, campus 
newspaper advertisements) and subcontracted solicitors who boldly 
established tables and booths in student centers, outside cafeterias, 
in dormitory ``commons'' areas, and along classroom walkways. Not 
incidentally, the increasing use of subcontracted marketing companies 
led to increased pressure tactics and illegal policies such as 
submitting applications with forged signatures and altering the age of 
applicants (e.g. high school students visiting college campuses or 
underage freshmen). Daily fees paid to colleges in order to ``rent'' 
on-campus booths or tables typically range from $50 to $250. However, 
an increasingly common practice is to solicit without authorization or 
simply to ``crash'' a campus. Robert Bugai, President of College 
Marketing Intelligence and an investigative journalist, has documented 
hundreds of cases of marketing abuses on college campuses in the 1990s.
    The more aggressive marketing of credit cards on campus, together 
with the implicit assent of university administrators who saw greater 
access to credit as a revenue generator by enabling students to pay for 
the higher cost of educational expenses plus million dollar marketing 
agreements, led to marketing not just to alumni and upper classmen but 
then to freshmen and sophomores. Not only had solicitations become 
commonplace in book bags but they had become an accepted feature of 
freshman orientation. More importantly, the lines of credit offered to 
student soared. From an initial $300 to $500 lime of credit, students, 
found that they could request or were automatically offered lines of 
credit of from $2500 to $5000 within a year, Furthermore, students were 
now offered multiple credit cards; if they exhausted their credit on 
one card then they could receive two or three others. As the 
underwriting standards eroded, students became a distinct market niche 
for banks. In only a decade, the required co-signature with parents was 
replaced with only some proof of enrollment in college.
    By the mid-1990s, some students were amassing $5,000 to $15,000 in 
credit card debt and parents were finding themselves in the dilemma of 
``loaning'' their children the money to pay off their debts or teaching 
them a lesson in financial responsibility. With the booming economy, 
students could easily find part-time jobs and/or their parents were 
more likely to have savings or access to lower interest loans to payoff 
these debts. Increasingly, students in public schools used larger 
portions of their student loans to pay down their credit cards while 
private school students began resorting to private bank loans or 
college credit union loans; at Georgetown University, I was informed 
that the most common use of the $10,000 loan available to students at 
the university credit union is to pay for their credit cards. 
Increasingly, students that ``mixed-out'' their credit cards were 
rewarded with higher hues of credit or other credit card applications. 
By the end of the decade, college campuses have become filled with 
anxiety ridden students whose request for holiday gifts were often 
``please pay may credit card debt.'' More importantly, credit card 
debts of the most indebted, mixed out students jumped from $10,000 
$15,000 range to $20,000-$25,000. In a few cases, financial aid offers 
have communicated to me that they have had students from disadvantaged 
backgrounds report that they have accumulated over $30,000 in credit 
card debt. More recently, attention has focussed on the medical, 
educational, employment, and financial impacts (even suicides) 
associated with escalating student credit card debt.
    Today, the most striking feature of credit card marketing is how 
young students are when then receive their first credit card. In 2000, 
an industry sponsored survey reported that 25% of college seniors 
reported receiving credit cards before starting college compared to 55% 
of college freshmen. In some cases, students have simply applied for 
bank credit cards while in high school while others have been solicited 
due to their use of retail credit cards or are secondary account 
members of their parents' credit cards. In fact, the new VISA BUXX 
credit card program, which requires parental co-signature, is designed 
for teenagers. Most importantly, as the marketing of credit cards has 
shifted from employed alumni and then college seniors to college 
freshmen arid now high school students, there has not been a 
corresponding increase in financial education as credit increasingly is 
being allocated to consumers before they begin full-time employment. 
Unlike driving a car, young people are being given the ``keys'' to the 
consumer lifestyle but not required to learn the necessary defensive 
``driving'' skills.
    Lastly, the interest rates and penalty fees are among the highest 
levels in the college student market. More importantly, credit card 
companies recognize that college students are mobile and have crisis 
periods which commonly lead to cash advances and penalty fees that 
quickly lead to sharp increases in credit card finance charges: from 
22.8% to 27.9% APR. For instance, a student that forgets to pay his/her 
credit card bill during final exam week may then wait until the 
forwarded mail arrives at parents' home or summer job. Often, the 
student is now two (2) payments late which invokes the ``escalator'' 
clause and thus requires the student to pay the highest finance charge 
rate.
    In sum, the last decade has seen a dramatic rise in the extension 
of credit to increasingly younger students without any accompanying 
financial educational programs. As the cost of higher education has 
risen and the cost of the student lifestyle has escalated, it is not 
surprising that the highest credit card debt levels of students have 
jumped sharply over the last 10-12 years: from less than $5,000 to over 
$25,000. And, the proportion of students with credit cards is now 
between 75 and 80 percent.

    Question Part C: ``Are these policies different for young adults of 
the same age that are not college students? ''
    Answer: The different status and underwriting standards of college 
students is revealed by the policies of the credit card industry as 
they apply to .non-students in the 18-23 year-old age range. For this 
age group, proof of employment and total income are required as well as 
a consumer credit investigation. Young adults that report typical 
student incomes of $3,000 to $8,000 per year are routinely rejected for 
bank credit cards or offered ``subprime'' credit cards with low credit 
limits and high mandatory fees. For instance, a typical subprime credit 
card offers from $300 to $900 in credit with the highest interest rates 
(19.9%-36% APR) as well as requires membership fees ($20-$50), 
processing fees ($10-$25), and educational materials ($75-$199). In 
addition, they may be offered more costly ``secured'' cards that 
require a bank deposit that determines the amount of credit offered. 
For example, a $100 deposit will result in a credit line of from $100 
to $250 and often a high membership fee. Even more instructive is the 
experience of students after graduation that do not get credit cards in 
college or accept only low credit limits. Commonly, recent graduates 
with relatively low-wage, entry-level jobs (and typically high student 
debt levels) are offered low credit limits and even rejected for new 
credit cards. In sum, there is clearly a ``double standard'' in 
offering unsecured consumer loans via credit cards to students versus 
non-students of the same age. Ironically, young adults with relatively 
low-wage, full-time jobs ate more likely to be rejected for bank credit 
cards and/or offered low credit limits than their peers who are 
unemployed and may have never had a fell-time job.

    Question 2, Part A: ``Are young adults the fastest growing 
bankruptcy filers today? ''
    Answer: Yes, young adults 25 years-old and younger have experienced 
a dramatic rise in their bankruptcy rates. In 1995, with the number of 
bankruptcies at a near record of almost 900,000, less than 1 percent or 
under 9,000 bankruptcy filers were 25 years old oar younger. When U.S. 
personal bankruptcies peaked at 1.4 million in 1998, this included 
about 68,000 young adults or approximately 4.9 percent of the total. In 
2000, it appears that the proportion of bankruptcy filers 25 years old 
or younger has jumped to over 10 percent of the total--over 100,000 
people. According to bankruptcy expert Professor Elizabeth Warren 
(Harvard Law School), who is the director of a national survey of 
bankruptcy filers and co-author of The Fragile Middle Class (Yale, 
2000), bankruptcies among young adults are continuing to increase 
today.

    Question Part B: ``What are the primary factors responsible for 
this new trend of the late 1990s? ''
    Answer: As the cost of a college education has soared over tine 
last two decades, the average debt levels of college graduates has 
similarly increased; federal grants have been increasingly replaced 
with federal loans. At the end of the 1990s, student loans of public 
school graduates averaged over $13,000 and student loans of private 
school graduates averaged over $16,000. With shorter deferment periods 
(typically 6 months), higher finance: rates plus increasing amounts of 
unsubsidized loans, and the end of income tax averaging as well as 
deductibility of interest on student loans (interest deductibility was 
re-instituted in 1998-to a maximum of $2,000), recent graduates with 
modest incomes from their entry level jobs found themselves squeezed by 
their substantial education and credit card debts.
    Furthermore, the consumption-oriented lifestyle that is being 
promoted on college campuses bias been viewed by students as an 
entitlement that is expected to be continued after graduating anal 
obtaining a full-time job. Indeed, this is a generation that has not 
experienced a recession and has been encouraged to accept debt as a 
middle-class entitlement rather than `saving for a rainy day.' 
Unfortunately, this short-sighted attitude has been reinforced in 
college by encouraging the use of `plastic money,' the CitibankSony 
Visa--`the currency of fun,' and the self-deprecating reference to 
credit cards as `yuppie food stamps.' In addition, the recent 
employment volatility of hi-tech sector companies has pushed more young 
adults into debt-counseling/debt refinance programs. Since they are the 
least likely to have accumulated equity through homeownership, unlike 
their parents, a larger proportion of heavily indebted young adults are 
funding few financial ``life lines'' and thus no other recourse but to 
file for bankruptcy.

    Question Part C: ``How will the proposed bankruptcy reform 
legislation affect them? ''
    Answer: In many ways, as the fastest growing group of bankruptcy 
filers, young adults are the most disadvantaged by the proposed 
bankruptcy legislation. This could have serious long-term consequences 
to the nation since these age cohorts currently have the lowest 
(negative) savings rate.
    First, for many of these bankruptcy filers, their college debts are 
the first or second largest debts. Since student loans normally can not 
be discharged, many young filers will find relatively little relief 
from the bankruptcy process-especially with the difficulty in obtaining 
future credit when they are so early in their consumer lifecycle. This 
situation is especially difficult for those with student loans that did 
not graduate from. college or whose vocational training did not offer 
marketable job skills.
    Second, the much higher finance rates of consumer credit card debts 
encourages students to pay for them with low-interest college education 
loans. For many young adults that file for bankruptcy, this decision 
means that they are required to pay for past credit card bills since 
these debts have been shifted into student loans. As the credit card 
industry demands that a larger proportion of credit card debt be 
repaid, they fail to acknowledge that a substantial portion is not 
dischargeable and must be repaid after it has been ``revoted'' into 
student loan debt. Since this was not an option for undergraduate 
students a decade ago, the deleterious impact is primarily assumed by 
young adults under 30 and especially under 25 years old.
    Third, this age group is least likely to own their residences and 
thus have the ability to protect personal assets through home 
ownership. Proposed changes in consumer bankruptcy law that help 
households protect some of their accumulated assets via home ownership 
do not affect most young adults filing for bankruptcy.
    Fourth, the most common form of start-up capital/financing for 
small businesses especially young entrepreneurs-is bank credit cards. 
Since these young adults are the least likely to have accumulated much 
equity through home ownership and thus have the option of ``home 
equity'' loans, business failure could push them into personal 
bankruptcy since they have few opportunities to secure small business 
loans.
    Fifth, with a slowdown in the economy and the accompanying rise in 
employment disruptions, the inability to discharge any student loan 
debts may lead to a greater likelihood of multiple bankruptcies by the 
youngest age cohorts of bankruptcy filers whose only option will be to 
increase the length of time of their loan repayment period.
    Question 3. Part A.: ``How do the lending and underwriting policies 
of small banks and regional retailers compare with the major credit 
card companies.''
    Answer: One of the most striking trends of banking deregulation is 
the increase in providing consumer loans in the form of ``evolving'' or 
unsecured credit cards rather than the traditional ``installment'' loan 
that dictates a fixed term of repayment at a specified monthly payment 
and interest rate. At the conclusion of the contract, the consumer has 
accumulated equity in the purchased item (auto, furniture, appliance) 
and the merchant or bank rewarded responsible consumers with more 
credit in the future.
    Small banks and regional retailers require a more extensive 
application process for consumer loans and tend to be more cautious in 
their underwriting criteria. Also, they have the option of repossessing 
the defaulted consumer goods (computers, stereos, autos) whereas 
unsecured credit cards are more likely to be used for purchases on 
consumer services that can not be repossessed. Unfortunately, credit 
cards have turned upside down the logic of financial lending: the most 
profitable loans are those that are not repaid. As a result, the most 
desired clients of the credit card companies are consumers that 
dutifully remit payments on their loans (especially late!) bust do not 
pay in full. In fact, in some cases, credit card companies may cancel 
the accounts of clients that payoff all of their charges each month 
arid disdainfully refer to them as ``dead beats.'' The result is that 
small banks and retailers tend to have more stringent lending criteria, 
encourage installment loans, and offer consumers lower lines of credit.
    Question 3. Part B: ``Do consumer defaults on loan contracts affect 
retailers the salve as large credit card companies? ''
    Answer: One of the major problems with the dramatic increase in the 
amount of consumer lending through bank credit cards is that it has 
shifted more financial risk to retailers and smaller banks. For 
example, a regional furniture store company that carefully limits the 
size of its consumer installment loans has no control over the 
additional amount of debt that its clients may obtain through bank or 
other retail credit cards. 'this is important because a default on a 
consumer loan means that the furniture company and/or its bank partner 
lose the amount of the consumer's financial delinquency. For the 
furniture company, this means that it has to absorb some portion of the 
defaulted consumer loan or it may lose its banking partner and thus 
financing source for future sales. For the consumer, the loss of modest 
cost financing may mean higher costs by obtaining a loan through a 
dance company.
    The link between. prudent installment credit by small banks and 
retailers and the weak underwriting criteria of major credit card 
companies (top ten credit card companies control \3/4\ of the market) 
merits greater attention. That is, ``good'' installment loans may end 
up in bankruptcy court because of future ``bad'' credit card debts. 
And, because of this relatively new shift in the relative allocation of 
consumer credit through ``installment'' loans versus unsecured 
``revolving'' credit cards, both types of loans are treated equally 
whereas the risk to retailers has increased substantially. This is 
because major credit card companies sell much of their credit card debt 
in secondary markets (U. S., Europe, and Asia) as ``securitized'' 
financial instruments. Higher default rates on credit cards often 
simply means that the ``bundle'' of credit card debt sells at a lower 
premium rather than producing a direct loss such as a default on a loan 
for the purchase of a stereo system.
    In sum, requiring bankruptcy petitioners to repay a portion of 
unsecured credit card debt could encourage banks to increase high 
interest consumer loans to financially insecure or distressed 
households that have the greatest likelihood of not being able to repay 
the loans. This, of course, would create a greater financial burden on 
low-income households and especially single, female-headed households 
with children. This impact has been previously discussed and 
documented. What has been generally neglected is how this proposed 
change in the bankruptcy law could seriously hurt retailers in general 
and smaller companies in particular. That is, these most recent trends 
suggest that a more effective change in consumer bankruptcy law should 
require more prudent lending policies by major credit card companies in 
the marketing of relatively large amounts of credit to low and middle-
income households.
    Please contact me if you require any additional information.

                                

   Responses of Todd Zywicki to Questions submitted by Senator Leahy

    Question 1: You testified that the current bankruptcy system is 
``threatening to spiral out of control'' and ``suffers from a crisis of 
both real and perceived abuse.'' But over the last two years, Chapter 7 
filings have dropped 15 percent and personal bankruptcy filings overall 
have declined by 12 percent across the nation. How can the current 
system be out of control and in crisis when personal bankruptcy filings 
have declined so dramatically in the last two years?
    Answer: After a brief respite in bankruptcy filing rates, 
bankruptcy filings have begun to rise again this year. I am not aware 
of any bankruptcy analyst who believed at the time that the two-year 
decline in bankruptcies presaged a permanent, rather than a temporary 
drop. Moreover, despite these slight reversals, the fact remains that 
despite a decade of unprecedented economic prosperity, consumer 
bankruptcies are almost twice as high as 1990, and are five times 
greater than in 1980. Most analysts expect at least a 15% increase in 
bankruptcy filings this year. Moreover, recent history suggests that 
bankruptcies tend to rise during a recession. Thus, if it is true that 
an economic slowdown portends, then this augurs a continuing rising 
tide of bankruptcy filings and threatens to cause the bankruptcy system 
to ``spiral out of control.''

    Question 2.: You testified that S. 220 should be enacted into law 
to stop the ``bankruptcy tax'' caused by bankruptcy abuses, which ``is 
reflected in shorter grace periods for paying bills, and higher penalty 
fees and late-charges for those who miss payments.'' What guarantee is 
in S. 220 that any savings to the credit industry from the passage of 
the bill will be passed down to consumers in longer grace periods for 
paying bills, and lower penalty fees and late charges for those who 
miss payments?
    Answer: As I testified, bankruptcy losses are a cost of doing 
business for firms that extend credit. As such, they are no different 
from other business expenses, whether rent, employee salaries, taxes, 
electricity bills, theft, or gas prices. The government provides a 
system of courts to enforce contracts in the belief that making valid 
contracts enforceable decreases the costs of doing business, which in 
turn favors all buyers and sellers, including consumers. Does anyone 
believe that eliminating the enforceability of contracts would not 
cause prices to rise? By limiting opportunistic use of the bankruptcy 
system, the bankruptcy reform bill similarly reinforces the 
enforceability of contractual promises; after all, no one doubts that 
there is actually a contractual obligation involved. As such, it will 
have the same effect as increasing the enforceability of contracts 
generally. Most people believe that making contracts more easily 
enforceable tends to benefit all parties, including consumers. Thus, if 
one believes that greater enforcement of valid contracts generally 
reduces costs and benefits consumers, then it is equally obvious that 
consumers as a whole will benefit from greater enforcement of consumer 
credit contracts through restrictions on opportunistic bankruptcy use.
    In a competitive market, consumer prices reflect changes in 
business costs. Consumer creditors unquestionably operate in 
competitive industries, thus changes in their costs will be reflected 
in changes in the bundle of price and non-price terms that they offer 
to consumers. See Todd J. Zywicki, ``The Economics of Credit Cards,'' 3 
Chapman L. Rev. 79 (2000). For instance, when interest rates were 
capped in the pre-Marquette era, issuers of consumer credit responded 
in a number of ways, including the imposition of substantial annual 
fees on consumers. These annual fees amounted to a redistribution from 
convenience users who paid their bills in full every month to those who 
revolved balances at below-market interest rates. Retailers who ran 
credit operations, such as large department stores, imposed the costs 
through charging higher prices for the goods they sold, sometimes 
offering ``cash discounts'' to those who did not buy the item on 
credit. In short, changes in the cost structure of credit issuers are 
reflected in the price and nonprice terms they charge.

