[Senate Hearing 109-1014]
[From the U.S. Government Publishing Office]
S. Hrg. 109-1014
BANKRUPTCY REFORM
=======================================================================
HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
FEBRUARY 10, 2005
__________
Serial No. J-109-3
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
ARLEN SPECTER, Pennsylvania, Chairman
ORRIN G. HATCH, Utah PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio HERB KOHL, Wisconsin
JEFF SESSIONS, Alabama DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin
JOHN CORNYN, Texas CHARLES E. SCHUMER, New York
SAM BROWNBACK, Kansas RICHARD J. DURBIN, Illinois
TOM COBURN, Oklahoma
David Brog, Staff Director
Michael O'Neill, Chief Counsel
Bruce A. Cohen, Democratic Chief Counsel and Staff Director
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Biden, Hon. Joseph R., Jr., a U.S. Senator from the State of
Delaware, prepared statement................................... 75
Cornyn, Hon. John, a U.S. Senator from the State of Texas,
prepared statements............................................ 83
Durbin, Hon. Richard J., a U.S. Senator from the State of
Illinois, prepared statement................................... 93
Feingold, Hon. Russell D., a U.S. Senator from the State of
Wisconsin, prepared statement.................................. 96
Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa,
prepared statement............................................. 98
Kennedy, Hon. Edward M., a U.S. Senator from the State of
Massachusetts.................................................. 3
prepared statement........................................... 107
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont. 3
prepared statement........................................... 110
Schumer, Hon. Charles E., a U.S. Senator from the State of New
York, prepared statement....................................... 2
Specter, Hon. Arlen, a U.S. Senator from the State of
Pennsylvania................................................... 1
WITNESSES
Beine, Kenneth H., President, Shoreline Credit Union, Two Rivers,
Wisconsin...................................................... 5
Bennett, Malcolm, President, International Realty Investments,
Inc., Los Angeles, California.................................. 14
McCall, David, Director, District 1, United Steel Workers of
America, AFL-CIO, Columbus, Ohio............................... 18
Menzies, R. Michael, President and Chief Executive Officer,
Easton Bank and Trust Company, Easton, Maryland, on behalf of
the the Independent Bankers Association........................ 20
Strauss, Philip L., Retired Attorney, Family Support Bureau,
Office of the District Attorney, San Francisco County,
California, on behalf of the National Child Support Enforcement
Association.................................................... 16
Vullo, Maria T., Paul, Weiss, Rifkind, Wharton and Garrison LLP,
New York, New York............................................. 7
Warren, Elizabeth, Leo Gottlieb Professor of Law, Harvard Law
School, Cambridge, Massachusetts............................... 10
Zywicki, Todd J., Visiting Professor of Law, Georgetown
University Law Center, Washington, D.C......................... 12
QUESTIONS AND ANSWERS
Responses of Maria T. Vullo to questions submitted by Senator
Specter........................................................ 43
Responses of Todd J. Zywicki to questions submitted by Senators
Sessions and Coburn............................................ 48
SUBMISSIONS FOR THE RECORD
Abbott, Greg, Attorney General of Texas, Austin, Texas, letter... 52
American Bar Association, Robert D. Evans, Director, Government
Affairs Office, Washington, D.C., letter....................... 53
American Land Title Association, Ann vom Eigen, Legislative and
Regulatory Counsel, Washington, D.C., letter................... 59
Beine, Kenneth H., President, Shoreline Credit Union, Two Rivers,
Wisconsin, prepared statement.................................. 61
Bennett, Malcolm, President, International Realty Investments,
Inc., Los Angeles, California.................................. 69
Clements, Richard R., Law Offices of Richard R. Clements, Long
Beach, California, letter...................................... 79
Commercial Law League of America, Mary K. Whitmer, President, Jay
L. Welford, Co-Chair, National Governmental Affairs Committee,
Peter C. Califano, Chair, Legislative Committee Bankruptcy
Section, Alan I. Nahamias, Chair, Bankruptcy Section, Judith
Greenstone Miller, Co-Chair, National Governmental Affairs
Committee, Chicago, Illinois, letter........................... 81
Cooper, Corinne, Tucson, Arizona, letter......................... 88
Creel, L.E., III, Creel & Moore, L.L.P., Dallas, Texas, letter... 90
Danner, Dan, Senior Vice President, Public Policy, National
Federation of Independent Business, Washington, D.C............ 92
Greendyke, William, Partner, Fulbright & Jaworski L.L.P.,
Houston, Texas, letter......................................... 104
Harshbarger, Scott, Murphy, Hesse, Toomey & Lehane, LLP, Boston,
Massachusetts, letter.......................................... 105
LoPucki, Lynn M., Security Pacific Bank Professor of Law,
University of California, Los Angeles, School of Law, Los
Angeles, California, letter.................................... 113
McCall, David, Director, District 1, United Steel Workers of
America, AFL-CIO, Columbus, Ohio, statement.................... 114
Manney, Mark, McClain, Leppert & Maney, Houston, Texas, letter... 116
Menzies, R. Michael, President and Chief Executive Officer,
Easton Bank and Trust Company, Easton, Maryland, statement and
attachment..................................................... 117
Moschella, William E., Assistant Attorney General, Office of
Legislative Affairs, Department of Justice, Washington, D.C.,
letter and attachment.......................................... 139
Munsch, Russell L., Munsch Hardt Kopf & Harr PC, Dallas, Texas,
letter......................................................... 142
National Association of Credit Management, Robin Schausell, CAE,
President, Columbia, Maryland, letter.......................... 143
National Association of Federal Credit Unions, Arlington,
Virginia, statement............................................ 145
National Association of Realtors and the Institute of Real Estate
Management, Washington, D.C., joint statement.................. 153
Pelofsky, Joel, Spencer Fane Britt & Browne LLP, Kansas City,
Missouri, letter............................................... 155
Small, A. Thomas, Bankruptcy Judge, Eastern District of the North
Carolina, and Eugene R. Wedoff, Chief Bankruptcy Judge,
Northern District of Illinois, proposal........................ 157
Spears, Berry D., Winstead Sechrest & Minick, Austin, Texas,
letter......................................................... 193
Strauss, Philip L., retired Attorney, Family Support Bureau,
Office of the District Attorney, San Francisco County,
California, statement and attachment........................... 195
Tucker, J. Maxwell, Winstead Sechrest & Minick, Austin, Texas,
letter......................................................... 218
Vullo, Maria T., Partner, Paul, Weiss, Rifkind, Wharton and
Garrison LLP, New York, New York, statement.................... 220
Warren, Elizabeth, Leo Gottlieb Professor of Law, Harvard Law
School, Cambridge, Massachusetts, prepared statement,
attachments and letter......................................... 227
Westbrook, Jay L., Benno C. Schmidt Chair of Business Law,
University of Texas at Austin, Austin, Texas, letter........... 238
Williamson, Brady C., LaFollette Godfrey & Kahn, Attorneys at
Law, Madison, Wisconsin, letter................................ 240
Woodward, William J., Jr., Professor of Law, Temple University,
James Beasley School of Law, Philadelphia, Pennsylvania, letter 242
Zywicki, Todd J., Visiting Professor of Law, Georgetown
University Law Center, Washington, D.C., statement............. 243
BANKRUPTCY REFORM
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THURSDAY, FEBRUARY 10, 2005
United States Senate,
Committee on the Judiciary,
Washington, DC.
The Committee met, pursuant to notice, at 10:15 a.m., in
room SD-226, Dirksen Senate Office Building, Hon. Arlen
Specter, Chairman of the Committee, presiding.
Present: Senators Specter, Grassley, Sessions, Cornyn,
Brownback, Coburn, Leahy, Kennedy, Biden, Feinstein, Feingold,
Schumer and Durbin.
OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM
THE STATE OF PENNSYLVANIA
Chairman Specter. The hour of 10:15 having arrived, we will
commence this hearing of the Judiciary Committee.
The bill we will be discussing today, S. 256, seeks to
address existing bankruptcy abuses, while implementing
appropriate consumer protection. It enjoys strong bipartisan
support in the Congress and has come close to enactment into
law on more than one occasion.