    Question 3: Should Congress include a trigger mechanism in S. 220 
to make sure that consumers will benefit from lower credit costs as a 
result of bankruptcy reform legislation that will clearly benefit the 
credit industry by lowering its costs of doing business?
    Answer: No. It would be impossible to predict how the consumer 
credit industry will respond to reductions in its bankruptcy losses and 
it would be unwise to force them to respond in a way calculated to 
satisfy political pressures rather than consumer preferences. 
Attempting to draft such a trigger would throw a blanket of uniformity 
over a market characterized by dynamic competition and strong consumer 
choice. Recent history indicates, for instance, that market competition 
has been driven by consumer demand for greater benefits, rather than 
reductions in credit prices. In the credit card industry alone, these 
benefits have included such a diverse array of services as cobranding 
benefits, frequent flyer miles, 24-hour customer service, anti-fraud 
protection, and car rental insurance. It is evident that these services 
are being supplied in response to customer demand, and that consumers 
have demanded these benefits in lieu of reductions in price terms. To 
paraphrase a recent observation from an article I with Judge Edith H. 
Jones, ``Using [cost savings] as the only proxy for vigorous 
competition is tantamount to saying that the automotive industry is 
noncompetitive because car manufacturers increase quality through 
improved safety, comfort, or gas milage, rather than simply cutting 
prices.'' Edith H. Jones and Todd J. Zywicki, ``It's Time for Means-
Testing,'' 1999 Brigham Young University L. Rev. 177.

    Question 6: You testified that there is a ``growing sophistication 
among lawyers and the public about the opportunities for fraud and 
abuse--both legal and illegal--in the bankruptcy system.'' Please 
provide specific examples of these opportunities for, fraud and abuse--
both legal and illegal.
    Answer: It is generally understood by bankruptcy analysts that 
there is a substantial degree of abuse in the system. Many of the 
reforms included by the legislation are responsive to concerns 
identified by the National Bankruptcy Review Commission in its Report. 
This includes such abuses as improper serial filings and such things as 
the use of so-called ``fractional interests'' to frustrate the 
legitimate exercise of creditors' rights (see NBRC Recommendation 
1.5.6). NBRC Recommendation 1.1.2 reflects the widespread concern about 
the inaccurate and misleading information provided by debtors on their 
schedules. Recommendation 1.1.4 expresses the concern that lawyers are 
not providing adequate oversight as to their clients behavior. 
Recommendation 1.4.4 evidences the Commission's concern that bankruptcy 
was being used improperly to avoid performance of spousal and child-
support obligation. Even though many of the Recommendations of the 
National Bankruptcy Review Commission were quite contentious, there has 
been a broad consensus that these particular Recommendations are rooted 
in real-world concerns about fraud and abuse in the bankruptcy system. 
I am not aware of anyone who has questioned the NBRC's concerns about 
inaccurate schedules, fractional interests, and the like.
    Moreover, it is evident that there are at least some individuals 
filing bankruptcy and receiving a discharge in chapter 7 that could 
repay some of their debts. Even if the figure is as low as 3%, this 
number is still greater than the current number of filers who have 
their cases dismissed for substantial abuse. For instance, Judge 
Newsome testified during the hearing that he has dismissed for 
substantial abuse less than 1% of the cases he has seen, which is 
substantially smaller than even the most modest estimates of what 
meanstesting would do. Professor Jack F. Williams, for instance, has 
observed that many perceive the anti-abuse provisions of Sec. 707(b) to 
be a ``dismal failure.'' See Jack F. Williams, ``Distrust: The Rhetoric 
and Reality of Means-Testing,'' 7 Am. Bankr. Inst. L. Rev. 105 (1998).
    In addition to this abuse, it appears that illegal activity has 
also increased in the bankruptcy system. In the past two years there 
has been large-scale criminal prosecutions in certain areas of the 
country that have demonstrated the presence of substantial illegal 
activity that is present in the consumer bankruptcy system. Consider 
some recent stories from the past year or so that have been reported in 
Bankruptcy Court Decisions:

 ``Sixteen Charged in Bankruptcy Abuse Cases,'' Volume 35, 
        Issue 8 (Jan. 11, 2000). ``In the fourth bankruptcy fraud sweep 
        in four years, 16 individuals from across Southern California 
        have been charged with a variety of criminal violations arising 
        form alleged misdeeds in bankruptcy cases.''
 ``Bankruptcy Fraud a Growing Problem Nationwide-In Maryland,'' 
        Volume 36, Issue 2 (June 6, 2000). ``Maryland U.S. Attorney 
        Lynne A. Battaglia said her office is pursuing an increasing 
        number of criminal bankruptcy fraud cases because this crime is 
        a growing problem nationwide-and in Maryland.''
 ``L.A. Landlord Convicted on Three Counts of Bankruptcy 
        Fraud,'' Volume 35, Issue 20 (April 4, 2000). ``Bernard Gross 
        of Los Angeles was convicted Feb. 16, after a two-week jury 
        trial, on three counts of bankruptcy fraud for making false 
        statements in his bankruptcy papers. `Gross' false statements 
        prevented the bankruptcy court from learning about other 
        potentially related bankruptcy cases, and about properties and 
        businesses that may have been connected with other bankruptcy 
        filings,' said U.S. Trustee Maureen Tighe.''
 ``New Mexico Man Pleads Guilty to Wire Fraud in Connection 
        with His Chapter 7,'' Volume 35, Issue 16 (March 7, 2000). 
        ``Gaylen Hindeldey, currently residing in Palm Sptings, Calif., 
        pleaded guilgy Feb. 22 in district court in New Mexico to one 
        count of wire fraud in connection with his 1992 Chapter 7. 
        `Hinkeldey attempted to use wire communications to hide more 
        than $55,000 from his creditors,' said U.S. Trustee Brenda 
        Moody Whinery.''
 ``Administrative Law Judge Convicted of Bankruptcy Fraud,'' 
        Volume 35, Issue 15 (February 29, 2000). ``Simona Flores 
        Rosales, an administrative law judge for the California State 
        Unemployment Insurance Appeals Board, was convicted Feb. 4 by a 
        Federal District Court jury of five felony criminal counts, 
        three counts of bankruptcy fraud, one count of money laundering 
        and one count of filing a false income tax return. The jury 
        found Rosales guilty of concealing assets and making false 
        statements under oath during her bankruptcy proceedings.''

    These stories are merely illustrative and chosen at random, but are 
suggestive of the concerns over fraud and illegality in the system.

    Question 5: Which provisions, if any, should be improved in S. 220? 
If there are provisions in S. 220 that should be improved, do you have 
any proposals, including legislative language, for the Committee?
    Answer: The only possible improvement to the bill that I can 
identify would be an elimination of the broad safe harbor provisions of 
the means-test provisions of the legislation. This provision could 
potentially allow high-income debtors with substantial repayment 
capacity to escape the means-test.

    Question 6: You testified that: ``means-testing will have no effect 
on those making less than the minimum income threshold provided. Thus, 
for the 80% of filers whose income lies beneath the state median, 
means-testing will have no effect whatsoever.'' Is it not true that the 
new paperwork requirements in S. 220 that are intended to implement the 
bill's means-test apply to all personal bankruptcy filings?
    Answer: Read in context, I believe it is clear that my testimony 
refers to the substantive elements of means-testing, not the procedural 
elements. Substantively, means-testing does not affect those who make 
less than the state median income. As for the question of whether 
increased paperwork will be required, I am not sure what specific 
paperwork the question refers to, nor am I aware of specific new 
paperwork that is supposedly the result of administering the means-
test, as opposed to preventing other forms of fraud and abuse. Current 
bankruptcy schedules I and J already require the information on the 
debtor's income and expenditures that are required by the means-test. 
Thus, it is not clear what additional paperwork would be required to 
administer the means-test.

                       SUBMISSIONS FOR THE RECORD

                                   American Bar Association
                                Governmental Affairs Office
                                          Washington, DC 20005-1022
The Honorable Orrin G. Hatch
Chairman
Committee on the Judiciary
United States Senate
Washington, D.C. 20510

Re: Bankruptcy Appellate Structure

Dear Mr. Chairman:
    On behalf of the American Bar Association (``ABA ''), I would like 
to thank you for the opportunity to submit the ABA's views regarding 
the bankruptcy appellate reform provisions contained in Section 1235 of 
S. 220, the ``Bankruptcy Reform Act of 2001,'' and we request that the 
following comments be included in the record of the Committee's hearing 
scheduled for February 8, 2001.
    The ABA, which has over 400,000 members throughout the country, 
strongly supports legislative provisions like Section 1235 that would 
allow direct appeals from orders of bankruptcy judges to the existing 
circuit courts of appeals. This is a non-partisan proposal which would 
significantly improve the bankruptcy system. As Chair of the Business 
Bankruptcy Committee of the ABA Section of Business Law, I have been 
authorized to express the ABA's views to you on this important matter 
in an effort to improve the administration of the bankruptcy laws.
    Direct appeal of bankruptcy matters to the regional circuit courts 
of appeals has also been recommended by the National Bankruptcy Review 
Commission (``Commission''), which studied the matter in depth. The 
Commission was composed of three members appointed by the President 
(then President Clinton), two members appointed by the Senate, two 
members appointed by the House of Representatives, and two members 
appointed by the Chief Justice.
    Although the Commission was split on a number of the bankruptcy 
issues addressed in its Report, the recommendation for direct appeals 
of bankruptcy matters received the unanimous support of all of the 
Commission's members.
    Under the current system of bankruptcy appeals, a bankruptcy order 
(unlike other federal trial court orders) is subject to an additional 
level of review: an appeal must go first to either a district court or 
a bankruptcy appellate panel (``BAP '') before the appeal may go to a 
circuit court. The two-level bankruptcy appellate process is extremely 
unusual. The ABA believes that this multi-tiered bankruptcy appellate 
structure works poorly. It imposes unnecessary delays and costs on all 
parties. In addition, as stated in the Judicial Conference's 1995 Long 
Range Plan for the Federal Courts: ``Under current practice, district 
courts and BAY decisions are not treated as stare decisis in other 
cases--resulting in a `patchwork' of differing legal interpretations 
that encourage forum shopping and undermine the national system of [a 
uniform] bankruptcy law.'' (p.48)
    The ABA believes that a direct appeals system, designed to closely 
parallel the track of nonbankruptcy civil appeals, will result in:

 Faster final decisions;
 Greater certainty, uniform interpretation and decisions of 
        precedential value with respect to key bankruptcy issues; and
 Reduction in unnecessary bankruptcy litigation.

    The ABA believes that direct appeals will aid in achieving the 
important goal of reducing the time and costs associated with the 
bankruptcy process and will also assist in harmonizing bankruptcy laws 
and nonbankruptcy commercial laws generally.
    When members of the National Bankruptcy Review Commission appeared 
before Congress on November 13, 1997, after submitting its Final 
Report, the Honorable Edith H. Jones of the U.S. Court of Appeals for 
the Fifth Circuit testified that: ``Congress should adopt the 
Commission's unanimous recommendation that appeals from bankruptcy 
courts should be routed directly to the U.S. Court of Appeals, rather 
than through an intermediary such as the district courts or bankruptcy 
appellate panels.  .  .(and) the importance of this measure cannot be 
overstated.'' (emphasis in original).\1\
---------------------------------------------------------------------------
    \1\ ``The current system which provides two appeals, the first 
either to a district court or a bankruptcy appellate panel and the 
second to the U.S. Court of Appeals, as of right from final orders in 
bankruptcy cases, should be changed to eliminate the first layer of 
review.'' National Bankruptcy Review Commission, Final Report, 
Recommendation 3.1.3 at 752-53 (1997).
---------------------------------------------------------------------------
    As noted in its commentary on the Recommendation: ``The 
Constitution authorizes Congress to establish a uniform law of 
bankruptcies. Despite this clear constitutional mandate, the current 
bankruptcy appellate structure has yielded results which are far from 
uniform.*  *  *Concerns over costs and efficiency also support the 
Recommendation. Under the current system, every bankruptcy appeal is an 
expensive excursion for both debtor and creditor who must work through 
two layers of appeal for a final resolution of their disputes. Final 
Report at 753-54.
    Both the ABA and the National Bankruptcy Review Commission 
recognize, and are sensitive to, the possibility of increased workload 
for the circuit court judges. After examining and analyzing the issue, 
however, the Commission concluded that, while direct appeals may 
temporarily increase the workload by approximately 9%, ``over time.  .  
.this number should decrease as more issues are settled within the 
circuit and fewer uncertainties linger, necessitating fewer appeals.'' 
(A copy of the relevant portions of the Commission's Final Report to 
Congress is enclosed for your convenience.) The Commission concluded 
that the substantial long-term benefits of a direct appeals system 
significantly outweigh any modest short-term burdens, and the ABA 
agrees with this conclusion.\2\
---------------------------------------------------------------------------
    \2\ In its 1995 Long Range Plan for the Federal Courts, the 
Judicial Conference stated that the appellate review of orders of 
bankruptcy judges should be studied to ``ensure prompt, inexpensive 
resolution.  .  .and foster coherent, consistent development of 
bankruptcy precedents.'' Recommendation 21 at 47. It was recommend that 
statutory change ``should await the [National Bankruptcy Review 
Commission's] report in that respect. Id at 48. As noted above, the 
Commission unanimously recommended direct appeals.
---------------------------------------------------------------------------
    Section 1235 of S. 220 would allow for direct appeals in most 
bankruptcy cases. Under this provision (which is identical to the 
corresponding provision in H.R. 2415, the bill approved by Congress 
last year but vetoed by President Clinton), bankruptcy appeals 
initially would be routed to the district courts for a 30-day period. 
After the 30-day period, the appeals would automatically proceed to the 
regional court of appeals if the district court had not ruled or 
entered an order extending such 30-day period or if the parties had not 
consented to the retention of the appeal in the district court beyond 
the 30-day period.
    Section 1235 was designed to address concerns that some litigants 
may prefer to keep the appeal in the district court and that the 
district court should be given some latitude to keep the appeal. 
Although the ABA prefers a pure direct appeal system for the bankruptcy 
courts that is the same as the system used in the other federal trial 
courts, the proposed alternative is acceptable to the ABA and we view 
it as a clear improvement over current law. In essence, this 
alternative would permit direct appeals to the circuit courts in most 
cases, except where the district court ruled during the 30-day period, 
the parties otherwise consented, or the district court extended the 30-
day period.\3\
---------------------------------------------------------------------------
    \3\ Several other provisions of the present Judicial Code relating 
to bankruptcy jurisdiction already hinge on the consent of the 
litigants or orders entered for cause. For example, if a circuit has 
established a bankruptcy appellate panel, appeals can go to the BAP 
only with consent of the parties. 28 U.S.C. Sec. 158(c)(1). A jury 
trial can be conducted by a bankruptcy judge only with the consent of 
the parties. 28 U.S.C.