Bankruptcy reform initiatives have been considered by the
Congress since 1998, and today's hearing will mark the 11th
hearing convened by the Judiciary Committee on this or similar
bills. Our counterparts in the House of Representatives have
also held numerous hearings on this legislation. The Committee
is holding hearings today to give an opportunity for renewed
consideration to the pending legislation, even though there
have been very many hearings in the past. This legislation has
been one of the priority items of the Majority Leader and it is
our hope to bring it up on the Judiciary Committee executive
session a week from today.
We are starting this hearing just a little later than we
customarily do because we have had a meeting among Republicans
on asbestos litigation. This has been a very busy time for our
Committee, after having the hearings on Attorney General
Gonzales and then moving last week to the class action bill,
which we were able to report out of an executive session in a
morning, which was prompt action for the Committee.
The class action bill is on the floor today. We will renew
the discussion at 11:30 and I will absent myself for a sort
time to go over to open the hearings. We will open the floor
action, but the bankruptcy hearings will continue during my
absence and I will return, because we want to hear everybody
and have an adequate opportunity for questioning by the panel.
We have a very distinguished array of witnesses, and I
believe that we have two of our colleagues here today to make
introductions. Senator Schumer wishes to make an introduction.
Senator Schumer is entering right on cue.
I just mentioned you, Senator Schumer, and your interest in
making an introduction.
STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR FROM THE
STATE OF NEW YORK
Senator Schumer. Well, thank you, Mr. Chairman, and I want
to thank you for this opportunity. Ms. Vullo has come down.
There are all sorts of things going on. I don't know; you may
not want this public, but she is doing a lot of nice things in
family and she came down because she cares so much about this.
I want to welcome her back. She is an accomplished attorney
from my State. She has spent years fighting pro bono for the
victims of violence, vandalism and harassment in providing safe
and legal health services.
For those who don't remember or were not here then, were
not members of this Committee, Ms. Vullo is here to remind us
that the Bankruptcy Code should not be used as a safe haven for
those who practice and are convicted of violence, no matter
what their views on choice.
I know it was not easy for Ms. Vullo to get here. I know
she has to leave early, but she knew how important it was to be
here to make the case. I remember Senator Biden was very
impressed with her testimony when she came a few years back.
Now, Mr. Chairman, since we were here last, the make-up of
the Senate has changed and the make-up of the Committee has
changed, but what hasn't changed is the need for real, honest
and fair bankruptcy reform. And what hasn't changed is the need
for an amendment to the current bill that prevents those who
engage in violence and intimidation at clinics from hiding
behind the Bankruptcy Code to escape court-imposed fees.
The FACE amendment, which passed in the Senate 80 to 17,
makes clear to those who would terrorize, use violence or
threaten violence against women and doctors that bankruptcy is
no escape from accountability. At the same time--and I
underline this--it will do no harm, no harm, to legitimate
protesters who are peaceful and who do not engage in violence
or threats.
So I hope now, as we reconsider this bill, that my
colleagues will not do an about-face and oppose this critical
measure. As I have said before, it is not pro-choice or pro-
life; it is pro-rule of law and anti-violence. We are going
after abuses of bankruptcy in this law and there is no reason
why this abuse of bankruptcy shouldn't be included as well.
I want to thank Ms. Vullo for making this case, and I ask
unanimous consent that my entire statement be placed in the
record.
Chairman Specter. Without objection, your full statement
will be made a part of the record.
Senator Schumer. Thank you for your courtesy, Mr. Chairman.
Chairman Specter. Thank you, Senator Schumer.
[The prepared statement of Senator Schumer appears as a
submission for the record.]
Chairman Specter. Senator Kennedy, I yield to you for an
introduction.
STATEMENT OF HON. EDWARD M. KENNEDY, A U.S. SENATOR FROM THE
STATE OF MASSACHUSETTS
Senator Kennedy. Thank you very much, Mr. Chairman. It
really is a great pleasure for me to introduce Elizabeth
Warren, who serves as the Leo Gottlieb Professor of Law on the
faculty of Harvard Law School and really is one of our Nation's
leading experts on bankruptcy law.
She is often cited for her studies on the economic squeeze
on middle-class families, as well as the economics of debt,
health care finance and other economic stresses. She also works
on policy issues relevant to corporate reorganization and
sovereign insolvency. The National Law Journal has named
Professor Warren one of the 50 most influential women lawyers
in America, and her students at Harvard have awarded her the
Sachs and Freund Award for teaching excellence.
So we look forward to Professor Warren sharing her
expertise with us. We thank her very much for being with us
today.
[The prepared statement of Senator Kennedy appears as a
submission for the record.]
Chairman Specter. Thank you very much, Senator Kennedy.
I now yield to my distinguished ranking member, Senator
Leahy.
STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE
STATE OF VERMONT
Senator Leahy. Thank you, Mr. Chairman. Thank you for
having this hearing. This is the first hearing on bankruptcy
reform we have had in 4 years. It is long overdue. I am
delighted you are doing it.
I also would note that the Nation faces a lot different
things than it did 4 years ago. We endured the terrorist
attacks of September 11th that only deepened the financial woes
of this country. We have been witness to a parade of financial
misdeeds by major U.S. corporations. The names of Enron,
WorldCom, among others, left a bitter taste in the mouths of
average Americans. They have damaged investor confidence. They
have shaken our capital markets. Financially-troubled companies
have short-changed their pension promises by nearly $100
billion, putting workers, responsible companies and taxpayers
at risk.
Since we last held a hearing on bankruptcy reform, 782,000
private sector jobs have been lost. Far too many Americans are
working and barely making ends meet even when they are holding
down two and three jobs. And we are immersed in wars in
Afghanistan and Iraq with no end in sight.
So I think when we discuss bankruptcy reform, we should do
it in the context of real-life developments since 2001. To be
appropriate and fair, the key provisions have to be carefully
examined. This week, the Majority Leader, Senator Frist, said
the following about bankruptcy reform legislation, quote, ``It
has been several Congresses since people have really looked at
the bill very carefully. So we thought it was important to have
hearings and have the opportunity to mark it up and modernize
it before taking it to the floor.''
I agree with Senator Frist. We should modernize the
legislation, but we should take into account what has happened
since 2001. For example, we should strengthen the financial
safety nets for middle-class American families confronting
illness or injury. Medical problems, I am told, contribute to
about half of all bankruptcies, even though most of those who
filed had health insurance when they first became sick.
Many lose their jobs and their insurance because their
conditions worsen, while others face thousands of dollars in
copayments and deductibles not covered by their insurance. I am
pleased Professor Warren is here and she could join us in
discussing her recent research and analysis of illness and
injury as they relate to bankruptcy.
We should provide for more disclosure of information so
that consumers may better manage their debts and avoid
bankruptcy altogether. U.S. consumer debts have reached
staggering levels, after more than doubling over the past 10
years. Consumer debt hit $1.98 trillion in October 2003, up
from $1.5 trillion three years ago. Credit card debt is at $735
billion. The average household has a balance of a little over
$1,200.
I know that Senators Grassley, Durbin, Schumer and others
share a commitment to include credit industry reforms in a fair
and balanced bankruptcy bill. The millions of credit card
solicitations made to American consumers over the past years
have contributed to the rise of consumer debt.
It doesn't give me a huge amount of confidence as a Senator
when I have a neighbor whose dog gets a credit card with a line
of credit already on it. It makes me wonder sometimes when I
hear the crocodile tears of some, if this may have something to
do with it. Or when you try, as I did the other day, just as an
experiment to get my frequent-flyers numbers back and they put
you on hold for 34 or 38 minutes, hoping that you will hang up
and they don't have to actually come through with something, I
lose a little bit of confidence.
Additional disclosure is needed to ensure that consumers
completely understand what is in there. When you get the credit
card, you want to know just what you are getting. We have to be
careful that our efforts to ensure accountability don't
inadvertently create problems for privacy and security. We are
in an age where personal information can be easily digitized
and shared. If it falls into the wrong hands, it is abused.
Identity theft is one danger, as is tracking and harassing a
battered spouse. We ought to look at how we can cut down on
that.
And then look at the economic hardships faced by service
members' families. That warrants our attention. Calls to serve
their country in Iraq, Afghanistan or elsewhere can cause loss
of family income, the closing of a family business, or
additional expenses. Senators Durbin, Graham and others have
taken an interest in this issue, and I will look forward to
working with them.
Now, there is one thing that has not changed. The campaign
of violence, vandalism and intimidation continues to curtail
the availability of family services and endangers providers and
patients. The perpetrators of such violence continue to escape
judgment through bankruptcy abuse. I want to applaud the senior
Senator from New York for his work in this area.
The 501-page bankruptcy reform bill introduced a few days
ago has been stripped of the consensus clinic violence
language. It fails to address the discharge of penalties for
violence against family planning clinics. Such people can
commit violence and escape. We should look at that, and I am
looking forward to hearing from Ms. Vullo, who, as Senator
Schumer has mentioned, has done a huge amount of pro bono work
in this area.
The rest of my statement, Mr. Chairman, I will put in the
record. We have a lot of work ahead of us. I think this is an
important hearing and I compliment you again for holding it.
Chairman Specter. Thank you very much, Senator Leahy, and
without objection, your full statement will be made a part of
the record.
[The prepared statement of Senator Leahy appears as a
submission for the record.]
Chairman Specter. Our practice at the Judiciary Committee
is to have 5 minutes for the witnesses to testify, and I would
appreciate it if you would observe the large timing lights in
front of you: green, continue; amber, one minute left; and the
red, stop.
Senator Biden. Mr. Chairman, can you yield to me for five
seconds? I have a hearing in the Foreign Relations Committee on
the tsunami and the President's request for about $1 billion,
which I think is appropriate.
I want to make clear to the witnesses that my coming in and
out of this hearing is not a lack of respect. Senator Grassley
and I have been working on this for 8 years. I am anxious to
get it resolved. So my failure to be here is not a lack of
interest, but I will be in and out.
Chairman Specter. Well, thank you, Senator Biden, for those
comments. That applies to other Senators, as well. There are
hearings going on all the time and there is floor action, so it
is no disrespect or lack of interest if Senators move in and
out of the hearing.
Our first witness is Mr. Kenneth Beine, who appears today
on behalf of the Credit Union National Association. He is
president of Shoreline Credit Union, a Wisconsin native, a
graduate of the University of Wisconsin in 1974, with a
master's in finance from the University of Wisconsin in 1984.
Thank you for joining us, Mr. Beine, and we look forward to
your testimony.
STATEMENT OF KENNETH H. BEINE, PRESIDENT, SHORELINE CREDIT
UNION, TWO RIVERS, WISCONSIN, ON BEHALF OF THE CREDIT UNION
NATIONAL ASSOCIATION
Mr. Beine. Thank you. Good morning, Chairman Specter and
other members of the Committee. I am Kenneth Beine, President
of Shoreline Credit Union, in Two Rivers, Wisconsin. We are a
$64 million State-chartered, federally-insured credit union. I
appreciate the opportunity to be here to tell you about our
concerns with bankruptcies and how they are impacting credit
unions, and my credit union in particular.
I am speaking on behalf of the Credit Union National
Association, which represents about 90 percent of the 9,100
State and Federal credit unions nationwide. We are very pleased
that the Committee is holding today's hearing on S. 256, the
Bankruptcy Abuse Prevention and Consumer Protection Act of
2005.
I sat in front of this Committee nearly 4 years ago today
with a message from America's credit unions. That message is
the same today as it was then. Credit unions recognize that
many people legitimately need the option to declare bankruptcy.
What concerns us, however, are the cases of abuse by those who
file Chapter 7 and totally walk away from their debt even
though they clearly have the ability to pay part or all of that
debt.
Credit unions have consistently had three top priorities
for bankruptcy reform legislation: a needs-based formula,
mandatory financial education, and maintenance of the ability
of credit union members to voluntarily reaffirm their debts.
The bill before you today, while a product of compromise, does
a good job of balancing these issues. We strongly urge the
Senate to pass this compromise bill as soon as possible.
CUNA strongly supports the provision in S. 256 that
requires a person contemplating bankruptcy to receive a
briefing about available credit counseling and assistance in
performing a budget analysis. We also strongly support the
provision in this legislation that would prohibit the Chapter 7
or 13 debtor from receiving a discharge if the debtor does not
complete a course in personal financial management.
Any sensible bankruptcy reform should include education
requirements to give debtors the tools they need to make wise
decisions about filing for bankruptcy and, more importantly, to
succeed financially after bankruptcy. In anticipation of this,
CUNA plans to develop face-to-face and/or online courses to
fulfill this aspect of the legislation.
I am confident that early financial education would have
helped some young adult members of Shoreline Credit Union to
make different decisions than they did. In one case, a couple
in their mid-20's decided they wanted a clean slate prior to
getting married. They ran up credit card purchases. One prepaid
on auto loan with us to have the cosigner, their parent,
removed. Both were employed full-time. They both then filed
Chapter 7. My credit union's share of their version of
financial planning was a write-off of almost $3,000 in credit
card balances, plus several hundred dollars on disposal of the
automobile.
Credit unions strongly believe that reaffirmations are of
benefit both to the credit union which would avoid a loss and
to the member debtor who, by reaffirming with their credit
union, continues to have access to financial services and to
reasonably-priced credit.
Let me digress for a moment. We do not remove members who
have a loss. We encourage them to continue to have a
relationship with us and continue to have savings accounts. We
also offer checking to those people so they can continue to
conduct business. We do not want to contribute anybody to the
unbanked. As not-for-profit financial cooperatives, losses to
the credit unions have a direct impact on the entire membership
due to a potential increase in loan rates or a decrease in
interest on savings accounts.
Perhaps the best demonstration of the credit union
movement's position that reaffirmation benefits both the member
and the credit union comes from another real-life example. We
had a middle-aged couple file for Chapter 7 due to several
medical problems and loss of employment. They reaffirmed their
automobile loans with Shoreline. Although not required to repay
their credit card loans, they were adamant about doing so and
did so quite voluntarily after discharge. Needless to say, they
are members today in good standing and they only ask to be
granted a loan.
Credit unions are very anxious to see Congress enact
meaningful bankruptcy reform and believe that needs-based
bankruptcy presents the best opportunity to achieve these
important public policy goals. Credit unions believe that
consumers who have the ability to repay all or part of their
debt should be required to file a Chapter 13 rather than have
all their debt erased in Chapter 7. Therefore, CUNA supports
the needs-based provision that is contained in S. 256.
We hope that today's hearing shows that the Senate is
moving toward passage of bankruptcy abuse reform legislation,
and we hope that bankruptcy reform will become law in the
coming weeks. As I said earlier, I was here 4 years ago. It is
an honor to be called back.
Thank you. I will be happy to answer any questions.
[The prepared statement of Mr. Beine appears as a
submission for the record.]
Chairman Specter. Thank you very much, Mr. Beine.
We now turn to Ms. Maria Vullo, partner in the law firm of
Paul, Weiss, Rifkind, Wharton & Garrison LLP. She received her
law degree from the New York University School of Law in 1987
and holds a bachelor of arts degree in political science from
the College of Mt. Saint Vincent. She clerked for Judge
MacKenzie in the district court in the Eastern District of
Virginia.
Thank you for joining us today, Ms. Vullo, and the floor is
yours.
STATEMENT OF MARIA T. VULLO, PAUL, WEISS, RIFKIND, WHARTON AND
GARRISON LLP, NEW YORK, NEW YORK
Ms. Vullo. Thank you, and good morning, Mr. Chairman and
Senator Leahy and the rest of the Committee. Thank you, Senator
Schumer, for your kind words.
As the Chairman mentioned, my name is Maria Vullo and I am
a partner at the law firm of Paul, Weiss, Rifkind, Wharton and
Garrison, based in New York. And I appear again before this
Committee. I was here, I think it was, in February of 2001, and
I am testifying from my personal experience regarding a present
loophole in the United States Bankruptcy Code that I very
strongly believe needs to be fixed to prevent further abuse of
the bankruptcy process by persons who are seeking to evade
judgments that have been obtained through extensive litigation
under the Freedom of Access to Clinic Entrances Act, also known
as the FACE statute.