    Question 1157(e). Also, a district court may withdraw the reference 
to a bankruptcy judge for cause. 28 U.S.C. Sec. 157(d).
    The bankruptcy system affects the lives of many Americans, whether 
as debtors or as creditors or as employees of companies undergoing 
reorganization. The ABA believes that direct appeals to the regional 
circuit courts of appeals is an important component of bankruptcy 
reform. It is fair and beneficial to all parties; it will help achieve 
uniformity; and it will help harmonize bankruptcy and nonbankruptcy 
commercial law. For these reasons, the ABA urges the Committee to 
support Section 1235 of S. 220.
    Thank you for your consideration, and if you would like to discuss 
the ABA's views on the bankruptcy appellate structure in greater 
detail, please feel free to contact me at (212) 4557140 or Larson 
Frisby in the ABA Governmental Affairs Office at (202) 662-1098.
            Sincerely,
                                           M. O. Sigal, Jr.

    cc: Members, Committee on the Judiciary

                                

Statement of Hon. Richard S. Arnold, U. S. Circuit Judge for the Eighth 
                                Circuit

    Mr. Chairman and Members of the Committee:
    I make this statement at the request of your staff, who got in 
touch with me by telephone on the afternoon of Monday, February 5. I 
understand that the Committee is holding hearings on pending bankruptcy 
legislation, including a provision that would allow for direct appeal 
from bankruptcy courts to the courts of appeals, instead of the current 
appellate structure, which is three-tiered, including bankruptcy 
courts, either district courts or bankruptcy appellate panels, and 
courts of appeals.
    I understand that the Judicial Conference of the United States is 
not in favor of the direct-appeal proposal. It is with some reluctance 
that I voice a different view, the more so as the position of the 
Judicial Conference is to be stated by Chief Judge Becker of the Third 
Circuit, whom I respect and admire as much as any judge in the country. 
Nevertheless, you have asked my opinion, and I believe that, as a 
citizen and an officer of the United States, I should respond to such a 
request from Congress.
    Some time ago, during the deliberations of the National Bankruptcy 
Review Commission, I was asked to appear before the Commission and give 
my views on certain subjects. Among other things, I expressed the 
opinion that the current complicated appeal process should be replaced 
by a simple system of direct appeals from bankruptcy courts to the 
courts of appeals, with further discretionary review by the Supreme 
Court, of course. I have not changed my opinion since that time, and 
desire to state briefly the reasons why. The statement will be very 
brief indeed, as I have not had much time to prepare it.
    For a litigant to have two appeals as of right is very unusual in, 
the federal system. It has always seemed odd to me that such a 
provision should obtain in bankruptcy cases, of all places, where, by 
hypothesis, assets are limited. Most litigants in bankruptcy fall into 
one of two broad categories: people who cannot pay their debts, and 
creditors who are destined to receive less than full payment. Every 
dollar that goes into litigation is a dollar that the creditors will 
not receive. For this reason, it seems to me that, in bankruptcy above 
all other areas, simplicity and reduction of expense should be the 
order of the day. Yet, largely for historical reasons, this is not the 
case.
    The best solution to any problem is usually the simplest one. In 
this instance, the simplest solution is to provide for appeals from 
bankruptcy courts directly to the courts of appeals. Under the current 
system, appeals from bankruptcy courts go either to the district courts 
or to bankruptcy appellate panels. Thereafter, unhappy litigants are 
given a second appeal, as of right, to the courts of appeals. Cases are 
prolonged, and expense is multiplied. I suggest that a direct appeal to 
the court of appeals is the best solution to this problem, because the 
courts of appeals, after all, are in the appellate business all the 
time. If there is anything we know how to do, this is it.
    I do not for a moment depreciate the work done by the district 
courts and the bankruptcy appellate panels in bankruptcy appeals. I 
have no criticism of the quality of their work. I have never 
understood, however, why bankruptcy appeals should be so much more 
complicated than appeals in other kinds of cases. If the Congress is 
not inclined to create a single system of direct appeals to the courts 
of appeals, perhaps it could leave in place the existing appellate 
system, but make the second step discretionary. Under such a system, 
the courts of appeals would have discretion, akin to that exercised now 
by the supreme Court on petitions for certiorari, to hear, or not, 
appeals in bankruptcy cases that have already received one appeal as of 
right.
    The downside of the direct-appeal idea, of course, is that it would 
load more cases into the courts of appeals, which are already 
overloaded. The solution, I suggest, is more judgeships. If more judges 
are needed to do the appellate work in an orderly and thorough fashion, 
and I believe they are, then Congress should create them. The addition 
of direct bankruptcy appeals to the work load of the courts of appeals 
would furnish one more reason for the creation of these new judgeships.
    Mr. Chairman, I appreciate your allowing me to submit this 
statement in writing. If there is any way in which I can be of further 
service to you or to the Committee, please don't fail to let me know.

                                          Richard S. Arnold

                                

        Statement of Association of Financial Guaranty Insurors

    Mr. Chairman, the Association of Financial Guaranty Insurors 
(AFGI), a trade association of financial guaranty insurors \1\, 
appreciates the opportunity to submit testimony to the Committee on 
suggested revisions to the United States Bankruptcy Code related to 
asset-backed securities. AFGI fully supports H.R. 220, but we would 
like to limit our remarks to the provisions included in Title IX, 
Section 912 that relate specifically to asset-backed securities.
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    \1\ The members of AFGI are AMBAC Indemnity Corporation, AXA Re 
Finance S.A., Capital Reinsurance Company, Enhance Reinsurance Company, 
Financial Guaranty Insurance Company, Financial Security Assurance, 
Inc, and MBIA Insurance Corporation.
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    AFGI has supported the revisions incorporated in Title IX, Section 
912 of S. 220 for several years. Through outside counsel, our 
Association submitted recommendations to the National Bankruptcy 
Commission in 1997; submitted testimony for the hearing record when the 
House Committee on the Judiciary's Subcommittee on Commercial and 
Administrative Law held hearings in the 105 th and 106 
th Sessions of Congress; and testified before this 
Committee's Subcommittee on Administrative Oversight and the Courts in 
1998.
         Purpose of the Proposed Change to the Bankruptcy Code
    AFGI believes that the suggested revisions incorporated in Title IX 
of S. 220 relating to asset-backed securities reduces uncertainty under 
the Bankruptcy Code as it applies to the almost $200 billion per year 
of asset-backed securities issued in the United States. By reducing 
uncertainty, the proposed amendment will increase stability in the 
capital markets and thereby facilitate asset-backed financings and 
eliminate certain risks which otherwise indirectly increase interest 
rates for millions of consumers, small business and others seeking 
financing from the capital markets. The proposed revision is 
constructed to achieve these benefits without impairing any of the 
reorganization and fairness policies underlying the Bankruptcy Code.
                   Application of the Proposed Change
    The proliferation of asset-backed securities in the United States 
over the past two decades has dramatically increased both the number of 
lenders and the lending capacity of existing financial institutions. 
This increased capacity has, in turn, created intense competition for 
borrowers.
    Today, consumers and small businesses have more choices when 
looking for a home, auto loan, a new credit card, or financing for a 
small business. More significantly, consumers and small businesses 
whose credit posed too great a risk to qualify for financing are now, 
in many cases, able to do so. This is because, in an asset 
securitization, loans and other receivables are sold by lenders to a 
company formed to sell securities in a structure which takes into 
account the credit risks posed by these receivables. The sale proceeds 
paid to the lender enable it to fund the ``securitized assets'' to make 
additional loans to consumers and small businesses.
    The company to which lenders sell their loans or other receivables 
(the ``Securitized Assets ''), will typically be a ``bankruptcy remote 
entity.'' The company's activities are restricted to the purchase and 
ownership of the Securitized Assets and issuance of the securities. 
Following its acquisition of the loan assets or other receivables, the 
bankruptcy remote entity will typically issue debt or other 
securities--the asset-backed securities--backed by Securitized Assets. 
By bankruptcy-remote, we simply mean that the company is required to 
maintain an existence that is completely separate from its affiliate 
companies such that it will not be affected by the bankruptcy of an 
affiliate.
    Generally, the cash flow or other proceeds generated by the 
Securitized Assets are sufficient to pay the amounts due on the asset-
backed securities. In certain instances credit enhancement is provided 
by third parties, including members of AFGI, guaranteeing the timely 
payment of amounts due to the holders of the asset-backed securities.
    Under current law, uncertainty can arise when the transfer of the 
Securitized Assets by the lender or its operating company to the 
bankruptcy remote entity is deemed to be something other than a sale. 
If the transfer is not a sale and if the seller of the loan assets 
seeks relief under Chapter 11 of the Bankruptcy Code, the Securitized 
Assets purported to have been transferred to the bankruptcy remote 
entity may be included in the seller's bankruptcy estate. In that 
event, the cash flow or other proceeds generated by the Securtized 
Assets (i) would be subject to the automatic stay provision of the 
Bankruptcy Code and would not be available to pay the holders of the 
asset-backed securities until relief was obtained from the automatic 
stay, and (ii) could be subject to cramdown or collateral substitution 
that would further impair the bankruptcy remote entity's ability to pay 
amounts due on the asset-backed securities.
    Any interruption or impairment of the cash flow or proceeds 
resulting from the application of the automatic stay, cramdown or 
collateral substitution, impairs the market value of the asset-backed 
securities and, in the case of insured asset-backed securities, 
requires the insurer of these securities to pay the amounts due the 
holders thereof which would otherwise have been paid by the bankruptcy-
remote entity.
    A ``true sale'' opinion is a fundamental requirement of every asset 
securitization. It is a ``reasoned'' opinion of legal counsel to the 
effect that the assets ``sold'' by an originator to the issuer of 
asset-backed securities will not be impaired in the event of the 
subsequent bankruptcy of the originator. The current Bankruptcy Code 
injects uncertainty into this opinion because it does not provide any 
clear guidance on what constitutes a ``true sale.'' Attached is a copy 
of a letter and an exhibit of a ``true sale'' opinion that was rendered 
in a recent asset-backed transaction rated by two rating agencies that 
the Association delivered to Senator Grassley following the 1998 Senate 
hearing (Appendix 1). Both our letter to Senator Grassley and the 
``true sale'' opinion more fully describe and illustrate the pressing 
need for the asset-backed security provision set out in Section 912 of 
S. 220.
                         The Proposed Revision
    In order to address the situation, in which the seller of loans or 
other receivables commences a Chapter 11 case under the Bankruptcy 
Code, the proposed change in Title IX, Section 912 of S. 220 prevents 
the Securitized Assets transferred to the bankruptcy remote entity from 
being included in the seller's bankruptcy estate. This enables the 
bankruptcy remote entity to continue using the cash flow or other 
proceeds from the Securitized Assets to make payments to the holders of 
the asset-backed securities. To the extent, if any, that the bankruptcy 
remote entity owes any amount to the seller, that obligation remains 
valid and the seller can obtain payment of that amount in accordance 
with its original terms.
    The revision to Section 541 of the Bankruptcy Code contained in 
Title IX, Section 912 of S. 220 is limited in its application to 
preventing the Securitized Assets conveyed by the seller to the 
bankruptcy remote entity from being included in the seller's bankruptcy 
estate. Thus, the proposed amendment simply confirms that the transfer 
intended by the parties as a sale will not be unwound and the 
reorganization of the bankrupt seller will not be otherwise impaired. 
Furthermore, the proposed amendment is limited to transactions 
involving the issuance of investment-grade, asset-backed securities, 
since a primary purpose of Section 912 is to protect the legitimate 
expectations of investors in asset-backed securities sold in the 
capital markets. In addition, as explained in greater detail in the 
commentary at Appendix 2, limiting the application of the proposed 
amendment to securitized transactions in which one class or tranche of 
securities are rated investment grade substantially reduces the 
possibility that a lender or its operating company could transfer some 
or all of its loan assets or other receivables to a bankruptcy remote 
entity in an effort to defraud creditors of the company. In addition, 
Section 912 provides that securitized assets may be included in a 
debtor's bankruptcy estate to the extent such assets may be recoverable 
by the bankruptcy trustee under Section 550 of the Bankruptcy Code by 
virtue of evidence as a fraudulent conveyance under Section 548 (a).
    AFGI strongly supports the revisions to Section 541 of the 
Bankruptcy Code contained in Section 912 of H.R. S. 220 relating to 
asset-backed securities. We believe the proposal will provide increased 
certainty to investors and other participants in the asset-backed 
securities market which, in turn, will create further stability in the 
capital markets, and facilitate future asset-backed financings. All of 
this will help maintain and foster an efficient funding source for 
mortgage loans, credit card receivables, automobile loans, and other 
loans available to citizens in small rural communities as well as our 
nation's cities. Section 912 will ensure that consumers small 
businesses and others have the opportunity to access the least 
expensive source of financing, the capital markets.

                                

                                         Fordham University
                                                       New York, NY

The Honorable Orrin G. Hatch
Chairman
Committee on the Judiciary
United States Senate
224 Dirksen Building
Washington, D.C. 20510

Dear Mr. Chairman,
    Thank you for the opportunity to state my views regarding the 
bankruptcy appellate reform provisions contained in Section 1235 of S. 
220, the ``Bankruptcy Reform Act of 2001.'' I respectfully request that 
these remarks be included in the record of the Committee's hearing 
scheduled for February 8, 2001.
    Section 1235 would enlarge the jurisdiction of the courts of 
appeals to permit direct review of certain bankruptcy court orders. 
Providing a route for parties directly to appeal the final judgments, 
decisions, orders, and decrees of bankruptcy courts will improve 
substantially the expeditious administration of bankruptcy cases and 
the ability of the bankruptcy appellate system to develop binding 
precedent.
    Bankruptcy appeals should be resolved as quickly as 
administratively feasible since delay in the resolution of a bankruptcy 
case invariably reduces distributions to creditors.\1\ The opportunity 
for a direct appeal to the court of appeals provided under section 1235 
would enable litigants who would in any event desire circuit court 
review to avoid the needless delay and expense attendant to a dual 
appeal system.\1\
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    \1\ As early as 1845, the Supreme Court indicated that the 
``manifest object'' of the federal bankruptcy laws was to provide 
speedy proceedings, and the ascertainment and adjustment of all claims 
and rights in favor of or against the bankrupt's estate, in the most 
expeditious manner. Ex pane Christy, 44 U.S. (3 How.) 292, 314-15 
(1845); see also Bailey v. Glover, 88 U.S. (21 Wall.) 342, 346 (1874) 
(``It is obviously one of the purposes of the Bankrupt law [of 1867] 
that there should be a speedy disposition of the bankrupt's estate '').
    \2\ A recent study conducted by the Federal Judicial Center 
concluded that, [f]or cases that continue on through the court of 
appeals, the time spent at the district covet or BAP adds substantially 
to the total time on appeal--for cases terminated on the merits by the 
courts of appeals in fiscal 1998, the average time spent in the total 
appellate process was more than 27 months (826 days), and the median 
time was more than 22 months (663 days). Judith A. McKenna & Elizabeth 
C. Wiggins, ALTERNATIVE STRUCTURES FOR BANKRUPTCY APPEALS at 3 (Federal 
Judicial Center 2000).
---------------------------------------------------------------------------
    The existing two-tiered bankruptcy appellate system undermines the 
development of stare decisis--binding precedent--in the bankruptcy 
context.\3\ While it is clear that the decision of a court of appeals 
binds every federal court within the circuit, courts are irreconcilably 
divided as to whether the appellate decisions of federal district 
courts or bankruptcy appellate panels are binding precedent for the 
circuit. The inability to create binding precedent undoubtedly creates 
a substantial reduction in the benefits of appellate review. If lawyers 
and others cannot predict the state of the law on important bankruptcy-
related topics, they may be unable to advise clients in structuring 
transactions or settling litigation. Enabling parties the ability to 
appeal certain bankruptcy court orders directly to the courts of 
appeals would improve significantly this lack-of binding-precedent 
problem in the bankruptcy system.\4\
---------------------------------------------------------------------------
    \3\ [Dan Bussel]
    \4\ (may not be the only method but probably the most politically 
feasible method] ASBA at 7-8.
---------------------------------------------------------------------------
    Two criticisms of proposals to enable direct review of bankruptcy 
appeals in courts of appeals have exaggerated the possible detrimental 
effects of this bankruptcy appellate reform.
    First, some argue that enactment of section 1235 would inundate 
courts of appeals with direct bankruptcy appeals. Careful studies of 
the likely effect of bankruptcy appellate reform on appellate filings 
predict relatively mild increases in the workload of courts of appeals, 
however. Specifically, the Federal Judicial Center, in its recent 
report on ALTERNATIVE STRUCTURES FOR BANKRUPTCY APPEALS, projected that 
proposals to eliminate intermediate level appellate review of 
bankruptcy court decisions (namely, the proposal made by the National 
Bankruptcy Review Commission) would affect total appellate filings by 
between 6.9 and 4.5 percent, with their ``best estimate'' at the low 
end of this range.\5\ These figures compare favorably to 9 percent 
increase in appellate filings estimated by the National Bankruptcy 
Review Commission in their Report to Congress.\6\
---------------------------------------------------------------------------
    \5\ Judith A. McKenna & Elizabeth C. Wiggins, ALTERNATIVE 
STRUCTURES FOR BANKRUPTCY APPEALS at 55-59 (Federal Judicial Center 
2000).
    \6\  National Bankruptcy Review Commission, Final Report at 753-54 
(1997).
---------------------------------------------------------------------------
    It is important to emphasize, moreover, that both the projections 
of the National Bankruptcy Review Commission and the Federal Judicial 
Center attempt to assess the effect on courts of appeals of eliminating 
intermediate levels of review for all bankruptcy appeals, a result that 
section 1235 of S. 220 does not seek to obtain. Section 1235 instead 
would permit direct review by court of appeals only of bankruptcy court 
orders as to which the district court has not, within a 30-day period, 
rendered an appellate decision or entered an order extending this 
period for cause. In addition, both of these projections estimate the 
immediate affects of bankruptcy appellate reform on the workload of 
courts of appeals. In the long term, however, direct filings should 
diminish as courts of appeals develop a clearer and more predictable 
body of stare decisis in bankruptcy.
    Second, some have argued that bankruptcy appellate reforms 
proposing to permit direct bankruptcy appeals to courts of appeals 
would subject bankruptcy courts' current exercise of jurisdiction to 
the claim that it is unconstitutional.\7\ Of course, any change to the 
complex balance of interests found in the existing bankruptcy 
jurisdictional provisions might invite spurious constitutional 
challenge, but I believe that section 1235 easily would withstand 
constitutional scrutiny.\8\ Supreme Court precedent clearly identifies 
de novo review, rather than ordinary appellate review, as critically 
important to the conclusion that an adjunct court's exercise of 
authority complies with constitutional requirements. For example, in 
U.S. v. Raddatz,\9\ the Supreme Court upheld the delegation of 
authority to untenured magistrates under 28 U.S.C. Sec. 636(c)(1) as 
constitutional and, in so doing, emphasized that ``Congress has 
provided that the magistrate's proposed findings and recommendations 
shall be subjected to de novo determinations `by the judge who.  .  
.then exercise[s] the ultimate authority to issue an appropriate 
order.'' Similarly, in Thomas v. Am,\10\ the Court rejected the 
argument that a rule viewing a failure timely to object to a magistrate 
judge's decision as a waiver of appellate review would violate Article 
III on these terms, emphasizing that
---------------------------------------------------------------------------
    \7\ During the 105th Congress, for example, the 
Department of Justice voiced its objection to section 411 of H.R. 3150 
(which would have eliminated all intermediate levels of review of 
bankruptcy court orders), urging Congress ``not to lessen district 
court review and remove this potentially significant basis for the 
constitutionality of the bankruptcy court's exercise of judicial 
power'' Letter from Ann N. Harkins, Acting Assistant Attorney General, 
to Rep. Henry J. Hyde (May 7, 1998). Section 411 did not survive the 
conference on H.R. 3150. See also John P. Hennignan, Jr., The Appellate 
Structure Regularized: The NBRC's Proposal, 102 DICK. L. REV. 839 
(1998) (``There is a plausible argument that the constitutionality of 
the present system depends upon classifying bankruptcy judges as 
adjuncts to the district courts and bypassing those courts on appeal 
obviates that classification.'').
    \8\ For a more detailed discussion of these constitutional issues, 
see Susan Block-Lieb, Assessing the Constitutionality of Proposed 
Reforms to the Bankruptcy Appellate Process, Appendix C to Judith A. 
McKenna & Elizabeth C. Wiggins, ALTERNATIVE STRUCTURES FOR BANKRUPTCY 
APPEALS at 93-107 (Federal Judicial Center 2000).
    \9\ 447 U.S. 667 (1980).
    \10\ 474 U.S. 140 (1985).
---------------------------------------------------------------------------
    [t]he waiver of appellate review does not implicate Article III, 
because it is the district court, not the court of appeals, that must 
exercise supervision over the magistrate.\11\
---------------------------------------------------------------------------
    \11\ Id. at 153-54. See also Briney v. Burley, 738 F.2d 981, 986 
(9th Cir. 1984) (``Because there is no constitutional right 
to an appeal,.  .  .a fortiori there is no constitutional right to two 
levels of appeal.  .  .by an Article III judge.'').
---------------------------------------------------------------------------
    Moreover, it is important to re-emphasize that section 1235 would 
not altogether eliminate intermediate appellate review of bankruptcy 
orders. It would provide for direct review by courts of appeals only in 
the event that a district court did not enter, within a 30-day period, 
either a decision on the appeal or an order extending such period for 
cause. Presumably, a significant percentage of district courts will be 
able to render their appellate decisions within this 30-day period. In 
addition, section 1235 would require all parties to the appeal to 
consent to direct review by the court of appeals. The Supreme Court 
repeatedly has emphasized the significance of litigant consent in this 
context in that, much like other constitutionally protected individual 
rights, an individual's interest in a fair and independent judiciary is 
subject to waiver.\12\
---------------------------------------------------------------------------
    \12\ See, e.g, Commodity Futures Trading Comm'n v. Schor, 478 U.S. 
833, 850 (1986).
---------------------------------------------------------------------------
    The process by which bankruptcy appeals are resolved is critically 
important to the administration of bankruptcy cases. Section 1235 of S. 
220 represents a cautious improvement over the existing arcane 
bankruptcy appellate provisions in that it would, under limited 
circumstances, permit courts of appeals directly to review certain 
bankruptcy court orders. Direct review would expedite resolution of 
bankruptcy appeals and strengthen both the quality and quantity of 
binding bankruptcy precedent. Direct review would not deluge courts of 
appeals with bankruptcy appeals and would not render the bankruptcy 
court system unconstitutional.
    Thank you for your consideration. Should you have further questions 
on my views regarding these or other bankruptcy appellate reforms, 
please feel free to contact me at (212) 636-6782.
            Sincerely,
                                           Susan Block-Lieb