I have been for almost ten years now--time goes by quite
quickly--lead counsel for the plaintiffs in a case that was
pending in Portland, Oregon, called Planned Parenthood of the
Columbia Williamette v. The American Coalition of Life
Activists. It is known as the Nuremberg Files case in many
other forums.
In February of 1999, after more than 4 years of litigation,
and after a one-month trial, we obtained on behalf of our
clients a $109 million judgment under the FACE statute to
compensate the plaintiffs for out-of-pocket security costs that
they were required to incur because of threats of violence by
certain extreme members of the anti-choice movement. The jury
also awarded punitive damages in large sums against each of the
14 defendants.
Since I appeared before this Committee, the Ninth Circuit,
sitting en banc, affirmed the judgment and the injunction that
had been issued by the district court. And the United States
Supreme Court has denied the defendant's petition for a writ of
certiorari, and in the course of those proceedings the
Solicitor General, Ted Olson's office, filed a brief in support
of my clients' legal positions and the Ninth Circuit's
judgment. So there is no question here that the case has been
fully litigated. The judgment is valid and the defendants are
required to pay it.
That being said, we have experienced, my law firm has
experienced, over the past five years since the judgment was
first rendered, some very significant obstacles in collecting
on the judgment. This experience has led to the proposed
amendment to the Bankruptcy Code that I urgently ask this
Committee to pass.
Just as a little bit of background, my clients are
physicians and family planning clinics who were subjected to
threats of violence, including the Nuremberg Files website
which had dripping blood and cross-outs of names of physicians
who had been murdered, grayed-out names of physicians who had
been shot at and wounded, and those who were still working and
living were not grayed yet or not crossed out yet. That was a
threat of violence that all the courts have said is
sanctionable under our country's laws, as it should be.
My clients live and work in relatively safe communities
across the country, but have been forced, because of the
defendants' actions, to live under a constant threat of
imminent attack. They have purchased and regularly have worn,
and still wear, 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 teachers of the dangers that they face.
They have developed emergency plans, should they come under
attack, including instructing young children to hide in the
bathtub when shots are fired. They vary their routes to and
from work to protect themselves from assailants. They have
installed window coverings to thwart snipers. They have
purchased and wear disguises to avoid being recognized by
extremists. And, of course, they are ever-vigilant in public.
They are not secure in their homes or in their offices. They
don't live their lives like we do, and that is un-American and
the defendants' conduct is un-American.
The passage of the FACE statute, however, has had a
significant impact on the lives and safety of family planning
clinic workers. We need the statute and its continued
enforcement to save lives, but the statute cannot be fully
enforceable if those who are found liable under the statute
after years of litigation can simply go into a bankruptcy court
or multiple bankruptcy courts, file a Chapter 7 petition,
trigger the automatic stay and cause relitigation and
relitigation of the same issue.
I experienced this personally in six different bankruptcy
courts across the country after the verdict. I was in Jackson,
Mississippi; Chattanooga, Tennessee; Norfolk, Virginia;
Roanoke, Virginia; Baltimore, Maryland; and Greenbelt,
Maryland--quite a list for a girl from Brooklyn.
Following the jury's verdict, the defendants announced that
they intended to pay not a cent of the amount awarded by the
jury. These are not honest but disfortunate debtors who find
themselves unable to pay their credit card debts or mortgage.
These are people who do not follow the laws of our country and
believe that they can just abuse the bankruptcy process in
order to avoid judgments that have been lawfully obtained
against them.
My firm has committed enormous research--
Chairman Specter. Ms. Vullo, your red light is on. Could
you summarize, please?
Ms. Vullo. Sure, sure.
The critics of the amendment that is being proposed may ask
why it is needed, given that I won the issue ultimately after
three or 4 years of litigation in the bankruptcy courts. And to
this, I have two quick responses.
First, an amendment that will make clear what the law
already provides should not be controversial. Secondly, the
amendment is needed most importantly because with it debtors
will not be able to abuse the Bankruptcy Code by invoking the
automatic stay, causing relitigation. It is very simple to make
it unambiguous in the Bankruptcy Code that you cannot abuse the
bankruptcy process and the automatic stay provision by filing
for bankruptcy and causing relitigation. Just state in the
statute that FACE judgments are non-dischargeable.
Chairman Specter. Thank you.
Ms. Vullo. Let me just--
Senator Schumer. Mr. Chairman, this is important. It is the
only witness on this controversial amendment. The witness came
at great trouble to herself. Could she just be given another
two minutes to make the end of her statement? I know that is
asking a good deal with the amount of witnesses.
Chairman Specter. There will be time for--
Senator Schumer. She has to leave, Mr. Chairman. She flew
down this morning and has to leave right after she speaks.
Chairman Specter. When do you have to leave, Ms. Vullo?
Ms. Vullo. I have to be in court this afternoon in the
Southern District of New York. I am caught between United
States Senators and a United States Federal judge.
Chairman Specter. When do you have to leave, Ms. Vullo?
Ms. Vullo. I have to leave no later than getting on the one
o'clock shuttle, so I have to leave by noon.
Chairman Specter. How much more time would you like, Ms.
Vullo?
Ms. Vullo. I just need a couple of minutes.
Chairman Specter. Go ahead.
Senator Schumer. Thank you, Mr. Chairman.
Ms. Vullo. After extensive litigation and considerable
expense over a period of four-plus years, as I mentioned, we
won the issue in the bankruptcy courts under the current Code
which deals with willful and malicious injury. But that does
not mean that the Bankruptcy Code worked, because the
relitigation demonstrates that it did not work.
Enactment of an amendment is necessary because we had to
relitigate the question of willful and malicious injury over
and over again. While we won that issue, what we need here is a
very unambiguous provision that says judgments under FACE or
similar statutes are non-dischargeable in bankruptcy, so you
don't have lawyers engaging in sanctionable conduct, as I would
submit, going into the bankruptcy courts, triggering the
automatic stay and arguing about interpretation, as we lawyers
like to do, of language in legislation. This is a loophole that
needs to be fixed based upon documented abuse.
I think I have said what I need to say. I strongly urge
this Committee to consider an amendment to the Code. It is
something that, as a private lawyer litigating this issue for
many years, I have personal experience with and feel very
strongly about because it is a problem in the Code that needs
to be remedied.
Again, I apologize that I have to leave to go to court. If
there are any questions--and I recognize other members of this
panel and I certainly don't want to impose on them, but I
apologize that I have to leave early.
[The prepared statement of Ms. Vullo appears as a
submission for the record.]
Chairman Specter. Well, thank you, Ms. Vullo.
If any of the other witnesses have any extraordinary time
constraints, just let us know and we will try to accommodate
you. We have limited the witnesses' testimony to give minutes
because our experience has been that when you get to the
question-and-answer session, you are responding to matters of
greater concern to the members which really is of assistance in
the legislative process.
Our next witness is Professor Elizabeth Warren, Leo
Gottlieb Professor of Law at Harvard; an extraordinary
background on writing, 50 book chapters; principal investigator
on a number of empirical studies on commercial law. Her works
have appeared in major national publications--Time and
Newsweek. She was the reporter for the National Bankruptcy
Review Commission and Vice President of the American Law
Institute. She has a bachelor's degree from the University of
Houston and a law degree from Rutgers.
Thank you for joining us, Professor Warren, and we look
forward to your testimony.
STATEMENT OF ELIZABETH WARREN, LEO GOTTLIEB PROFESSOR OF LAW,
HARVARD LAW SCHOOL, CAMBRIDGE, MASSACHUSETTS
Ms. Warren. Thank you, Senator. Thank you for having me.
This bill is 8 years old, and in 8 years bankruptcy has
certainly been in the news: Enron, WorldCom, Adelphia, United
Airlines, USAir, TWA, LTV Steel, K-Mart, Polaroid, Global
Crossing, just to name a few. And many of the companies that
have gone into bankruptcy are those associated with scandal.
But I notice there is no response in this bill. There is no
response because this bill was written before a lot of new
problems were on the horizon: companies that file for Chapter
11 that cancel pensions plans and health benefits, leaving
thousands of families economically devastated; companies that
continue to pay executives and insiders tens of millions of
dollars, while they demand concessions from their creditors;
military families targeted for payday loans, insurance scams,
and other forms of financial chicanery; scandals that have
rocked the so-called nonprofit credit counseling industry; sub-
prime mortgage companies that have unlawfully taken millions of
dollars from homeowners, then fled to the bankruptcy courts to
protect their insiders and bank lenders.
In the 8 years since this bill was introduced, there has
been a revolution in the data available to us. Unlike 8 years
ago, we need not have a theoretical debate about who uses the
bankruptcy system. We now know that 1 million men and women are
turning to bankruptcy each year in the aftermath of a serous
medical problem, and three-quarters of them had health
insurance at the onset of the illness that ultimately
bankrupted them. We know that a family with children is nearly
3 times more likely to file for bankruptcy than their
counterparts who have no children. And we know that now more
children every year live through their parents' bankruptcy than
live through their parents' divorce.
The effects on small business also need not be speculated
upon. This Congress has the opportunity with this bill to make
history. This would be the first law in the history of the
United States that would discriminate against small businesses.
It would say that the Enrons and WorldComs of the world can go
forward with no new disclosures, no supervision by the United
States--additional supervision by the United States trustee, no
fixed deadline. But if you are a little business, all of those
new restrictions will apply. And if you cannot meet them, you
are automatically thrown out of bankruptcy under this bill.
Now, we hear a lot about the means test. I remind the
Senators with respect, it is one section of 217. But the key
part of the means test to think about and all the other
provisions that apply to families is they treat all families
alike. It treats every family--it assumes that they are all in
bankruptcy for the same reason: that they have overspent. This
means that a family driven into bankruptcy by the increased
costs of caring for an elderly parent with Alzheimer's is
treated the same as someone who maxed out his credit cards at a
casino. A person who had a heart attack is treated the same as
someone who had a spending spree at the mall.
If Congress is determined to sort the good debtors from the
bad, then it is both morally and economically imperative that
they distinguish those who have worked hard and played by the
rules from those who have shirked their responsibilities.
I understand that bankruptcy losses hurt good people. My
brother is a small landlord. My sister-in-law works for the
Apartment Association. I have another brother who has run a
small business. I am a member of a credit union. Those losses
are real. No one denies that, and they can make a difference in
the bottom line--a 1-percent difference, a 2-percent difference
in some cases.
Those creditors are fully entitled to a system that is as
free of abuse as we can humanly make it. But I want you to
think about the people who are not here today. Think first
about the fact that there are no representatives from the
credit card industry here today, and yet they are the ones who
will scoop up most of the benefit from this bill. As
bankruptcies have risen in the 8 years that this bill has been
pending by 17 percent, credit card profits, despite not
adopting this bill, have gone up by 167 percent. They now top
$30 billion annually.
But think of the others who are not here. These are the
people for whom bankruptcy law matters 100 percent: the Mom
working two jobs trying to pay her bills; the family with a
child battling cancer; the reservist who has been called up and
lost his small business. These are good people who desperately
did not want to file for bankruptcy. A difference in the
bankruptcy laws is a 100-percent difference to them--
Chairman Specter. Professor Warren, your red light is on.
Ms. Warren. I will. Thank you. For these people it will be
the difference between whether they can save their homes,
whether or not they can stop the collection calls that come
principally in the afternoons when the children are home from
school, whether they can make peace in their lives after a
catastrophe has hit them. Please don't change the law without
hearing from these people.
[The prepared statement of Ms. Warren appears as a
submission for the record.]
Chairman Specter. Thank you very much, Professor Warren.
I might add that all of the statements which have been
submitted will be made a part of the record in full.
We turn now to Professor Todd Zywicki, Visiting Professor
of Law at Georgetown, Professor of Law at the James Buchanan
Center, an author of some 40 articles in the fields of
bankruptcy, commerce, commercial law, a law degree from the
University of Virginia where he was executive editor of the Law
Review, and a bachelor's degree cum laude from Clemson.
Thank you for coming today, Professor Zywicki, and we look
forward to your testimony.
STATEMENT OF TODD J. ZYWICKI, VISITING PROFESSOR OF LAW,
GEORGETOWN UNIVERSITY LAW CENTER, WASHINGTON, D.C.
Mr. Zywicki. Thank you. Distinguished Senators, it is a
distinct honor to testify before you today on the subject of
this bankruptcy reform legislation.
Last year, over 1.5 million people filed bankruptcy in this
country. During the past decade, annual bankruptcy filings
doubled. In the past two decades, bankruptcy rates have
quintupled--this during an era of almost uninterrupted
prosperity, high economic growth, low interest rates, low
unemployment rates, and rising stock in household real estate
markets. More people will file bankruptcy this year alone than
during the entire decade of the Great Depression.
Let's make one thing very clear at the outset, then. Record
numbers of Americans are not filing bankruptcy because they
have to. Many Americans are filing bankruptcy because we have a
bankruptcy system that is out of control. We have a system
riddled with fraud and abuse. We have a system where rich
debtors use bankruptcy to walk away from debts they could repay
but choose not to. We have a system where unscrupulous deadbeat
fathers hide behind the machinery of the Bankruptcy Code to
avoid paying alimony and child support, and divorced women
actually have to stand in line behind bankruptcy lawyers to
collect money that they are owed in bankruptcy.
We have a system where debtors can abuse the unlimited
homestead exemption by relocating on the eve of bankruptcy,
leaving creditors in the lurch. We have a system where debtors
conceal assets, like about their incomes, and manipulate the
system, safe in the knowledge that their malfeasance rarely
will be caught. We have a system where lawyers stampede their
clients into bankruptcy while never asking whether a debtor
should try to avoid bankruptcy through credit counseling.
Senators, we have a bankruptcy system that is broken and
must be repaired. It will not fix itself, and in 8 years the
problems have not disappeared, and in 8 years the critics of
this much needed reform still have offered no plan for fixing
it.
Those who turn a blind eye to bankruptcy fraud and abuse
ignore its victims. Those victims include the unsuspecting
divorcee who is sandbagged by the bankruptcy system when she
learns that her property settlement has been discharged; the
small businesses that are forced to raise prices, curtail
services, or lay off workers to compensate for losses resulting
from bankruptcy filings. They include hospitals that are unable
to buy new equipment or hire another nurse because of unpaid
bills discharged in bankruptcy. They include young and low-
income workers who are unable to buy a car because they cannot
get a car loan because of out-of-control bankruptcy system. And
they include you and me, every American who is forced to pay
more for credit, goods, and services because others file
bankruptcy and walk away from debts they could pay but choose
not to. This is unfair and unnecessary.
This bill rebalances the consumer bankruptcy system in two
ways: first, it increases protection against abuse, primarily
by institutionalizing a systems of means testing, eligibility
for filing Chapter 7; second, it installs important new
safeguards against bankruptcy fraud.
The central debate over this legislation boils down to one
simple question: Should high-income debtors who can repay a
substantial portion of their debts without significant
financial or other hardship be required to do so? I believe the
answer must be yes.
Bankruptcy is intended as a last resort for those who are
poor or unemployed, suffering from health problems, or
otherwise down on their luck. Bankruptcy should not be a first
resort for those who consciously choose to live beyond their
means. Nor should bankruptcy be a mechanism for people to
strategically take advantage of the system for financial gain.
Means testing will improve the administration of the bankruptcy
system, increase the recovery from high-income debtors, protect
low-income debtors, and increase public confidence in the
fairness and efficiency of the bankruptcy system.
At the same time, means testing will protect the poor and
unfortunate debtors for whom bankruptcy is intended. By
definition, means testing does not apply at all to the great
bulk of bankruptcy filers, the roughly 80 percent of Chapter 7
filers whose incomes are below the median. Nor will it apply to
debtors who can demonstrate special circumstances to rebut the
means-testing presumption. No honest unfortunate debtor will be
denied the right to file bankruptcy under this or any other
provision of the legislation.