                                

                Statement of the Bond Market Association

    The Bond Market Association appreciates the opportunity to comment 
on proposed reforms to the bankruptcy laws. The Bankruptcy Reform Act 
of 2001 (S. 220) includes several provisions that would help insulate 
the financial system from systemic risk-the risk that the failure of 
one market participant could ripple through the capital markets and 
bring down other participants. The Bond Market Association represents 
securities firms and banks that underwrite, trade, and sell debt 
securities both domestically and internationally. The Association's 
membership collectively accounts for approximately 97 percent of the 
nation's bond underwriting activity.
    We commend Senator Hatch for calling this hearing and for his 
commitment to comprehensive bankruptcy reform early in the current 
congressional session. Last year's bankruptcy bill passed both houses 
of Congress by wide margins, and we are hopeful that this year's bill 
will be enacted quickly.
    In this statement, the Bond Market Association focuses on 
provisions in S. 220 concerning cross-product netting, closeout rights 
and asset-backed securities (ABS).
                            I. Introduction
    Certain financial transactions involve ongoing economic 
relationships or commitments to be fulfilled in the future. For 
example, risk management tools such as forward contracts and swaps are 
based on contractual agreements between parties to transfer assets or 
payments at some future time. Repurchase agreements, which are 
important sources of liquidity in the debt markets and, to an 
increasing degree, in the equity markets, involve financial commitments 
that must be fulfilled at a later date. In these important market 
activities which can involve huge sums and concentrated exposures, the 
inability of one party to exercise its contractual ``self-help'' rights 
in the event of the insolvency of the other party could cause ripple 
effects by undermining the financial condition of the nonbankrupt party 
(and its counterparties) and the markets more generally.
    Recognizing the important role of these transactions in capital 
formation and market liquidity and the potential for a chain reaction 
of insolvencies should non-bankrupt parties' contractual self-help 
rights be impaired, Congress has included provisions in the Bankruptcy 
Code and the bank insolvency laws that expressly protect the exercise 
of such rights in the event of bankruptcy or insolvency. However, it 
has been almost ten years since the last legislative update to the 
safe-harbor provisions. The financial markets have evolved during that 
time in ways that leave various transactions and parties subject to 
legal uncertainty. As more types of market participants have engaged in 
a broader range of transactions, statutory inconsistencies have 
surfaced that make it difficult to conclude that Congress's goal of 
minimizing systemic risk has been fully achieved through the existing 
market safe harbors. Important technical corrections are needed to 
minimize systemic risk in light of market developments.
    The Bankruptcy Code should also be amended to protect and enhance 
the important role of the asset-backed securitization process. Asset 
securitizations, which provide a secondary market for mortgage, 
consumer, commercial and industrial loans and other debt obligations, 
are multi-stage transactions where the integrity of securities payment 
commitments rests on the finality of earlier transfers of underlying 
assets. An efficient secondary market for debt obligations lowers the 
cost and increases the availability of capital. This translates into 
more jobs for Americans. Amendments to increase market efficiency and 
provide comfort for investors will not only enhance the development of 
future asset-backed securitizations, they will provide a safeguard 
against market turmoil should a seller of financial assets become the 
subject of proceedings under the Bankruptcy Code and attempt to disrupt 
the cash flow on assets that were securitized.
    The comprehensive bankruptcy bills currently pending in Congress 
would substantially improve the statutory regime that governs financial 
transactions when a party fails to meet its payment obligations. The 
Bankruptcy Reform Act of 2001 (S. 220) and the Bankruptcy Abuse 
Prevention and Consumer Protection Act (H.R. 333) are identical to the 
bankruptcy conference report that was approved by a wide bipartisan 
majority in the House and Senate last year.
    This legislation would harmonize the Bankruptcy Code and bank 
insolvency laws governing swaps, repurchase agreements, securities 
contacts, forward contracts, and commodity contracts. They would also 
provide a safe-harbor in the Bankruptcy Code for ABS transactions. The 
Bond Market Association urges Congress to enact the full set of 
bankruptcy and insolvency law changes that are needed to protect modern 
financial markets. These proposed changes are entirely consistent with 
many statutory provisions that have already been enacted, and are in 
the nature of technical corrections.
            II. The Current Safe Harbors Need to be Updated
                           a. swap agreements
    Swap agreements are privately negotiated contracts between parties 
to exchange payments under specified conditions. The parties' 
obligations are linked to some index, commodity price, interest rate, 
currency or other indication of economic value. In an interest rate 
swap, for example, two parties agree to exchange payments based on some 
agreed upon notional principal amount. However, principal does not 
typically change
    hands in a swap contract. It merely serves as the reference for the 
calculation of the payments to be made.
    The primary purpose of swaps is risk management. The universe of 
parties actively engaged in swaps is expansive and growing: banks, 
securities firms, mutual funds, pension funds both public and private, 
manufacturing firms, and state and local governments, just to name a 
few. Virtually all significant commercial enterprises face certain 
risks that can be managed through the use of swaps. In the example that 
follows, Party B attempts to manage its exposure to changes in interest 
rates through the use of an interest rate swap:
Example 1. Two parties to an interest rate swap agree to exchange 
        payments based on a $1 million notional amount. Party A agrees 
        to pay a fixed rate of seven percent, and Party B agrees to 
        make floating payments based on some market index. If payments 
        are exchanged once per year, Party A would pay Party B $70,000 
        (seven percent of $1 million) and Party B would pay Party A 
        $40,000 in the first year (four percent of $1 million), 
        assuming that the floating rate index were four percent at the 
        time of calculation. In practice, the payments are netted so 
        that Party A simply pays Party B $30,000, or $70,000--$40,000. 
        (In this example, Party B may have floating rate assets and 
        fixed rate liabilities, and it desires to hedge that mismatch. 
        In this example, the payment that Party B receives makes up for 
        the reduced return Party B receives on its floating rate 
        assets, allowing it to satisfy its fixed rate liabilities. 
        Party A may be a dealer, who hedges its position by taking an 
        offsetting position, either in the swaps market or in another 
        fixed income market.)
    The fundamental contractual terms in a swap for the exercise of 
remedies in the event of bankruptcy or insolvency provide for ``close-
out,'' ``netting'' and foreclosure. Close-out involves the termination 
of future obligations between the parties and the calculation of gain 
or loss. Netting involves offsetting the parties' gains and losses to 
arrive at a net outstanding amount payable by one party to the other. 
Foreclosure involves the use of pledged assets to satisfy the net 
payment obligation. The ability to execute this process swiftly is key 
to the financial markets and the solvency of its participants due to 
the potential exposure a counterparty in such transactions has to 
market risks and the possibility of changes in the values of financial 
contracts and collateral due to market movements. The inability of a 
financial market participant to exercise these remedies promptly could 
impair its liquidity and solvency.
    The following is a basic example of the close-out, netting and 
foreclosure process:
Example 2. Party A and Party B enter into two interest rate swaps at 
        different times (Swap X and Swap Y). Both contracts contain 
        provisions that allow for close-out, netting and foreclosure 
        and are in effect when Party A becomes insolvent. At the time 
        of Party A's insolvency, Party A's mark-to-market loss under 
        the terms of Swap X is $30 million and its mark-to-market gain 
        under the terms of Swap Y is $20 million. Through the process 
        of close-out and netting, the swaps are terminated and Party A 
        owes Party B $10 million. If Party A had pledged $15 million of 
        collateral to Party B, Party B would foreclose on the 
        collateral, use $10 million to satisfy Party A's obligation, 
        and return $5 million to Party A.
    If Party A became subject to a proceeding under the Bankruptcy 
Code, Party B would be entitled under current law (Sections 362(b)(17) 
and 560 of the Bankruptcy Code) to exercise its self-help close-out, 
netting and foreclosure remedies as described above. If Party A were an 
FDIC-insured bank that became subject to a receivership (and Swaps X 
and Y were not transferred to a successor entity), Party B would be 
entitled under the Federal Deposit Insurance Act to exercise its self-
help close-out, netting and foreclosure remedies as described above. In 
either case, if Party B were unable to exercise such remedies, its 
liquidity and solvency could be impaired, creating gridlock and posing 
the risk of systemic problems.
    The swaps market has evolved since the protections for interest 
rate and other swaps were first put in place. Parties have learned to 
apply the principles of risk management in many different ways that are 
not expressly covered under the applicable definitions in the 
Bankruptcy Code and the Federal Deposit Insurance Act. As a result, the 
markets in some cases proceed under some degree of legal uncertainty 
regarding the enforceability of certain contracts, even though they are 
economically equivalent to other contracts that are expressly protected 
and pose the same risks that Congress has sought in the past to avoid.
    For example, if in the above hypothetical the two swaps were equity 
swaps in which the payments were calculated on the basis of an equity 
securities index, it is not entirely clear that the transactions would 
fall within the market safe harbor in the Bankruptcy Code or the 
Federal Deposit Insurance Act for ``swap agreements.'' If both of the 
parties were ``financial institutions'' under the Federal Deposit 
Insurance Corporation Improvement Act or the Federal Reserve Board's 
Regulation EE and the swap agreement were a ``netting contract,'' then 
Party B might (although it is not entirely clear) be able to exercise 
close-out, netting and foreclosure rights in respect to the equity swap 
transactions. If one of the parties were not a ``financial 
institution'' or the contract did not constitute a ``netting contract'' 
(for example, because it was governed by the laws of the United 
Kingdom), then Party B could be subject, among other things, to the 
risk of ``cherry-picking''--the risk that Party A's trustee or receiver 
would assume Swap Y and reject Swap X, leaving Party B with a $30 
million claim (which would be undersecured because of the impairment of 
netting) and to the risk that its foreclosure on the collateral would 
be stayed indefinitely. This could impair Party B's creditworthiness, 
which in turn could lead to its default to its counterparties. The 
pending legislation would minimize these risks by making clear that an 
equity swap is a ``swap agreement,'' entitled to the same market safe 
harbors as interest swap agreements.
                        b. repurchase agreements
    Repurchase agreements, also known as ``repos,'' are contracts 
involving the sale and repurchase of securities or other financial 
assets at predetermined prices and times. Although structured and 
treated for legal purposes as purchases and sales, economically repos 
resemble secured lending transactions. In economic terms, one 
participant in the repo transaction (the ``seller'') is borrowing cash 
at the same time that the other participant (the ``buyer'') is 
receiving securities. The recipient of cash agrees to pay the cash-to 
repurchase the securities-at a predetermined time and price, including 
a price differential (the economic equivalent of interest). The buyer 
agrees to purchase and later resell the securities.
    According to published reports, on an average day in 2000, nearly 
$1.4 trillion in repos were outstanding between dealers of U.S. 
government and federal agency securities, up from a daily average of 
$310 billion in 1988. Parties also routinely engage in repo 
transactions involving non-agency mortgage-backed securities, whole 
loans and other financial instruments. As a result of recent 
legislative changes enacted as part of the National Securities Markets 
Improvement Act and recent changes to federal margin regulations, repos 
may now involve equity securities. Participants in the repo market are 
diverse, including commercial banks, securities firms, thrifts, finance 
companies, nonfinancial corporations, state and local governments, 
mutual and money-market funds and the Federal Reserve Banks, among 
others.
    In 1984, Congress acted to protect certain types of repos from the 
insolvency of market participants after the 1982 Lombard-Wall 
bankruptcy court decision cast uncertainty on the ability of market 
participants to close out their positions. According to the Senate 
Judiciary Committee report on the 1984 legislation, that decision had a 
distinct adverse effect on the financial markets. At that time, 
Congress granted protection only to repos involving certificates of 
deposit, eligible bankers' acceptances, and securities that are direct 
obligations of, or that are fully guaranteed as to principal and 
interest by, the federal government. In doing so, Congress expressly 
stated that repos serve a vital role in reducing borrowing costs in the 
markets for these securities and sought to encourage market 
participants to use repos with confidence.
    Unfortunately, the list of instruments protected by those 1984 
amendments to the Bankruptcy Code has grown outdated as market 
participants have entered into repos involving a wide range of 
financial assets. Besides repurchase agreements on government and 
federal agency securities, which are covered under the Bankruptcy Code 
and Federal Deposit Insurance Act definitions of ``repurchase 
agreement,'' firms now actively engage in repurchase agreements on the 
foreign sovereign debt of OECD countries, whole mortgage loans, and 
mortgage-backed securities of many types. Under H.R. 333 and S. 220, 
each of these types of repurchase agreements would be covered by the 
market safe harbors provided in the Bankruptcy Code (they are already 
covered by the Federal Deposit Insurance Act and regulations 
thereunder). Market participants could then enter into such 
transactions with greater confidence that they will be easily 
enforceable, improving the liquidity and cost of financing in the 
markets for the underlying instruments, and minimizing systemic risk.
   c. securities contracts, forward contracts and commodity contracts
    Market participants enter into contractual arrangements for the 
sale of securities and commodities where payment and delivery 
obligations are fulfilled at some future date. Securities contracts, 
forward contracts, and commodity contracts all can take many forms, but 
they can also be similar from an economic perspective. ``Securities 
contracts'' include forward purchases of securities, pursuant to which 
the parties agree to exchange payments and securities at a fixed date 
in the future. ``Forward contracts'' include privately negotiated 
arrangements where one party agrees to sell a commodity to another 
party at a fixed price for delivery at a future date. The terms of 
forward contracts can closely resemble those of futures contracts 
(which are ``commodity contracts''). However, forward contracts are not 
traded on commodity exchanges under standardized terms and the parties 
envision actual delivery of the underlying commodity. Despite the 
economic similarities of securities contracts, forward contracts and 
commodity contracts, the Bankruptcy Code and the Federal Deposit 
Insurance Act are inconsistent in their treatment of these 
transactions. Under the Federal Deposit Insurance Act, any counterparty 
can close out and net obligations under all securities contracts, 
forward contracts or commodity contracts it may have outstanding with 
the FDIC-insured bank in a liquidating receivership. However, if the 
failing counterparty is a debtor subject to the Bankruptcy Code, the 
enforceability of close-out provisions depends on a number of factors, 
including the type of counterparty, and the type of contract involved. 
In order to close out and net ``securities contracts,'' the non-
bankrupt counterparty must be a ``stockbroker,'' ``financial 
institution'' or ``securities clearing agency.'' In order to close out 
and net ``forward contracts,'' the non-defaulting party must qualify as 
a ``forward contract merchant.'' A few examples illustrate these 
differences:
    Example 3. Party A, a mutual fund, and Party B, a securities 
dealer, have two outstanding contracts for the purchase of securities, 
one that is in-the-money to Party A, one that is out-of-the-money to 
Party A. If Party B becomes the subject of proceedings under the 
Bankruptcy Code, Party A would not be able to close out the contracts 
and net its obligations to Party B under the out-of-the-money contract 
against Party B's obligations under the in-the-money contract (unless 
it had acted through a bank agent). However, if it is Party A that 
becomes the subject of proceedings under the Bankruptcy Code, Party B 
would be able to close out the transactions and net its obligations. 
This is because Section 555 of the Bankruptcy Code allows liquidation 
of securities contracts only by stockbrokers, financial institutions 
and securities clearing agencies, none of which includes the mutual 
fund (unless it had acted through a bank agent).
    Example 4. Now assume that in the above example Party B is an FDIC-
insured depository institution. If Party B becomes the subject of 
receivership proceedings and the securities contracts with Party A are 
not transferred to a successor institution, Party A will be able to 
close out the transactions and net the obligations thereunder. This is 
because the Federal Deposit Insurance Act, since 1989, contains no 
counterparty restrictions.
    Example 5. Party A, the mutual fund, and Party B, an affiliate of a 
securities dealer, have two outstanding forward foreign exchange 
contracts. If Party B becomes the subject of proceedings under the 
Bankruptcy Code, Party A would be able to close out and net the foreign 
exchange transactions. This is because Section 556 of the Bankruptcy 
Code allows liquidation of ``forward contracts'' (the foreign exchange 
transactions) by forward contract merchants, a classification that 
includes the mutual fund. (Note that the forward foreign exchange 
contracts would also be ``swap agreements,'' and the mutual fund, as a 
``swap participant,'' could exercise its rights on that basis as well. 
Other ``forward contracts'' would not qualify as ``swap agreements.'')
    Thus, parties of similar size who enter the markets with equal 
frequency and in the same manner enjoy different degrees of protection 
under the Bankruptcy Code and the Federal Deposit Insurance Act. This 
makes no sense from the point of view of the reduction of systemic 
risk--the failure of these market players could trigger the same kind 
of chain reaction that a bank, broker-dealer or clearing agency failure 
could trigger. The pending legislation would improve the current 
situation by making certain technical definitional changes under the 
Bankruptcy Code (to bring it closer to the Federal Deposit Insurance 
Act). The amendments would expand the universe of counterparties whose 
contractual rights would be enforceable. In addition to stockbrokers, 
financial institutions, registered investment companies and securities 
clearing agencies, large and sophisticated market participants would be 
able to close out their securities contracts, forward contracts and 
commodity contracts against Bankruptcy Code debtors. Such 
counterparties would be defined as ``financial participants'' under the 
Bankruptcy Code through certain quantitative tests modeled on the 
Federal Reserve Board's Regulation EE. Once amended, the counterparty 
limitations under the Bankruptcy Code would have a more rational scope 
than they do under current law.
                        d. cross-product netting
    Financial market participants often have a wide range of 
transactions outstanding with one another at any given time. Thus, a 
given party's exposure to the risk of default by another party may be 
understood only by considering the total value of the payments that 
party expects to receive and pay under all of the various contracts. 
The Federal Deposit Insurance Act reflects an understanding of this and 
permits the netting of obligations stemming from one type of 
``qualified financial contract'' against obligations stemming from 
another type of ``qualified financial contract.'' This practice, known 
as ``crossproduct'' netting, permits more rational risk management 
practices and allows market participants to resolve whatever problems 
arise from the insolvency of one of their counterparties in a more 
orderly fashion. Cross-product netting also reduces the likelihood of 
systemic risk, as it allows the non-bankrupt counterparty to 
crystallize its exposure and not be treated as a secured creditor with 
an interest in cash collateral subject to the automatic stay.
    Cross-product netting is also permitted under the Bankruptcy Code, 
but to a lesser degree. Parties can net their obligations under 
securities contracts, forward contracts and commodity contracts against 
one another. It is unclear whether cross-product netting is permitted, 
however, when the contracts involved are swaps and repurchase 
agreements.
    Example. Party A, a securities dealer, and Party B, a large 
corporation, have an outstanding securities contract that upon close-
out is profitable for Party A. The parties also have an outstanding 
forward contract that upon close-out is profitable for Party B. When 
Party B becomes the subject of a proceeding under the Bankruptcy Code, 
Party A would be able to close out each of the contracts and offset its 
obligation to pay Party B under the forward against Party B's 
obligation to Party A under the securities contract.
    Example 7. Party A and Party B have an outstanding swap that upon 
close-out is profitable for Party A. The parties also have an 
outstanding repurchase agreement under which Party A holds securities 
purchased from Party B that upon close-out is profitable to Party B 
(i.e., the value of the securities exceeds the repurchase price). If 
Party B becomes the subject of proceedings under the Bankruptcy Code, 
Party A would not clearly be able to offset the excess repo proceeds 
against Party B's outstanding obligation under the swap. At worst, 
Party A would be treated as a secured creditor with a security interest 
in the repo proceeds. Its rights could, however, be subject to the 
automatic stay, thereby impairing its liquidity and creating the 
potential for systemic risk.
    There is no plausible rationale for treating cross-product netting 
between securities, forward and commodity contracts differently from 
cross-product netting between those contracts, swap agreements and 
repurchase agreements. These anomalies emerged over time, as various 
protective provisions were added to the Bankruptcy Code to protect 
various types of markets. (Because the ``qualified financial contract'' 
provisions of the Federal Deposit Insurance Act were enacted at the 
same time, no such anomalies exist in those provisions.) However, the 
capital markets have grown and matured to such an extent that various 
types of market participants now engage in many types of transactions, 
and it is time for the market safe harbors to be rationalized and made 
consistent in their application to all financial products for all 
participants. Wider and more certain cross-product netting in cases of 
bankruptcy should allow parties to enter into additional types of 
transactions with the same counterparty without necessarily increasing, 
on a net basis, their overall credit exposure or risk to the markets as 
a whole. Indeed, some cross-product transactions will serve to reduce a 
counterparty's overall risk, facilitating better risk management and 
reducing overall risk in the financial markets.
               III. Mortgage- and Asset-backed Securities
    The process of assembling pools of financial assets and selling 
securities with payments derived from the assets' cash flows is known 
as ``securitization.'' Almost any financial asset can be securitized. 
The earliest examples were home mortgage loans, but today financial 
services firms securitize car loans and leases, credit card 
receivables, business loans and many other assets generating current or 
future cash flows. The proceeds from sales of securities supported by 
those assets make their way back into the capital markets and become 
available for new lending to homeowners, car owners, consumers, 
businesses and myriad other borrowers. A larger supply of lendable 
capital means that home buyers, car buyers, consumers and companies can 
all borrow at lower interest costs. A simple example demonstrates the 
process of financial asset securitization:
    Example 8. Party O originates mortgage loans with a total principal 
amount of $100 million and sells the whole loans to a special-purpose 
vehicle (an ``SPV ''). The SPV issues mortgage-backed securities (``MBS 
''), the payments on which are supported by cash flows from the 
mortgage loans. As borrowers make principal and interest payments on 
their mortgage loans, these payments pass through a servicer and 
eventually are distributed to the MBS investors. The proceeds of the 
sale of the loans by Party O to the SPV are available for new loans to 
home buyers.
    Certain types of mortgage-backed and asset-backed transactions 
raise issues under the Bankruptcy Code that make them more costly or 
difficult to complete. The central issue in such situations is the risk 
that securitized assets transferred to a special-purpose vehicle, which 
then issues securities backed by such assets, will be considered part 
of the bankruptcy estate of the party selling them into the pool if 
that seller becomes insolvent. Such treatment could subject the cash 
flows from the securitized assets to the automatic stay and inhibit the 
timely distribution of principal and interest payments to investors in 
the subsequently issued asset-backed securities. It could also subject 
the pool of transferred assets to attack by a bankruptcy trustee who 
might seek to reclaim them for the bankrupt's estate for the benefit of 
general creditors, denying beneficial holders of asset-backed 
securities the primary source of repayment that was intended to be 
provided by these securitized assets. Consider the following 
transaction:
    Example 9. Party A originates mortgage loans with a total principal 
amount of $100 million and sells the loans to Party B. Party B sells 
two classes of asset-backed securities based on the pool. The Class A 
securities, totaling $90 million, have a senior claim on the cash flows 
generated by the mortgage loans and receive an investment-grade credit 
rating. The Class B securities, totaling $10 million, are subordinated 
to the Class A securities and not rated investment-grade. Assume Party 
B obtained the mortgage loans from Party A in exchange for (i) the $90 
million raised through the sale of the Class A securities and (ii) the 
Class B certificates. If Party A becomes insolvent, Party A (as debtor-
in-possession) or its trustee could attempt to recharacterize the sale 
of the mortgage loans as a pledge to secure a financing, based on Party 
A's retention of the Class B securities. If it were successful, 
notwithstanding that it had received fair value at the outset of the 
transaction and the reasonable expectations of the investors in the 
Class A securities, distribution of the principal and interest payments 
on the loans to the investors would be subject to the automatic stay, 
jeopardizing timely payment to the Class A investors. Such a result 
would not only harm the particular investors in question, it could have 
a material, negative effect on the mortgage-backed and asset-backed 
securities markets more generally.
    In order to obtain sales treatment under the relevant accounting 
standards, participants in mortgage-backed and asset-backed 
securitization transactions must obtain assurances from counsel that 
the sale of assets will be final under applicable bankruptcy law. Such 
legal advice is referred to as a ``true sale opinion.'' Unfortunately, 
there is a lack of guiding judicial precedent regarding what 
constitutes such a true sale of assets. The considerations in the 
analysis are highly subjective and depend on a qualitative assessment 
of a wide variety of facts and circumstances. For these and other 
reasons, any true sale opinion will generally be a reasoned one, with 
various assumptions as to factual matters and conclusions that 
introduce an unnecessary degree of legal uncertainty in the asset-
backed market. As a result, for some types of transactions, true sale 
opinions can be extremely difficult, costly, and in a few cases, 
impossible to render.
    The FDIC recently released for comment a proposed Policy Statement 
that would clarify that, with respect to certain securitizations by 
FDIC-insured institutions, the FDIC would not seek to reclaim assets 
that were the subject of the securitization. In particular, the Policy 
Statement ``provides that subject to certain conditions, the FDIC will 
not attempt to reclaim, recover, or recharacterize as property of the 
institution or the receivership estate.  .  .the financial assets 
transferred.  .  .in connection with the securitization.'' 63 Fed. Reg. 
71926 (December 30, 1998). Similar action is needed to cover transfers 
by market participants who later become debtors under the Bankruptcy 
Code. In an effort to clarify the rights of investors in asset-backed 
securities and bring the benefits of securitization to a broader 
spectrum of market activity, H.R. 333 and S. 220 include a series of 
amendments to the Bankruptcy Code that would specifically exempt 
certain transferred assets from a debtor's bankruptcy estate and 
clarify whatever ``true sale'' confusion may exist. The amendments 
would be narrowly tailored to apply only to eligible assets transferred 
as part of a bona fide securitization involving the issuance of 
securities rated investment grade by at least one nationally recognized 
rating organization. Through a series of definitions, the proposed 
amendments would exclude from a debtor's estate any asset ``to the 
extent that such eligible asset was transferred by the debtor, before 
the date of commencement of the case, to an eligible entity in 
connection with an asset-backed securitization.''
    These changes would not only reduce transaction costs for future 
mortgage- and asset backed securitizations, they would minimize the 
likelihood that an insolvent debtor could attempt to reclaim already--
securitized assets in a proceeding under the Bankruptcy Code, 
notwithstanding the structural safeguards designed to avoid such a 
result. Even if such a debtor were not successful, the possibility of 
recharacterization could have a significant adverse impact on the 
markets in mortgage- and asset-backed securities.
                             IV. Conclusion
    The above examples illustrate the need for Congress to enact the 
financial contract provisions of S. 220 and H.R. 333, which would make 
important, but highly technical changes to the Bankruptcy Code and the 
Federal Deposit Insurance Act. These changes are consistent with the 
existing market safe harbors in the Bankruptcy Code and the Federal 
Deposit Insurance Act and will encourage broader use of sound risk 
management techniques and help to minimize overall systemic risk. We 
urge Congress to act quickly on this important legislation.