Does bankruptcy abuse occur? Every day. In one case, a
Miami physician who earned over $245,000 per year tried to
discharge $265,000 in unsecured debt. In addition to his
homestead, he had property in Washington, D.C., with over half
a million dollars of equity and three vacant lots in Colorado.
I could give additional examples, but I think you get the
picture.
This bill would also create numerous new safeguards against
the rampant fraud in the system today. The FBI estimates that
10 percent of bankruptcy cases contain some degree of fraud,
especially a failure to fully disclose all assets. This
legislation includes numerous, simple cost-effective measures
to reduce bankruptcy fraud.
Are fraud and abuse of bankruptcy filers the majority of
individuals in the bankruptcy system? Senator, may I have 30
seconds to conclude?
Chairman Specter. You may.
Mr. Zywicki. No. But they are representative of a certain
class of bankruptcy filers, those who file bankruptcy not as a
result of financial hardship, as conventionally understood, but
merely as a convenience to maintain an extravagant lifestyle.
This legislation rebalances the bankruptcy system by targeting
the worst forms of fraud and abuse in the system while leaving
honest bankruptcy filers unaffected. It rewards old-fashioned
virtues of thrift and personal responsibility and ends the
shameful subsidization of upper-class profligacy by those who
are forced to pick up the bill. I urge you to pass it.
Thank you.
[The prepared statement of Mr. Zywicki appears as a
submission for the record.]
Chairman Specter. Thank you very much, Professor Zywicki.
We now turn to Mr. Malcolm Bennett, who appears here on
behalf of the National Multi Housing Council and the National
Apartment Association. He is president and founder of the
Minority Apartment Owners Association and founder of
International Realty and Investments, Incorporated.
Thank you very much for coming from California, Mr.
Bennett, and the floor is yours.
STATEMENT OF MALCOLM BENNETT, PRESIDENT AND FOUNDER,
INTERNATIONAL REALTY INVESTMENTS, INC., LOS ANGELES, CALIFORNIA
Mr. Bennett. Thank you, Chairman Specter and other members
of the Committee. Thank you for the invitation to be with you
here today as you consider S. 256, the Bankruptcy Abuse
Prevention and Consumer Protection Act. As said, my name is
Malcolm Bennett. I am from Los Angeles, California, where I am
the founder and president of International Realty and
Investments, one of the largest minority-owned and -operated
firms in the area. And, in addition, I formed the Minority
Apartment Owners Association, which represents owners
throughout Southern California. And today I am here
representing the National Multi Housing Council and the
National Apartment Association, and I would like to share with
you my views as well as the industry views on the current
Bankruptcy Code.
While we are certainly in support of comprehensive and
meaningful reform of the Bankruptcy Code, I will limit my
comments to those that are of most interest to us, and that is
the provisions of the automatic stay.
As you are well aware, Section 362 of the Code essentially
denies creditors the ability of collection effort when a person
files for bankruptcy protection. For those of us in the rental
housing community, this means that we are prohibited from
continuing with the eviction process. While we certainly
realize that the automatic stay provision to give debtors
breathing room is a worthy one, however the rental housing
industry and renters in general are disproportionately
disadvantaged by this provision, especially when it is
manipulated by people for personal gain. And I may explain, I
have made my work putting people into housing, especially a lot
of those that would almost be out of that safety net. And in
the majority of cases, it has been tremendously rewarding.
Unfortunately, there does come a time when a resident must be
removed from his or her rental unit by eviction. Now,
understand that as property owners we need tenants, and we
would not evict a tenant without cause. And when we do use the
eviction process, it is actually the last action that we take.
And we do so following strict State laws and procedures which
we believe to be fair and protective of the residents.
We really cannot go in and change the locks and take
possession of a unit. There are numerous legal matters that
arise in the eviction process. On the whole, the average
eviction takes about 3 months, and during this time several
things happen. Number one, there is no rent being paid by the
tenant, and there is obviously the potential for extensive
damage because the tenant knows that they are going to
eventually be evicted, and there is no way to re-rent the
apartment. In the meantime, we continue to incur legal bills,
ongoing utilities, and other miscellaneous costs associated
with a unit that is basically out of service.
Once we have been granted a judgment in a State eviction
court, then he or she subsequently files a bankruptcy petition.
And as you know, that automatic stay provision stops our
eviction right in its tracks. And as a result, residents are
allowed to stay in these places rent-free, which could be
several additional months. And it is really most absurd when
the situations arise out of illegal drug activities when we are
mandated to get rid of these people, yet they are allowed to
remain in because of the automatic stay. And, in addition, we
run the possibility of losing good tenants.
What is even more distressful is there are a lot of
unscrupulous opportunities which exploit the automatic stay by
going out and passing out to our tenants flyers saying that
they can get them extra time by filing all sorts of frivolous
motions in the eviction proceedings. Then after all of that
fails, then they file for bankruptcy, stalling, which could
take another several months. These abuses play out all across
the United States, from large multi-family communities to
single units.
I would also like to point out that a recent study shows
that 47 percent of all rental housing is owned by individuals
like me, and 35 percent of all of those are properties with ten
units or less. In short, when apartment owners, especially
small firms, lose our ability, it is a great significant
burden, and the added cost really impacts the low and moderate
housing.
Section 311 is a much-needed reform to the automatic stay.
While it does not exempt rental housing from the automatic
stay, it goes a long way to help the abuse. And what it really
does, it denies an automatic stay if the property owner or
manager already had a judgment prior to the bankruptcy being
filed, and when the property is endangered with illegal drugs
or controlled substances. Both of these will allow the owner to
gain possession much faster. Also, it provides that needed
protection for a tenant that wants to reinstate their entire
monetary default and remain in the unit.
At all cost, we try to avoid evictions, and as I move to
close, this is an important step to reduce the abuse, and this
amendment will go a long way. And I would like to thank you on
behalf of the National Multi Housing Council and the National
Apartment Association for the opportunity to present these
points to you today, and I certainly will entertain any
questions.
[The prepared statement of Mr. Bennett appears as a
submission for the record.]
Chairman Specter. Thank you very much, Mr. Bennett, for
your testimony.
Our next witness is Mr. Philip Strauss, here on behalf of
the National Child Support Enforcement Association, principal
attorney for the Legal Division of the Department of Child
Support Services in San Francisco; a bachelor's degree in
history from the University of California at Berkeley and law
degree from the University of California at Hastings.
Thank you very much for joining us, Mr. Strauss, and you
are up.
STATEMENT OF PHILIP L. STRAUSS, RETIRED ATTORNEY, FAMILY
SUPPORT BUREAU, OFFICE OF THE DISTRICT ATTORNEY, SAN FRANCISCO
COUNTY, CALIFORNIA, ON BEHALF OF THE NATIONAL CHILD SUPPORT
ENFORCEMENT ASSOCIATION, SAN FRANCISCO, CALIFORNIA
Mr. Strauss. Mr. Chairman, members of the Committee, good
morning. As you said, I appear on behalf of the National Child
Support Enforcement Association, whose membership consists of
professionals at the local, State, and Federal Government
levels who have the responsibility for administering and
implementing the Federal child support enforcement program. I
welcome the opportunity to discuss the effect that the
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
will have on the collection of child support and alimony when
the debtor has filed a petition for relief under the Bankruptcy
Code.
For the last 31 years I was employed as an attorney for the
City and County of San Francisco, and the last 28 I spent
enforcing child support obligations. For the last 16 years, I
specialized in the collection of support during bankruptcy and
have taught this subject to attorneys both in California and
nationally. I have litigated bankruptcy support cases before
numerous bankruptcy courts, the District Court for the Northern
District of California, Bankruptcy Appellate Panel of the Ninth
Circuit, and the Ninth Circuit Court of Appeals. I retired from
service in San Francisco in 2004.
Seven years ago, I proposed amendments to the Bankruptcy
Code which now appear in S. 256. It is my opinion and the
opinion of every professional support collector with whom I
have discussed the issue that the child support amendments
contained in Sections 211 through 219 of S. 256 will
revolutionize the enforcement of support obligations against
debtors in bankruptcy. These enhancements will also result in a
more efficient and economical use of attorney and court
resources.
During the past 17 years in which I have taught the subject
of support enforcement during bankruptcy, I have reviewed
virtually every court opinion written on the subject since the
enactment of the Bankruptcy Code in 1978. Based on this
experience, I developed, in association with my colleagues,
what essentially became a wish list of amendments to the
Bankruptcy Code aimed at facilitating the collection of support
from bankruptcy debtors. This wish list is reflected in
Sections 211 through 214 and 216 through 217 of S. 256.
The most important amendment is found in Section 214 which
removes several impediments to the collection of support. Of
these, the most valuable by far is a provision allowing the
continued operation of an earnings withholding order for
support. Since State courts or administrative agencies have
already determined the appropriate level of support and
arrearage payment, the removal of withholding orders from the
reach of the automatic stay will require a support debtor to
design his or her bankruptcy plan to accommodate support
debts--which are, of course, the most serious and primary of
all financial obligations. Under current bankruptcy law the
reverse is true. The support creditor is often forced to take a
back seat to ordinary commercial creditors when a support
arrearage payment is sought in a bankruptcy case.
Under current bankruptcy law, when a debtor files for
protection under Chapter 12 or 13, the collection of even
ongoing support is stayed. The economic detriment to the family
which is not receiving public assistance can be devastating.
This amendment, therefore, not only ensures that the
payment of support by wage earners will not be interrupted, but
it will also avoid the need to entangle the debtor's family in
the bankruptcy process.
In addition to the removal of the earnings withholding
process from the automatic stay, other federally mandated
collection processes would be exempt under Section 214 of the
bill. These include the interception of the debtor's tax
refunds to pay the support obligation; the revocation of
debtors' professional, driver's, or recreational licenses for
those debtors who are not paying their support; the continued
enforcement of medical obligations; and the continued reporting
of support delinquencies to credit reporting agencies.
Perhaps the second most important and useful section of the
bill is contained in Section 213 which prevents a debtor from
obtaining confirmation of a bankruptcy plan and a subsequent
discharge if that debtor has not made full payment of all
support first becoming due after the petition date. This
section is significant for two reasons. It will prevent a
support debtor from paying other debts at the expense of
familial obligations. And, second, the provision is self-
executing. Neither the support creditor, an attorney for the
creditor, nor a public attorney will have to seek enforcement
of this provision in bankruptcy court.
I know that there has been some criticism that the bill
will put child support creditors in competition with banks or
financial institutions who have debts that have not been
discharged because of this bill. However, there is no
professional child support collector who believes that is a
serious issue. We have never had a problem collecting support
simply because a credit card or a financial institution was
collecting support. Therefore, on behalf of the National Child
Support Enforcement Association, we urge you to enact this bill
so that these amendments can finally be implemented. We have
waited a decade for them, and every year that goes by means
support that is not collected for children.
[The prepared statement of Mr. Strauss appears as a
submission for the record.]
Chairman Specter. Thank you very much, Mr. Strauss.
Our next witness is Mr. David McCall, here on behalf of the
United Steel Workers of America, where he is director of
District 1. He has had numerous key positions in the labor
movement and leads the union's negotiating committees for
Republic Engineered Products, attended the labor studies
program at Indiana University, Northwest, and graduated from
the Harvard University trade union program.
Thank you very much for joining us today, Mr. McCall, and
we look forward to your testimony.
STATEMENT OF DAVID MCCALL, DIRECTOR, DISTRICT 1, UNITED STEEL
WORKERS OF AMERICA, AFL-CIO, COLUMBUS, OHIO
Mr. McCall. Good morning, Mr. Chairman and members of the
Committee. I am a member of our union's International Executive
Board and the USWA district director for the State of Ohio, a
State that has lost over 200,000 jobs in the last 5 years, a
State where our union and the workers and the retirees we
represent have experienced bankruptcies at such companies as
LTV Steel, Ormet Aluminum, Warren Consolidated Industries,
Republic Engineered Steels, and Wheeling-Pittsburgh Steel,
which are among the largest. Beyond Ohio, our union of over 1
million active and retired steelworkers has experienced
bankruptcies at other locations such as Bethlehem Steel,
National Steel, Kaiser Aluminum, and many other companies.
Given the importance of bankruptcy law to the lives of our
workers and our retirees, you can be sure that our
International President, Leo Gerard, would be here today if he
were not out of the country. But on his behalf, my own, and our
union, we certainly thank you for holding these hearings and
considering the perspectives that we offer.
By itself, bankruptcy law cannot solve the many problems
facing the American worker and pensioners today. It cannot roll
back a flood of illegal imports that may undermine a plant or
an industry, and it cannot directly challenge the transferring
of manufacturing jobs to other countries. Nor can it
necessarily close the widening gap between rich and not-so-rich
in our country or solve the problems of our health care and
pension systems. When these forces do drive companies under,
our bankruptcy law should treat workers and retirees and their
families as fairly and as humanely as possible.
Most of the bill now before this Committee addresses
consumer bankruptcies, but over the life of this bill and its
predecessors, our union and the rest of the AFL-CIO have viewed
S. 256 generally as rendering wholesale changes in the consumer
bankruptcy system that would shift the rules decidedly in favor
of creditors and to the detriment of individuals.
Let me offer four points based on the experience of our
union with manufacturing companies in bankruptcy. And much of
this experience comes after and before the waves of bankruptcy
in manufacturing.
First, it is hard to say what is the worst thing about
bankruptcies in manufacturing, whether it is the loss of tens
of thousands of jobs and the impact on workers and their
families; whether it is the extreme economic shock to the
affected communities; whether it is the loss of hard-earned and
promised benefits. But surely one of the most tragic injuries
is when retirees, their spouses, and surviving spouses lose
through bankruptcy their health insurance, just at a time when
it is most needed in their life. These are citizens who spent a
lifetime working in hard and dangerous jobs to earn what was
supposed to be a lifetime employer-paid retiree insurance, only
to lose it all as a result of the bankruptcy. If bankruptcy law
is to be seen as legitimate and credible, it must be as humane
and fair as possible on this particular subject. Therefore,
when bankrupt companies sell its assets to a buyer, the buyer
should fund or support at least a portion of the previous
health care promises. I know Senators Leahy and Durbin and
Rockefeller have each developed ideas that would dedicate a
greater share of the bankruptcy estate to the needs of retirees
who lost their health care in bankruptcy.
Second is the subject of pensions. Even with a
comprehensive Federal pension law such as the PBGC,
bankruptcies leave behind too many victims. The shock and
nightmare of workers and retirees losing a substantial amount
of a pension benefit because of the termination of the plans in
bankruptcy is a tragedy I have witnessed all too often.
Third, the bill before you proposes to raise the priority
for wages from 90 days before filing up to a maximum of $4,925.
A new rule would give priority to those items earned in the 180
days prior to filing up to a maximum of $10,000. This is
progress, but it is not a complete solution. For example,
courts in most areas of the country view severance pay as being
earned over a long period of time, often over somebody's entire
career. So even a rule prioritizing 180 days' worth of accrual
brings very little severance pay to the priority category. In
short, there are really two problems with the wage priority
provision, both the amount and accrual period.
Fourth, a section of this bill which does not appear until
page 495 of a 501-page document is entitled ``Preventing
Corporate Bankruptcy Abuse.'' I believe a more comprehensive
approach to the problem of corporate abuses could be addressed
by eliminating or restricting key employee retention plans.
These golden parachutes are payable to executives of a
reorganizing company and rewarding them handsomely often after
they have cut workers' pay, reduced or eliminated retiree
benefits, shuttered plants, and sold them off. A second area of
concern is the problem of enormous sums of money going to
bankruptcy professionals. Congress should look at restricting
that.
Finally, let me conclude by saying our union is committed
to work with anybody in this Committee in particular on any
issues over bankruptcy, and we thank you for your time today.
[The prepared statement of Mr. McCall appears as a
submission for the record.]