                                

             Statement of Commercial Law League of America

The Honorable Orrin G. Hatch
Chairman of the Judiciary Committee
The United States Senate
131 Russell Senate Office Building
Washington, DC 20510

Dear Senator Hatch:

    The Commercial Law League of America (the ``League ''), founded in 
1895, is the nation's oldest organization of attorneys and other 
experts in credit and finance actively engaged in the fields of 
commercial law, bankruptcy and reorganization. Its membership exceeds 
4,600 individuals. The League has long been associated with the 
representation of creditor interests, while at the same time seeking 
fair, equitable and efficient administration of bankruptcy cases for 
all parties in interest.
    The Bankruptcy Section of the League is made up of approximately 
1,600 bankruptcy lawyers and bankruptcy judges from virtually every 
state in the United States. Its members include practitioners with both 
small and large practices, who represent divergent interests in 
bankruptcy cases. The League has testified on numerous occasions before 
Congress as experts in the bankruptcy and reorganization fields.
    In the Senate and the House of Representatives, S. 220 and H.R. 333 
have been respectively introduced to reform the nation's bankruptcy 
laws. Each is virtually identical to H.R. 2415, which passed the 
106th Congress, but did not become law due to a presidential 
veto. Although the League has prepared a position paper addressing its 
foremost substantive concerns with S. 220 and H.R. 333, we believe it 
is necessary to address procedural and substantive concerns that have 
arisen in that past and that, in all likelihood, will persist as S. 220 
and H.R. 333 are considered.
    Last session's H.R. 2415 reflected a compromise between H.R. 833 
and S. 625, each of which passed its respective Congressional house but 
with some significant substantive differences. Unfortunately, the 
compromise that produced H.R. 2415 was not the product of reasoned 
debate because the legislation was never considered by a conference 
committee consisting of members of the Judiciary Committee.
    The need for a full conference cannot be overemphasized. Bankruptcy 
law and legislation is highly specialized and complex, requiring 
intimate knowledge of the inner workings of the Bankruptcy Code and 
Rules, and their interrelationship among the various parties in 
interest. Further, to the League's knowledge, not a single bankruptcy 
organization, judges group or academicians has endorsed the current 
versions of the bills or their predecessors. Most disturbing is that 
the recommendations of the Bankruptcy Review Commission have been all 
but ignored in the current legislation.
    While extensive attention has been given to the consumer aspects of 
bankruptcy reform, the business bankruptcy provisions have varied from 
bill to bill and have not been afforded the same deference. With an 
economic downturn already occurring, business bankruptcies inevitably 
will rise, making it more critical that any business bankruptcy reform 
be well reasoned and fully considered.
    The business provisions of H.R. 833 and S. 625 were fundamentally 
flawed. As extensively addressed in the League's previous position 
papers, both pieces of legislation created far more problems than they 
remedied. These problems are carried forward in the recently re-
introduced versions of H.R. 833 and S. 625.
    For example, the legislation creates an untested procedure for the 
reorganization of small businesses. The problems begin with the 
commencement of the bankruptcy case be case the definition of ``small 
business,'' tied to the amount of debt, would include an overwhelming 
majority of all business bankruptcies. Designed with a preference for 
efficiency over practicality, the small business provisions completely 
ignore the realities involved and will effectively eliminate the 
possibility of an otherwise viable reorganization in a great number of 
cases, causing creditors to go unpaid and workers to lose their jobs.
    Retail bankruptcies are doomed to failure. The proposed legislation 
grants lessors of commercial real estate virtual veto power over lease 
assumption and rejection, rather than allowing the bankruptcy courts to 
continue to exercise their discretion regarding the time necessary for 
a debtor to make decisions about whether or not to retain leased 
property. Lessors will, in all likelihood, use their extraordinary 
power to exert concessions from debtors as the quid pro quo for the 
requested extensions, to the detriment of all other parties in 
interest. This protection is, of course, in addition to the already 
preferential treatment that commercial real estate lessors currently 
enjoy under the Bankruptcy Code, which requires debtors to timely remit 
lease payments or risk eviction from the premises. Equally disturbing 
is that lessors' administrative expense claims are proposed to be 
expanded. This further enhances lessors' rights, correlatively 
compounding the harm to all other creditors. Strenuous objection has 
been raised to this provision and virtually no one, other than the 
shopping center lobby, supports it.
    Most critically, the legislation does not address the single 
largest defect in the business bankruptcy process--venue. The corporate 
chapter 11 has become an embarrassment to our system of law. Due 
process considerations have been undermined and access to the courts by 
creditors and parties in interest has effectively been eliminated, 
based on a debtor's current ability to file in its state of 
incorporation, rather than where its principal assets or principal 
place of business is located. This has resulted in over 40%of the 
business bankruptcy cases filed in 1999 having been filed in Delaware. 
Delaware courts are now determining from a remote location, issues 
which directly impact the community where the debtor is actually 
located and conducts its business. The inequitable nature of this 
process is heightened, as the largest bankruptcy cases are now being 
filed in Delaware. Whole communities, which are dependent on these 
mega-employers, are affected without having any local presence or real 
access to the process. Taxing authorities, who do not routinely utilize 
``local counsel'' are being railroaded in the claims process, to the 
detriment of their citizens. Local community issues, such as hospital 
bed availability, nursing home care and public services such as garbage 
removal and utility service, are being determined by those who are 
least affected by the bankruptcy courts. Public confidence in the 
bankruptcy process is eroding, and justifiably so, when ``notice'' and 
``an opportunity to be heard'' are nothing but hollow gestures.
    These and a plethora of other troublesome provisions demonstrate 
the inherent complications involved in the process of reforming the 
Bankruptcy Code on the scale contemplated by the most recent bankruptcy 
reform legislation. The please of those with an intimate understanding 
of the bankruptcy system, including judges, practitioners, trustees, 
and academics, to more carefully consider the effects of the reform 
legislation have repeatedly fallen on deaf ears. Bankruptcy reform 
generally has yet to be debated in an appropriate conference, 
independent of other legislation, where its problematic aspects can be 
considered, including proper analysis of the harmful, unintended 
consequences that surely will befall debtors, creditors and the process 
as a whole. Real bankruptcy reform need not be so disruptive and should 
never depart so far from the longstanding and bedrock principle of 
bankruptcy--fair and balanced treatment of all parties in interest.
    The League appreciates the opportunity to set forth and discuss 
these significant concerns regarding proposed bankruptcy reform and the 
process by which such reform is being considered. We welcome the 
invitation to work with you and the other members of Congress to 
achieve effective, balanced and meaningful bankruptcy reform for all 
parties in interest.
            Respectfully submitted,
                                             Jay L. Welford
                                    Co-Chair, Legislative Committee

                                   Judith Greenstone Miller
                                    Co-Chair, Legislative Committee

                                              Mark Shieriff
                                                          President

                                

                    Commercial Law League of America

Position Paper on S. 178 and H.R. 188 Permanent Reenactment of Chapter 
        12 of Title 11, United States Code Submitted to the United 
        States House of Representatives and the United States Senate by 
        The Commercial Law League of America and Its Bankruptcy Section

    The Commercial Law League of America (``League ''), founded in 
1895, is the nation's oldest organization of attorneys and other 
experts in credit and finance actively engaged in the field of 
commercial law, bankruptcy and reorganization. Its membership exceeds 
4,600 individuals. The League has long been associated with the 
representation of creditor interests, while at the same time seeking 
fair, equitable and efficient administration of bankruptcy cases for 
all parties in interest.
    The Bankruptcy Section of the League is made up of approximately 
1,600 bankruptcy lawyers and bankruptcy judges from virtually every 
state in the United States. Its members include practitioners with both 
small and large practices, who represent divergent interests in 
bankruptcy cases. The League has testified on numerous occasions before 
Congress as experts in the bankruptcy and reorganization fields.
    The League strongly supports H.R. 188 and S. 178, which would make 
permanent Chapter 12 of the Bankruptcy Code (the ``Code ''), the 
provisions authorizing family farmer reorganization. The League urges 
prompt enactment of this legislation.
    Since the 105th Congress, the existence of the family 
farmer reorganization provisions have been tenuous, subject to a series 
of sunset dates imposed by temporary extensions. During this time, the 
intent of Congress to make Chapter 12 permanent has been clear. 
Fulfilling this intent has been repeatedly stalled, however, because 
the necessary provisions to make Chapter 12 permanent have been 
included in controversial bills that sought extensive reform of the 
Code generally.
    By all accounts, Chapter 12 has proven successful, enabling family 
farmers to reorganize within a specifically tailored bankruptcy 
structure. Prior to the enactment of Chapter 12, many family farmer 
bankruptcies failed simply because the existing Code provisions were 
unworkable in the unique circumstances involved in farming operations.
    No evidence has been presented that Chapter 12 is not accomplishing 
the purpose for which it was designed. It appears to be a victim of the 
ongoing discussions relative to much more comprehensive and more 
controversial bankruptcy legislation.
    Enacting the permanent extension of Chapter 12, as proposed in H.R. 
188 and S. 178, will ensure that family farmers in need of 
reorganization are not denied meaningful bankruptcy relief. Too much 
uncertainty arises for existing Chapter 12 debtors from temporary 
extensions when, as in the past, gap periods occur during which there 
is no authority to utilize the chapter's provisions. A permanent 
extension of Chapter 12 independent of any other reform of the Code is 
the only means of protecting all parties involved, including current 
and potential family farmer debtors, as well as their creditors.
    The League appreciates the opportunity to comment on H.R. 188 and 
S. 178. We would be happy to address the position taken by the League 
and its Bankruptcy Section in this Position Paper or to respond to 
questions or concerns raised by this analysis.

                                

                Statement of Consumer Mortgage Coalition

    Mr. Chairman, the Consumer Mortgage Coalition (``CMC''), a trade 
association of national mortgage lenders and servicers, appreciates the 
opportunity to submit testimony to the Committee on S. 220, the 
``Bankruptcy Reform Act of 2001.''
        Impact of Bankruptcy In the Residential Mortgage Market
    CMC acknowledges the potential societal benefit in providing relief 
for borrowers who are unable to pay their debts because of legitimate, 
unforeseen circumstances. At the same time, it must be recognized that 
the effect of bankruptcy on home mortgage lenders (``bankruptcy 
severity'') ultimately affects the cost of residential mortgage loans 
or credit availability, or both. In making pricing and underwriting 
decisions, mortgage lenders consider the frequency of bankruptcy 
filings, the delays caused by such filings, the amount of debt 
recovered in bankruptcy, and the legal fees and other transaction costs 
involved. Delays are of particular concern to mortgage lenders because 
they lead to deterioration of the secured residence, which is being 
maintained by a debtor with little or no stake in the property. Too 
often, by the time the automatic stay is lifted by the bankruptcy court 
and the lender is permitted to foreclose upon and sell the residence, 
the proceeds of the sale are insufficient to pay the mortgage loan in 
full. Lenders who want to remain in business spread their mortgage loan 
losses to other borrowers in the form of higher interest rates. Any 
changes in the bankruptcy system that decrease bankruptcy severity will 
ultimately reduce the cost of home mortgages to the general public and 
will benefit creditworthy consumers who are seeking home mortgage 
financing.
                            Abusive Filings
    There are a number of abuses of the bankruptcy process that prevent 
lenders from foreclosing, even when the debtor is clearly unable to pay 
the mortgage debt. Attached to this testimony is a case history 
(Appendix A) which illustrates the reason mortgage lenders are 
concerned with abusive filings. In this case, the debtor was able to 
delay foreclosure for more than a year through the simple technique of 
repeatedly conveying a partial interest in the mortgaged property to a 
third party, who then filed for bankruptcy relief under Chapter 7. The 
filing by the third party triggered the automatic stay, delaying 
foreclosure on the property by two to three months. When the judge 
dismissed the Chapter 7 filed by the third party, the debtor simply 
found another transferee to whom a partial interest was conveyed and 
who filed under Chapter 7 following the conveyance again triggering the 
application of the automatic stay to the mortgaged property.
    In this case example, the debtor was able to obtain nine separate 
delays of the foreclosure sale, using five different transferees. The 
lender was finally able to obtain relief from the automatic stay by 
presenting evidence demonstrating to the court that the addresses--and 
even the existence--of the transferees could not be verified. Even 
after the court granted the motion for relief, the debtor again 
attempted the same technique, transferring a partial interest in the 
mortgaged property to yet another third party who immediately filed 
under Chapter 7. Unfortunately, the practice of transferring partial 
interests in mortgaged property to third parties who in turn file a 
bankruptcy petition to delay foreclosure has become more prevalent over 
the last few years. CMC would be pleased to present additional case 
histories to the Committee or its staff upon request.
    In addition to the third party transferee abuse, a debtor may file 
a Chapter 13 petition, never make a single mortgage payment under the 
plan, voluntarily dismiss the case just before the hearing on the 
lender's motion to lift the automatic stay--and then file another 
petition just before the next foreclosure sale. Although these 
practices should subject the debtor to sanctions, the penalties in the 
current Bankruptcy Code are difficult to enforce.
    S. 220, Mr. Chairman, addresses the above-described filing abuses. 
Section 302 amends Section 362 of the Bankruptcy Code to provide that 
if a case filed by a debtor under Chapters 7, 11 or 13 was dismissed 
and if the same debtor files a second case within a year of the 
dismissal, the automatic stay will terminate within 30 days of the 
filing of the second case unless the court extends the stay upon a 
finding that the second case was filed in good faith.
    In addition, Section 303 of S. 220 addresses the situation in which 
a debtor transfers undivided interest in secured property to third 
party transferees by permitting the bankruptcy judge to grant in rem 
relief from the automatic stay. Properly applied, the in rem relief 
would prevent third party transferees who file a petition in bankruptcy 
from delaying foreclosure on property covered by in rem relief because 
the automatic stay would not apply to the covered property.
                               Cramdowns
    Several recent decisions have held that a lien on a residence 
securing a mortgage loan is subject to- cramdown in certain 
circumstances. A cramdown can negatively impact the lender's secured 
claim. In a cramdown, the secured claim--the amount due on the mortgage 
loan--is reduced to the amount of the lien that does not exceed the 
market value of the property. The remainder of the claim is considered 
unsecured, which reduces or eliminates its value.
    In addition, the lender's remaining lien under a cramdown is 
subject to restructuring as a secured claim in the Chapter 13 plan, 
which can dramatically reduce its value. There have been cases, for 
example, in which a conventional mortgage loan with equal monthly 
payments to maturity was converted into one with small monthly payments 
and large balloon payment at maturity--which the borrower could not 
realistically be expected to be able to pay.
    The United States Supreme Court in Nobelman v. American Savings 
Bank, 508 U.S. 324 (1993), disallowed cramdowns under a Chapter 13 on 
residential mortgage loans that constituted the debtor's principal 
residence. However, courts, such as the Third Circuit Court of Appeals 
in Hammond v. Commonwealth Mortgage Corporation of America, 27 F.3d 52 
(3d Cir. 1994), have subsequently narrowed the reach of the Nobelman 
decision. Section 1322(b)(2) of the Bankruptcy Code provides that a 
Chapter 13 plan may not cramdown a ``claim secured only by a security 
interest in real property that is the debtor's principal residence.'' 
(Emphasis added). The Third Circuit in Hammond narrowly read the term 
``only'' and held because the mortgage lien on the principal residence 
contained language creating a security interest in fixtures, rents, 
escrow balance and the like--in addition to the lien on the real 
property--the mortgage lien was no longer entitled to protection from 
cramdowns under Section 1322(b)(2) of the Bankruptcy Code. Almost all 
residential real estate mortgages--including the standard Federal 
National Mortgage Association (Fannie Mae) and the Federal Home Loan 
Mortgage Corporation (Freddie Mac) mortgage forms--contain language 
creating a security interest in fixtures, escrow balances, etc. The 
practical effect of decisions, such as Hammond, is to nullify the 
cramdown protections in the Bankruptcy Code as enacted by Congress and 
interpreted by the U.S. Supreme Court in Nobelman for the overwhelming 
majority of residential mortgages.
    There are a number of reasons for according residential mortgage 
loans protection from the cramdown provisions of Chapter 13.
 Protecting residential mortgage loans against cramdown 
        encourages lenders to make higher loan-to-value loans and to 
        lend to borrowers to whom they might otherwise not lend at all. 
        This in turn makes possible wider home ownership consistent 
        with the national policy evidenced by tax benefits favoring 
        home ownership and government-sponsored mortgage insurance 
        programs.
 Prohibiting cramdowns on residential mortgage loans protects 
        and supports the secondary market for home mortgages. A sizable 
        portion of Fannie Mae and Freddie Mac mortgage loans, together 
        with other residential mortgage loans, are sold into the 
        secondary market. The existence of the secondary market 
        encourages mortgage origination by providing greater access to 
        capital with which to fund residential mortgage loans.
 If a debtor is permitted to cramdown a mortgage loan to the 
        current market value of the residence securing the mortgage 
        loan, he will be able to take advantage of a temporary decline 
        in the value of his home to reduce the mortgage lender's 
        secured claim. If the residence later increases in value 
        following a cramdown, the debtor rather than the lender will 
        obtain the benefit of the appreciation. This problem is not 
        particularly serious in the case of other consumer collateral 
        (such as automobiles or appliances) since those types of 
        collateral depreciate in value over time. It is a serious 
        problem (and a temptation to the debtor) in the case of a home 
        mortgage, since a residence often fluctuates in value over the 
        life of a mortgage loan.
 Since the procedures provided by real estate law for 
        foreclosing on a residential mortgage loan are typically more 
        formal, more cumbersome and provide greater protection to 
        borrowers (e.g., through rights of redemption) than is the case 
        with other types of consumer collateral, the borrower's need 
        for the ability to cramdown a mortgage loan is less and the 
        prejudice to the mortgage lender of taking away the protection 
        from cramdown, when combined with the stricter limitations on 
        the lender's ability to foreclose is greater.
    Perhaps the best argument for protecting residential mortgage loans 
from cramdown was advanced by the Fourth Circuit Court of Appeals in 
its recent decision, Witt v. United Companies Lending Corp. 113 F.3d 
508, (4th Cir. 1997) in which it noted that:
 We recognize that the effect of our decision will require the 
        Witts to pay back the full amount of their home mortgage loan, 
        making it harder for them to get `a fresh start in life, after 
        they have made a good-faith attempt to pay what they can.' 
        Report at 32. As Justice Stevens recognized in Nobelman, `[a]t 
        first blush it seems somewhat strange that the Bankruptcy Code 
        should provide less protection to an individual's interest in 
        retaining possession of his or her home than of other assets.' 
        Nobelman, 508 U.S. at 332 (Stevens, J., concurring). Permitting 
        the bifurcation of home mortgage loans, however, could make 
        lenders more hesitant to make such loans in the first place. 
        Although a broader reading of [section] 1322(c)(2) might help 
        the Witts today, it could make it more difficult in the future 
        for those similarly situated to the Witts to obtain any 
        financing at all. Congress appears to have designed another 
        important section, [section] 1322(b)(2), with this result in 
        mind. See id. (stating that [section] 1322(b)(2)'s `legislative 
        history indicat[es] that favorable treatment of residential 
        mortgagees was intended to encourage the flow of capital into 
        the home lending market)'; Perry, 945 F2d at 64 (finding that 
        [section] 1322(b)(2) `was intended to make home mortgage money 
        on affordable terms more accessible to homeowners by assuring 
        lenders that their expectations would not be frustrated'); 
        Grubbs v. Houston Am. Sav. Ass'n, 730 Fd 236 (5th Cir. 1984) 
        (noting that the exception for home mortgages in [section] 
        1322(b)(2) `was apparently in response to perceptions, or to 
        suggestions advanced in the legislative hearings.  .  .that 
        home mortgage lenders, performing a valuable social service 
        through their loans, needed special protections against 
        modification thereof (i.e., reducing installment payments, 
        secured valuations, etc.)'). Witt at page 514.
    Recognizing the importance of protecting residential mortgage loans 
from cramdown under a Chapter 13, Section 306(c) of S. 220 includes 
definitions of ``debtor's principal residence'' and ``incidental 
property'' clarifying that a lender's security interest in incidental 
property that is commonly conveyed with a principal residence to secure 
a mortgage loan will not remove the loan from the cramdown protections 
afforded under Section 1322(b)(2).
    One additional cramdown issue merits consideration of the 
Committee. It relates to confusion that has arisen among various courts 
in differing jurisdictions as to whether mortgage loans secured by 
duplexes, triplexes and four-unit residences are entitled to protection 
from cramdown under Section 1322(b)(2).
    The definition of ``debtor's principal residence'' in Section 
306(c)(1) of S. 220 reads as follows:
(13A) `debtor's principal residence'--
 (A) means a residential structure, including incidental property, 
        without regard to whether that structure is attached to real 
        property; and
 (B) includes an individual condominium or cooperative unit, a mobile 
        or manufactured home, or trailer;
    Language should be added to subsection (A) of the definition of 
``debtor's principal residence'' to make it clear that the definition 
includes duplexes, triplexes and four-unit residences. The revised 
subsection (A) would read as follows:
(A) means a residential structure containing 1 to 4 units, including 
        incidental property, without regard to whether that structure 
        is attached to real property; and
    The ``1 to 4 units'' language would resolve a conflict in 
jurisdictions. Courts have differed as to whether a duplex, triplex or 
four-unit residence in which the debtor/owner lives in one of the units 
and rents out the remaining units qualifies as a ``debtor's principal 
residence'' protected from cramdown under Section 1322(b)(2). See Lomas 
Mortgage, Inc. v. Louis, 82 F.3d 1 (1st Cir, 1996) in which the First 
Circuit found that a triplex did not qualify as ``debtor's principal 
residence'' under Section 1322(b)(2) and Brunson v. Wendover Funding 
Inc., 201 B.R. 351 (Bankr. W.D.N.Y. 1996) in which the Bankruptcy Court 
for the Western District of New York found that a duplex did qualify as 
``debtor's principal residence''.
    The First Circuit in Lomas noted that the Supreme Court in Nobelman 
had determined that Congress enacted carmdown protection under Section 
1322(b)(2) to encourage the flow of capital into the home lending 
market and went on to state that:
If the antimodification provision [Section 1322(b)(2)] is meant to 
        encourage home lending, then excluding multifamily houses would 
        tend to harm (in revenue terms) those purchasing property in 
        urban neighborhoods, where owner-occupied multi-unit housing 
        would tend to be more common, and to favor those purchasing 
        single-family homes, more common in suburbia. The theory is 
        that lenders would face relatively more risk of modification 
        [cramdown] in the case of default in urban areas, and interest 
        rates on loans in those areas would rise accordingly. Lomas, 82 
        F.3d at 6.
    The First Circuit noted that ``extending the antimodification 
provision to multi-family houses would create a difficult line-drawing 
problem. It is unlikely Congress intended the antimodification 
provision to reach a 100-unit apartment complex simply because the 
debtor lives in one of the units.'' Lomas, 82 F.3d at 6.
    The First Circuit ended its decision by noting that ``If we are 
wrong as to what Congress intended [in concluding that the 
antimodification provisions of Section 1322(b)(2) did not protect a 
triplex from cramdown], legislation can provide a correction.'' The 
Burnson court shared the concern of the First Circuit in Lomas, noting 
that the Lomas:
Court bemoaned a lack of `clear guidance' on the question [of whether a 
        multi-family residential property was subject to cramdown] from 
        either the language or contemporaneous legislative history of 
        Section 1322(b)(2).  .  .This Court shares the frustration of 
        numerous other courts in attempting to interpret this statute 
        which is impenetrable when sought to be applied to a single 
        parcel of land upon which the Debtor resides but which contains 
        two or more dwelling units. Brunson, 201 B.R. at 351.
    As the First Circuit noted in Lomas, a number of residential 
properties, particularly in the Northeast, are comprised of duplexes, 
triplexes and four-unit residences. Clarifying that such properties 
would qualify as ``debtor's principal residence'' for purposes of 
Section 1322(b)(2) with the result that mortgage loans secured by 
duplexes, triplexes and four-unit residences would not be subject to 
cramdown--would provide certainty to residential mortgage lenders. Such 
certainty would encourage the continued flow of capital into the 2 to 4 
unit residential market.
    The definition of ``debtor's principal residence'' at Section 
306(c)(1) of S. 220 should be modified to include language making it 
clear that that a ``debtor's principal residence'' for purposes of 
Section 1322(b)(2) of the Bankruptcy Code includes a residential 
``structure containing 1 to 4 units.''
                               Conclusion
    Mr. Chairman, CMC is very appreciative of the opportunity to 
present its views on issues of critical importance to the residential 
mortgage industry and to all American homeowners. We look forward to 
working with you and the other Members of the Committee and the staff 
in finalizing legislation to implement necessary and long overdue 
reforms to the Bankruptcy Code.

                                

       Statement of the International Council of Shopping Centers

                              Introduction
    The International Council of Shopping Centers (ICSC) is pleased to 
present this written statement for the record to the Senate Judiciary 
Committee in conjunction with its February 8, 2001 hearing on the 
Bankruptcy Reform Act of 2001 (S. 220).
    ICSC is the global trade association of the shopping center 
industry. Its 40,000 members in the United States, Canada and more than 
70 other countries around the world include shopping center owners, 
developers, managers, investors, lenders, retailers and other 
professionals. The shopping center industry contributes significantly 
to the U.S. economy. In 1999, shopping centers in the U.S. generated 
over $1.2 trillion in retail sales and over $47 billion in state sales 
tax revenue, and employed over 11 million people.
    First and foremost, ICSC would like to commend Congress, and this 
Committee in particular, for its efforts over the past few years to 
enact meaningful bankruptcy reform legislation. We are hopeful that S. 
220, introduced by Senator Charles Grassley (R-IA), will be swiftly 
enacted so it can end existing abuses of the bankruptcy system. 
Although all of ICSC's concerns are not addressed in S. 220, we believe 
it is a well-balanced piece of legislation and should be approved and 
signed into law as soon as possible.
            Business Bankruptcy Abuses are a Growing Problem
    As we all know, an increasing number of retailers and entertainment 
establishments have been filing for bankruptcy protection over the last 
several years, including Bradlees, Crown Books, Discovery Zone, Edison 
Brothers, Garden Botanika, General Cinema, Montgomery Ward, Paul Harris 
Stores, Planet Hollywood, Service Merchandise, and United Artists, just 
to name a few. According to industry sources, included in the total 
number of businesses filing Chapter 11 bankruptcies in 2000 are 176 
companies with assets totaling $95 billion. It seems as if every week 
another longstanding business is declaring bankruptcy. Furthermore, as 
our nation's economy continues to soften, it is very likely that 
additional businesses--both large and small alike--will be forced to 
seek the protections of Chapter 7 and 11 of the Bankruptcy Code.
    ICSC supports and respects an underlying goal of the bankruptcy 
system that companies facing financial catastrophe should be able to 
reorganize their businesses under Chapter 11. Unfortunately, more and 
more solvent businesses are taking advantage of the system and filing 
for bankruptcy protection in order to accomplish goals that would 
otherwise not be permissible, such as shedding undesirable leases.
    In addition, many U.S. bankruptcy judges and trustees are not 
abiding by existing rules that were enacted by Congress to protect 
shopping center owners. As a result, many shopping center owners are 
losing control over their own properties, neighboring tenants are 
losing business, retail employees are losing jobs or suffering reduced 
working hours, and local economies are being threatened.
   Shopping Centers Need Special Protection Under the Bankruptcy Code
    Bankruptcies pose unique risks and hardships to shopping center 
owners that are not faced by other creditors because such owners are 
compelled creditors to their retail tenants. As a compelled creditor, a 
shopping center owner must, under the Bankruptcy Code, continue to 
provide leased space and services to its debtor tenants without any 
real assurance of payment or knowledge as to whether or when its leases 
will be assumed or rejected or whether its stores will be vacated.
    On the other hand, trade creditors can decide for themselves 
whether or not they want to continue providing credit to its bankrupt 
customers for goods or services. Banks and other lenders are not 
obliged to continue making loans to their clients once they file for 
bankruptcy. Utility companies can demand security deposits before they 
provide additional services to their customers. In fact, some judges 
are granting ``critical vendor motions'' made by certain creditors that 
allow them to receive their pre-petition claims (before all other 
creditors) in exchange for agreeing to provide their goods or services 
to the debtor during bankruptcy.
    Another element unique to shopping center owners is the 
interdependence and synergy that exists between a shopping center and 
its tenants. Owners carefully design a ``tenant mix'' for each of its 
shopping centers in order to maximize customer traffic from its market 
area. The tenant mix includes tenants based on their nature or ``use'', 
their quality, and their contribution to the overall shopping center, 
and is enforced by lease clauses that describe the required uses, 
conditions and terms of operation. Such clauses are designed to prevent 
an owner from losing control over its own property and to maintain a 
well-balanced shopping atmosphere for the local community.
    For example, an owner and a retailer of upscale ladies' shoes may 
enter into an agreement that restricts the tenant, or an assignee, from 
selling low quality, discounted footwear or changing its line of 
business to one that competes with another store in the same shopping 
center. When a use clause is ignored during bankruptcy proceedings, the 
delicate retail balance and synergy that has been painstakingly 
achieved by an owner with its tenants is disturbed and can deal a 
devastating blow to the entire shopping center, and to the community at 
large.
    Acknowledging that shopping center owners are in a truly unique 
position once one of its tenants files for bankruptcy, Congress enacted 
special protections in Section 365 of the Code in 1978 and 1984. 
Unfortunately, many of these laws either have not been enforced or have 
been liberally construed against shopping center owners beyond 
Congress' original intent.
 Leases Need to be Assumed or Rejected within a Reasonable, Fixed Time 
                                 Period
    Under Section 365(d)(4), tenants have 60 days after filing for 
bankruptcy to
    assume or reject their leases. If additional time is needed, the 
court may extend the time period ``for cause''. Unfortunately, in most 
cases, the ``for cause'' exception has become the rule. As a matter of 
practice, bankruptcy judges routinely extend the 60-day period for 
several months or years. In many instances, debtors do not have to 
decide what they plan on doing with their leases until their plans of 
reorganization are confirmed. Some debtors are even permitted to make 
such decisions after the date of confirmation.
    As a result, the stores of these bankrupt retailers often remain 
closed for long periods of time, casting a dark shadow on the entire 
shopping center. Even if a shopping center owner receives rent from the 
bankrupt tenant during this period, a vacant store usually creates a 
negative impact on the other stores in the shopping center. Not only do 
the neighboring stores suffer reduced traffic and sales, but the owner, 
by virtue of percentage rent clauses that have been written into their 
leases, suffers reduced percentage rent income from its other tenants.
    To make matters worse, the owner is unable to make arrangements to 
lease out the vacant space to another potential tenant since the 
bankrupt retailer is not required to inform the owner whether it plans 
to assume or reject the lease. It is this uncertainty that is most 
frustrating to shopping center owners. They, and the rest of the 
shopping center, are essentially kept in limbo until the debtor, or the 
debtor's trustee, makes a decision to assume or reject its lease. 
Owners are not attempting to pressure debtors to reject their leases. 
Instead, they simply want a determinable period of time for their 
bankrupt tenants to assume or reject their leases.
    The current situation is clearly unfair to shopping center owners 
and has to be remedied. While we realize that 60 days in most cases is 
not enough time for a bankrupt retailer to decide which of its leases 
it wants to assume or reject, we strongly believe that a reasonable, 
fixed time period must be created so an owner, and the rest of the 
tenants in the shopping center, have certainty as to when a lease of a 
vacant store will be either assumed or rejected.
    One must remember that, in most cases, a debtor can decide when it 
files for bankruptcy protection. Retail chains do not suddenly decide 
they will file for bankruptcy. They typically review their economic 
situation well in advance of filing a bankruptcy petition. Retailers 
and their advisors have a pretty good indication even before they file 
for bankruptcy which leases they want to assume and which they want to 
reject since it is often the very reason they are filing for 
bankruptcy.
    Section 404(a) of S. 220 would require a debtor tenant to assume or 
reject its leases within 120 days after filing for bankruptcy. Prior to 
the expiration of the 120 days, a judge could extend this time period 
for an additional 90 days upon the motion of the trustee or owner ``for 
cause''. Additional extensions could be granted only upon the prior 
written consent of the owner.
    By requiring an owner's consent for additional extensions after the 
initial 120-day and court-extended 90-day periods, shopping center 
owners would retain a certain degree of control of their property if a 
tenant has not decided to assume or reject its leases within 210 days. 
Owners would often be amenable to extending the time period for 
assumption or rejection for a certain length of time if it appears to 
be in the best interest of both parties.
    While ICSC believes that a total of 120 days (including a court 
extension ``for cause '') is ample time for retailers in bankruptcy to 
make informed decisions as to which leases should be assumed and which 
should be rejected, to the extent the other shopping center provisions 
listed below are included in the final package, we would support this 
provision of S. 220.
   ``Use'' Clauses Need to be Adhered to by Trustees Upon Assignment
    As mentioned above, a well balanced ``tenant mix'' helps create the 
character and synergy among the various tenants of a shopping center. A 
lease's ``use'' clause is specifically designed to maintain this tenant 
mix, and is supposed to be adhered to upon assumption or assignment. 
Unfortunately, a growing number of judges are allowing trustees to 
assign shopping center leases to outside retailers in clear violation 
of existing use clauses and Code Sections 365(f)(2)(B) and 365(b)(3).
    A recent notable case involves a children's educational retailer in 
the Boston-area in which a judge allowed the trustee to assign two of 
its unexpired leases to a jeweler and a candle shop, even though 
another children's educational retailer offered bids, albeit lower 
ones, on those leases.
    Use clauses are mutually agreed-upon provisions that are intended 
to direct the use of a particular property to a particular use. They do 
not prevent the assignment of a property to another retailer; however, 
the new tenant is supposed to adhere to the lease's use clause.
    Congress has already recognized in the Bankruptcy Code that a 
shopping center does not merely consist of land and buildings. It is 
also a particular mix of retail uses which the owner has the right to 
determine. Thus, Section 365(f)(2)(B) already requires that a trustee 
has to obtain adequate assurance that a lease's use clause will be 
respected before he or she can assign the lease to a third party. 
Section 365(b)(3)(C), defining ``adequate assurance'', states that ``.  
.  .adequate assurance of future performance of a lease of real 
property in a shopping center includes adequate assurance .  .  . that 
assumption or assignment of such lease is subject to all the provisions 
thereof, including (but not limited to) provisions such as radius, 
location, use, or exclusivity provision .  .  .  .''
    Yet, a number of bankruptcy judges have ignored this requirement. 
This abuse of the Bankruptcy Code must end. Section 404(b) of S. 220 
would amend Section 365(f)(1) to make it crystal clear to all trustees 
that the shopping center provisions contained in Section 365(b), 
including that relating to adequate assurance that use clauses will be 
respected, must be adhered to before they can assign leases to other 
retailers.
  Shopping Center Owners Need Greater Access to Creditors' Committees
    Another growing concern of the shopping center industry is the lack 
of appointments by many U.S. trustees of shopping center owners to 
creditors' committees during bankruptcy proceedings. A creditors' 
committee is the key decision-making body in a bankruptcy case as it 
helps formulates how and when a debtor is going to reorganize its 
business. In addition to having a vested interest in the outcome of a 
bankruptcy case, a shopping center owner can provide valuable 
knowledge, insight and perspective to a creditors' committee in order 
to assist in the creation of a successful reorganization plan.
    Under current law, U.S. trustees are authorized under Section 
1102(a)(1) to appoint a committee of creditors holding unsecured 
claims. Unfortunately, many trustees have excluded shopping center 
owners from these committees, even if they qualify to serve under 
Section 1102(b)(1). This section states that a creditors' committee ``.  
.  . shall ordinarily consist of the persons, willing to serve, that 
hold the seven largest claims against the debtor of the kinds 
represented on such committee .  .  .''.
    Even in cases where an owner is not one of the seven largest pre-
petition creditors, it usually is one of the seven largest post-
petition creditors due to damage claims from rejected leases. A 
retailer may have been making timely lease payments up to the time it 
filed for bankruptcy; however, if it later defaults on payments (which 
it is obligated to make) or decides to reject some or all of its 
leases, the shopping center owner usually has very large potential 
rejection claim damages. Certainly, such an owner should be entitled to 
participate on these creditors' committees.
    Although bankruptcy judges currently may order the appointment of 
additional committees to assure adequate representation of creditors, 
only the trustees are actually authorized to appoint such committees. 
Therefore, the discretion to add shopping center owners to creditors' 
committees is solely vested with the U.S. trustees. Section 405 of S. 
220 would also give this discretion to bankruptcy judges as it would 
permit them, after receiving a request from an interested party, to 
order a change in the membership of a creditors' committee to ensure 
the adequate representation of creditors.
  Non-Monetary Defaults Need to be Cured before a Lease can be Assumed
    Under Section 365(b)(1)(A) of the Bankruptcy Code, a trustee may 
not assume an unexpired lease unless he or she cures, or provides 
adequate assurance that he or she will promptly cure, all existing 
monetary and non-monetary defaults. This provision was enacted by 
Congress to ensure that existing leases are adhered to before they may 
be assumed and later assigned to another tenant. Unfortunately, some 
judges are allowing leases to be assumed and assigned despite the fact 
that such leases remain in default.
    Section 328 of S. 220 would amend existing law by providing that 
non-monetary defaults of unexpired leases of real property that are 
``impossible'' to cure would not prevent a trustee from assuming a 
lease. Unlike monetary defaults, certain non-monetary defaults are 
impossible to cure. For example, a vacant store can later be reopened; 
however, the default (the vacating of the store) can never be fully 
cured since it is impossible to reopen the store during the time it was 
vacant.
    However, Section 328 also provides that ``.  .  . if such default 
arises from a failure to operate in accordance with a nonresidential 
real property lease, then such default shall be cured by performance at 
and after the time of assumption in accordance with such lease, and 
pecuniary losses resulting from such default shall be compensated .  .  
.''. Therefore, a trustee would be able to assume the lease of a vacant 
store so long as its nonmonetary defaults are cured (e.g., the store is 
reopened) at and after the time of assumption. ICSC supports this 
provision since it would require trustees to abide by the terms of a 
commercial lease agreement upon its assumption.
    A Reasonable Administrative Priority for Rents Should be Enacted
    Under current law, post-petition rents are treated as an 
administrative priority until a lease is assumed or rejected under 
Section 365(d)(3). If a lease is rejected, postrejection rents are 
treated as an unsecured claim under Section 502(b)(6), which usually 
limits the claim to one year's rent. The Bankruptcy Code, however, does 
not specifically address claims resulting from nonresidential real 
property leases that are assumed and subsequently rejected.
    However, in a 1996 U.S. Court of Appeals case, Klein Sleep 
Products, the court held that all future rents due under an assumed 
lease, regardless of whether it is subsequently rejected, should be 
treated as an administrative priority and not limited by Section 
502(b)(6). As a practical matter, shopping center owners prefer to 
lease their property to operating retailers as soon as possible to 
maintain a vibrant center and collect rent, rather than maintain a 
vacant store whose unpaid rents are treated as an administrative 
priority.
    Section 445 of S. 220 would treat rents due under an assumed and 
subsequently rejected lease as an administrative priority for two years 
after the date of rejection or turnover of the premises, whichever is 
later, ``without reduction or set off for any reason except for sums 
actually received or to be received from a nondebtor''. Any remaining 
rents due for the balance of the lease term would be treated as an 
unsecured claim limited under Section 502(b)(6).
    While ICSC prefers that rents due under an assumed and subsequently 
rejected lease are treated as an administrative priority for three 
years, and that any remaining rents due under the lease are treated as 
an unsecured claim not limited under Section 502(b)(6), we accept this 
provision as a reasonable compromise so long as the other shopping 
center provisions listed above are included in the final package.

                                

                             United States Court of Appeals
                                              Fifth Circuit
                                          Houston, Texas 77002-2655

Chairman Orrin Hatch
Senate Judiciary Committee
Washington, DC 20510

    Re: Section 1235, Bankruptcy Reform Act of 2000, Expedited Appeals 
of Bankruptcy Cases to Courts of Appeals

    Dear Chairman Hatch:

    Streamlining the bankruptcy appellate process is one of the most 
important bankruptcy reform goals that Congress can achieve. As an 
appellate court judge, a member of the National Bankruptcy Review 
Commission, and a former bankruptcy lawyer, I write to issue my support 
for expediting some bankruptcy appeals to the courts of appeals. By 
keeping this type of provision in the Bankruptcy Reform bill, Congress 
will: (1) eliminate excessive costs and delay; (2) promote efficiency, 
fairness and stability; and (3) bring much needed uniformity to 
bankruptcy and the American commercial law system. Contrary to the 
position taken by some appellate judges, authorizing direct appeals 
will not cause an undue burden on the federal courts of appeals.\1\
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    \1\ I do not write in support of any particular form of direct 
appeals, because there are a number of possibilities in addition to 
Sec. 1235 as now structured that would accomplish the same basic 
objective.
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    Enthusiasm for expedited appeals exists throughout the bankruptcy 
community. Its supporters include bankruptcy judges, lawyers, 
academics, and debtor and creditor representatives. Indeed, in a rare 
expression of unity, the National Bankruptcy Review Commission voted 
unanimously to recommend direct appeals.\2\
---------------------------------------------------------------------------
    \2\ See 1 National Bankruptcy Review Commission, Final Report of 
the National Bankruptcy Review Commission (Bankruptcy: The Next Twenty 
Years) 752-67 (1997). Then-Chief Judge Richard Arnold of the Eighth 
Circuit, who was at that time a member of the Executive Committee of 
the Judicial Conference of the United States, endorsed the direct 
appeal proposal when he attended the meeting where the Commission voted 
to support it.
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    The present two-tier appellate system directs bankruptcy appeals 
first to the district courts and then to the courts of appeals. The 
policy reasons supporting the elimination, as far as practical, of 
federal district courts from the bankruptcy appellate process are 
overwhelming. Bankruptcy cases, recently rising to over one million a 
year, have immediate and far-reaching consequences for borrowers and 
lenders nationwide. These cases are a significant federal court 
responsibility. Not only do bankruptcy courts interpret the federal 
Bankruptcy Code, but their decisions form the core body of cases in 
American commercial law today. Despite the potential social 
significance of the decisions, and despite the Constitution's provision 
for uniform bankruptcy law, there is precious little uniformity in 
bankruptcy.
    The present system discourages final rulings and uniformity in 
several ways. First, most participants in bankruptcy lack the resources 
to finance legal fees through two full stages of appeal. Since most 
bankruptcy claims are already heavily discounted, there is rarely 
enough money at stake to justify undertaking duplicative appeals in 
order to obtain binding precedent. Second, delay imposes high costs. 
Adding to the inherent delay from duplication is the fact that some 
federal district courts do not handle bankruptcy appeals expeditiously. 
Neglect by these courts creates incentives to file appeals for the 
purposes of delay, even as it discourages the pursuit of meritorious 
appeals.
    The excessive costs and delays mean that courts of appeals are 
rarely called upon to issue bankruptcy precedents binding throughout 
their circuit. Unfortunately, district court opinions rendered at the 
first level of review are not considered binding on the bankruptcy 
courts. Consequently, bankruptcy law is variable, non-uniform, and 
lacking in stare decisis within individual judicial districts as well 
as nationwide. Many issues that could have been settled by circuit 
courts are subject to interminable and costly relitigation in case 
after case, because the current appellate process stymies the 
definitive resolution of issues by courts of appeals.
    The current two-tier system is thus both legally inefficient and 
unfair to the hapless participants in bankruptcy.
    Against the manifest deficiencies of this system, and the national 
impact of bankruptcy court and Bankruptcy Code decisions, some 
appellate judges fear that eliminating the district court appellate 
function will unbearably increase our workload. With due respect, I 
believe this fear is exaggerated.
    The courts of appeals, while busy, are currently not overburdened. 
In fact, appellate filings for fiscal year 1999 fell 3%, after 
excluding some newly-counted original proceedings.\3\
---------------------------------------------------------------------------
    \3\ See Administrative Office of the U.S. Courts, Judicial Business 
of the United States Courts: 1999 Annual Report of the Director 15.
---------------------------------------------------------------------------
    The short-term impact of expediting bankruptcy appeals to the 
courts of appeals is unknowable, but there are several reasons to 
predict it will not be severe.\4\ First, many appeals now filed for 
purposes of delay in the district courts would not be pursued to the 
courts of appeals. Second, the Bankruptcy Appellate Panels (BAP's) will 
remain available for bankruptcy appeals in several circuits or could be 
created in other circuits where they become necessary. BAP's will be 
selected by many litigants for strategic reasons that we cannot presume 
to assess.\5\ Finally, devices such as appeals without oral argument 
and the growing use of appellate conference attorneys could screen and 
resolve many less consequential bankruptcy appeals.
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    \4\ Even if each appeal filed in the district courts in fiscal year 
1999 went to the courts of appeals, that would amount to about 3,000, 
or at most, a 6t increase in the court of appeals docket. For the 
reasons stated, I question whether anything close to one-to-one 
equivalency would occur.
    \5\ In addition, to some litigants, the relative unfamiliarity of 
federal appellate court procedure might be a deterrent (albeit an 
irrational one) to appeal.
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    The long-term forecast for direct bankruptcy appeals is more 
optimistic. As unclear issues are resolved at the circuit level, there 
will be more stability in the initial bankruptcy process and less need 
for appeals.
    As is the case with any changes in legal process, the courts of 
appeals can expect a period of somewhat increased bankruptcy appeals, 
followed by a leveling-off due to the growing effect of stare decisis. 
To measure the desirability of the change, one must consider the impact 
not only on the appellate courts but also on the bankruptcy system and 
the American commercial system it serves. In view of the very large 
benefits that will accrue from eliminating a wasteful and inefficient 
extra layer of bankruptcy appeals and from instilling more appellate 
certainty in bankruptcy, I think the complaints about an increased 
appellate caseload are misplaced.
    Thank you for allowing me to comment on this vital element of 
bankruptcy reform.

            Very truly yours,

                                        Hon. Edith H. Jones

                                

                                 U.S. Department of Justice
                              Office of Legislative Affairs
                                               Washington, DC 20530

Hon. Charles E. Schumer
United States Senate
Washington, DC 20510

    Dear Senator Schumer:

    The Administration is deeply concerned by the incidents of 
violence, vandalism, and harassment committed against family planning 
clinics: Some of these acts have resulted in the deaths and maiming of 
innocent people. The Administration believes that these unlawful 
activities must not be tolerated, and that when they are committed, 
those found liable should be held accountable under the law.
    The Administration has a strong record of supporting efforts to end 
clinic violence. The Freedom of Access to Clinic Entrances (FACE) Act 
of which you were the principal House sponsor, and which the President 
signed into law, provides federal protection against unlawful and 
violent actions while it protects the right to engage in peaceful 
picketing and protest unaccompanied by force or physical obstruction. 
Violators of FACE are subject to criminal penalties of imprisonment, a 
fine or both. In addition, the court may also assess civil penalties 
for a particularly egregious offense or against a repeat offender. 
State clinic access laws and state and federal anti-racketeering laws 
are additional tools used to prosecute clinic violence. Yet, if 
offenders are able to escape the damages assessed under these laws, 
then they will gradually lose their effectiveness.
    Unfortunately, some defendants found liable for clinic violence are 
abusing the bankruptcy system in an effort to shield themselves from 
civil monetary penalties assessed under these laws. More specifically, 
these defendants are filing for Chapter 7 to discharge their 
obligations to the victims of their clinic violence and to escape 
responsibility for their actions. In order to stem the tide of clinic-
related violence by ensuring that penalties for these acts are strictly 
enforced, we support your amendment that would make court-ordered fines 
and debts resulting from clinic violence nondischargeable.
    The Administration's general position has been to oppose the 
expansion of nondischargeable debt unless there is an overriding public 
policy objective to be protected and no other way to achieve that 
objective. Consistent with this position, we view your amendment as a 
necessary tool in our current efforts to end illegal clinic violence 
and intimidation.
    Certainly, one could argue that damages awarded- for all 
intentional torts should be nondischargeable. Indeed, this is largely 
the case under the ``willful and malicious injury'' exception contained 
in Section 536(x)(6) of the Bankruptcy Code. Some damages resulting 
from clinic-related violence, however, are not protected under this 
exception. This was made clear in the Supreme Court's recent decision 
in Geiger v. Kawaauhau, 523 U.S. 57 (1998). In Geiger the Court held 
that the word ``willful'' ``modifies the word `injuy' indicating that 
nondischargeability takes a deliberate or intentional injury, not 
merely a deliberate or intentional act that leads to injury.  .  .'' 
Although some clinic=related violence is not committed with the direct 
intention to inflict injury, some such violence indirectly may result 
in injury. Take for example a family planning clinic that is blockaded, 
preventing all ingress and egress. Women who need essential medical 
services--some unrelated to abortion--may be denied those services; 
resulting in serious physical harm. Should damages awarded to victims 
such as these be any less protected simply because the blockader did 
not intentionally intend to injure these victims?
    In addition, there is another compelling reason to create a 
specific nondischargeability carve-out for clinic-related violence 
damages. There are reports of-those who have been found liable for such 
acts blatantly--even enthusiastically--announcing how they are going to 
escape responsibility for their actions by filing for Chapter 7. 
Indeed, such abuse of the bankruptcy system appears to be part of a 
concerted plan on the pant of these individuals to perpetuate their 
acts of violence and intimidation.
    Parties on both sides of the issue of abortion agree that violence 
against clinics should not be tolerated. This is why we have laws in 
place designed to deter such activity. We must not permit those who 
have committed odious acts of violence to escape responsibility for 
their actions. Your amendment furthers our efforts toward achieving 
this goal.
            Sincerely,
                                            Jon P. Jennings
                                  Acting Assistant Attorney General

                                

 Statement of George J. Wallace, Eckert Seamans Cherin & Mellott LLC, 
                             Washington, DC

    Chairman Hatch, Senator Leahy and Members of the Committee, thank 
you for this opportunity to express my views on consumer bankruptcy and 
H.R. 333, The Bankruptcy Reform of 2001, and particularly the impact of 
the bill upon low income women.
    My name is George Wallace. I am a member of the law firm of Eckert 
Seamans Cherin & Mellott LLC and am resident in the Washington, D.C. 
office.
    I represent the The Coalition for Responsible Bankruptcy Laws, a 
broad coalition of consumer creditors, including banks, credit unions, 
savings institutions, retailers, mortgage companies, sales finance 
companies and diversified financial services providers.
    The Coalition strongly supports S. 220 because it will take 
significant steps toward reforming today's consumer bankruptcy laws 
while at the same time preserving the basic bankruptcy discharge and 
repayment plan remedies for debtors who use bankruptcy responsibly.
    Despite being well-intentioned, it is increasingly clear that our 
bankruptcy laws are susceptible of misuse. Everyone is by now familiar 
with the ``means test'' and how it would require approximately 10% of 
those who file chapter 7 who have the ability to repay a significant 
part of what they owe to do so. But an equally important flaw in the 
present bankruptcy system is that it can be used to significantly delay 
or defeat the payment of child support and marital obligations. S. 220 
stops that misuse of the bankruptcy system. It assures that those who 
file for bankruptcy will continue to pay their child support 
obligations throughout the bankruptcy. If S. 220 is enacted, filing 
bankruptcy will no longer halt the payment of crucial child support 
payments to low income single parent families.
    The most important change the bill makes to child support 
collection is to except child support collection orders from the 
automatic stay, require a chapter 13 debtor to be current in post-
filing child support payments to confirm a plan, and stay current as 
well as pay all arrears in order to get a discharge. With these 
changes, the ability to use chapter 13 to delay payment of child 
support for up to 5 years is stopped. The bill also changes current law 
to place child support arrears in first priority (versus seventh under 
present law) in a chapter 7, extremely important if there are assets to 
be distributed. Other marital dissolution obligations, including 
indemnification obligations, are made clearly nondischargeable (unlike 
under present law which permits discharge under certain circumstances). 
Post- filing support arrears owed to the single parent must be paid in 
order to receive a discharge, unless waived by the custodial parent.
    Some, however, have asserted that S. 220 would harm single-parent 
families, and especially those headed by women. One claim is that 
single parents trying to collect child support will lose out to credit 
card companies collecting nondischargeable debt. This claim is 
completely without foundation. In fact, the quite reforms in S. 220 
extending in minor ways the provisions of present law on 
nondischargeable debts are unlikely to have a significant impact on 
collection of credit card debt. Moreover, the child support collection 
system Congress has mandated outside bankruptcy already gives the child 
support creditor extraordinary power to collect child support, both 
current and in arrears, except when the debtor goes into bankruptcy.\1\ 
That is why it is recognized by child support collection professionals 
that child support always wins over competing creditors like credit 
card companies. Philip L. Strauss, Assistant District Attorney, City 
and County of San Francisco. Testified in 1999 before the House 
Committee on the Judiciary directly to this point:
---------------------------------------------------------------------------
    \1\ Child support obligations take precedence over all other debts, 
and Congress has given extraordinary powers to assist in its collection 
Today, a custodial parent owed child support can obtain free or at a 
minimal cost (the maximum charge for collection is a one time fee of 
$25, waived by many states) a child support collection lawyer employed 
by the state or municipality whose only job is to collect child 
support. That lawyer has the power to withhold child support from the 
non-custodial parent's income of payment to the mother and children. 
The child support creditor also has a blanket, automatic lien arising 
upon nonpayment on all of the debtor's personal property. In addition, 
failure to make child support payments will result in the loss of a 
motor vehicle operators license, professional license (such as a 
physician's license, law license, etc.), or even jail. Faced with loss 
of the driver's license if he doesn't pay child support, the debtor 
will always pay that first, if he can pay anything at all.

``Some criticism has been raised that the 1999 Bankruptcy Reform Act 
        would be detrimental to women and children because it would pit 
        them against banks and credit cared companies for collection of 
        nondischarged credit card debt. Although this argument has some 
        surface logic, no support collection professional that I know 
        deems this concern to be serious.  .  .  .[N] onbankruptcy law 
        has so tilted the field in favor of support creditors that 
        competition with financial institutions for the collection of 
        postdischarge debts presents no problems for support 
---------------------------------------------------------------------------
        creditors.''

    Other have claimed that the means test will be excessively harsh on 
poor, single parent families, and particularly those headed by women, 
when they seek bankruptcy protection. Nothing could be further from the 
truth. To be impacted by the ability to pay provisions in this 
legislation as a practical matter, families would have to earn more 
than the State median income adjusted for family size. To put this 
inperspective, a family of four living in Alabama would have to earn 
over $46,000 annually before the ``ability to pay'' test would even be 
applied. In Connecticut, they would have to earn over $72,000. As you 
know, the vast number of single parent families with children survive 
on an income well below that amount.
    Moreover, even when the ability to pay test comes into play, it 
will only require dismissal from chapter 7 if the debtor's net income 
shows that the debtor could pay more than $100 a month if the debtor 
has debts over $24,000, or a minimum of $10,000 is his debts are 
smaller. Poor families would not have such net income, and could remain 
in chapter 7. Thus, no matter how you look at it, S. 200's ability to 
pay test will have no impact on poor families. They will continue to 
have, as they have under present law, the choice to either file in 
chapter 7 or chapter 13.
    Finally, vague claims have been made that in some fashion, other 
provisions of the bill will somehow make bankruptcy less available or 
less beneficial for low income families. When examined, these claims 
always evaporate. For example, some have urged that the requirement of 
pre-filing credit counseling burdens low income debtors who have a 
great deal of difficulty paying for their bankruptcy attorney. Yet the 
requirement is minor. You just have to go to a short (1 hour) training 
session approved by the United States Trustee, which can be over the 
phone or by internet. If there is an emergency, the debtor can file for 
bankruptcy and obtain the counseling within the next 30 days. 
Furthermore, obtaining credit counseling before filing bankruptcy 
generally benefits debtors. First, they obtain more information about 
their alternatives from a neutral source, not a bankruptcy professional 
trying to earn money from their filing. Second, some of them may be 
able to save themselves from bankruptcy through a credit repayment 
plan. They will save their credit rating and be rehabilitated more 
quickly. Finally, credit counseling teaches budgeting skills, crucial 
for the very poor struggling to make ends meet. On examination, there 
appears to be absolutely no basis to argue that these benefits somehow 
will hurt low income families, whether they are headed by women or men.
    In summary, S. 220 is legislation which benefits low income 
families, particularly those headed by women. To the extent those 
families are dependent on child support, it makes major changes to 
bankruptcy law so that it can no longer be misused to delay or defeat 
the collection of child support. Moreover, its provisions aimed at 
those who would abuse the bankruptcy system in other ways will not 
affect the honest, poor debtor needing relief from debts he has no hope 
of repaying. Finally, the bill contains provisions such as the credit 
counseling provisions, which will improve the assistance that the 
bankruptcy system provides debtors who need debt relief and help in 
reorganizing their finances.
    Thank you for the opportunity to address the Committee, and I urge 
your strong support for S. 220.


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