Chairman Specter. Thank you very much, Mr. McCall.
Our final witness on the panel is Mr. Michael Menzies, who
appears here today on behalf of the Independent Community
Bankers of America. He is President and CEO of the Easton Bank
of Easton, Maryland, has his bachelor's degree from Randolph
Macon College, master's degree from Baltimore Loyola College,
and moved to the Darden School of Banking at UVA.
Thank you for joining us, Mr. Menzies, and the floor is
yours.
STATEMENT OF R. MICHAEL MENZIES, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, EASTON BANK AND TRUST COMPANY, EASTON, MARYLAND, ON
BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA
Mr. Menzies. Mr. Chairman, thank you. It is an honor to be
in front of you today and to testify on behalf of the ICBA, the
Independent Community Bankers of America, and I am especially
honored that you waited for my testimony.
Mr. Chairman, ICBA strongly supports S. 256 and appreciates
the very hard work of this Committee over the past 8 years. We
know you have truly been into this subject.
Before sharing thoughts about the environment of personal
bankruptcy and its impact on our communities, allow me to offer
a brief illustration of the loan risk-taking process. Community
banks are in the risk-taking business, and the reward for that
risk, if properly underwritten, is earnings for all concerned.
The customer benefits through financial health. The healthier
the customer, the healthier the community, the healthier the
bank, the healthier our overall economy, the healthier our tax
base. The underwriting of consumer loan risk is a fundamental
driver to all local economies.
Successful consumer lending depends on numbers. Banks must
make many loans to as many people as possible to diversify
exposure and to spread the risk. In some respects, it is almost
like health insurance without the impediments of health
insurance. Consumer lending involves spreading risk over an
entire portfolio. Many small loans are made, so profits from
any one loan are small and profits come through volume. At the
same time losses can be significant relative to unit
profitability. This is especially true when the entire
principal of a loan is lost all at once. Let me review the
simplified consumer loan portfolio example that is attached to
my testimony.
The example consists of two revolving loan portfolios, each
containing 100 loans of $1,000 apiece and each paid off within
a year. One portfolio has an interest rate of 5 percent, the
other portfolio an interest rate of 18 percent.
If one loan in the 5-percent portfolio were to immediately
default, regardless of reason, it would take the interest
payments of 41 performing loans to compensate for that default.
To put it another way, if you are earning 5 percent on a loan
and you lose 100 percent of the principal balance of that loan,
it takes 20 years of the same loan of interest earnings to
offset the loss of that one loan.
If one loan in the 18-percent portfolio defaults, it takes
the interest from 12 performing loans to compensate for that
default. Obviously, if a lender is experiencing greater losses
than anticipated, they either have to charge more or be more
selective in their underwriting process.
There is not much more to underwriting than that, but it is
difficult and lenders expend a tremendous amount of effort and
energy to try to get it right. A lender that provides the
greatest number of borrowers with the best rate while keeping
defaults to a minimum is going to have the most reward and the
most customers. Anything that enhances this process has obvious
consumer benefits. Anything that detracts has obvious
downsides. Again, we either have to raise rates or tighten loan
standards.
ICBA believes that bankruptcy is an appropriate solution
for individuals who have legitimate reasons to walk away from
their obligations. ICBA recognizes that all other borrowers pay
for these losses created by those who are discharged from their
debts. Sometimes these other borrowers are our children who
inherit the impact of the cost of our credit system. This tax
on the majority of individual borrowers should be mitigated
wherever possible. Healthy consumer borrowers benefit
communities, their economies, and our overall tax base.
Economic disincentives such as unnecessary bankruptcies or the
unnecessary discharge of debt hinders the wealth formation
process that is necessary for social progress.
Unbalanced bankruptcy policies have significant social
implications, whether manifested in the casual avoidance of
domestic support obligations, State taxes, or debts owed to
lenders. A balanced policy will recognize that there are
situations where it is appropriate to relieve individuals of
all or part of their financial responsibilities, but at the
same time will encourage Americans to take ownership of their
personal financial health.
ICBA would like again to express our strong support for S.
256 and appreciate the efforts of this Committee to provide a
modern legal framework for bankruptcy. We hope that after 8
years of extensive consideration the Committee will move
expeditiously to enact this much needed legislation. On behalf
of community bankers, we stand ready to do everything possible
to help you with this effort
Thank you, Mr. Chairman.
[The prepared statement of Mr. Menzies appears as a
submission for the record.]
Chairman Specter. Thank you very much, Mr. Menzies.
On behalf of Senator Grassley, we will introduce his
statement into the record in full, and Senator Grassley would
also like to submit the testimony of the National Association
of Federal Credit Unions and a letter from the Department of
Justice, all of which will be made a part of the record,
without objection.
As I had commented earlier, I am going to be due on the
floor on the class action bill at 11:30, so I am going to defer
my round of questioning and absent myself for just a few
minutes. I think we have time for 7-minute rounds. There is a
vote scheduled at 12:30, so we will have at least time for one
round, and if there are other questions, we will give the
members full opportunity to question as they see fit on into
the afternoon.
At this time I will yield to my colleague, Senator
Sessions.
Senator Sessions. Thank you, Mr. Chairman. I appreciate
your leadership on this issue. I know I have inherited Senator
Grassley's Court Subcommittee, and he is the leader on this
bill and has worked on it I guess for 8 years. It has been a
big part of what I have done since I have been in the Senate.
Former Chairman Hatch has worked on it very, very hard, and we
have got a lot of bipartisan support, really.
I think there is a real consensus that we can do better,
that we as a Congress ought to evaluate this Federal court
system. This is not like a State court system. It is a Federal
system, and we have the responsibility to examine what is
happening with it, see if it is working, and where it is not
working to fix it.
We have run into a lot of examples of abuses. Mr. Bennett,
I think we had a little fuss over the housing matter last time,
and rentals, but I think we really came up with compromise
language that made a big step forward, because that bankruptcy
law is clearly being abused when it comes to tenants whose
leases expire, they have no right to be in there, and it just
creates a nightmare.
Mr. Bennett. Thank you so much.
Senator Sessions. Mr. Strauss, there is no doubt--I am so
glad you made that passionately clear--that this legislation
clearly benefits child support and those who are receiving
alimony from the courts. That is something that has been
handicapped by the bankruptcy laws, and we know we can do
better about it. I personally believe and I think most
Americans believe that if someone is making more than median
income and can pay back a part of the debts that they owe, why
don't they do so?
And I believe, Mr. Zywicki, you indicate that 80 percent of
the filers in bankruptcy court are below median income. Is that
correct?
Mr. Zywicki. That is correct, Senator.
Senator Sessions. And so the only people that would be
impacted by the means test would be those who make median
income or above, and many of those have substantial incomes. Is
that correct?
Mr. Zywicki. That is correct, Senator, and they have
substantial expenses that they can deduct, such as medical
expenses, for instance.
Senator Sessions. Well, explain that. I know there has been
some concern that somehow the medical expenses invalidate the
bankruptcy reform bill. I will just put it that way. I see Dr.
Tom Coburn here. Earlier he had to leave. But maybe someday if
you can afford to pay the doctor or your hospital, maybe you
should pay them. It is not as if they are evil entities, your
physician or your hospital. If a person has a high income, they
have got a low medical bill, maybe they can pay all or part of
that. If they are below median income, they would not be
required to pay it in any case, I assume.
But would you comment on the discussion about health care.
Mr. Zywicki. Thank you, Senator. With respect to your
specific observations, those are exactly right. First, the way
the means test works, you first have to determine whether a
debtor is above the median income adjusted for family size. If
not, then the means test completely does not apply.
If they are above the median income, you then move to the
second step, which is to determine--to establish a budget for
the debtor to live on and several categories of expenses that
are permissible and are subtracted right off the top before you
determine these sorts of things, one of which is specifically
medical expenses. There is a specific provision in the
legislation on the means test that specifically makes a special
allowance for health insurance and health care expenses and for
caring for other health care expenses that arise in the family.
Senator Sessions. In other words, if you moved into Chapter
13 and the court evaluates how much money you should pay toward
the debts you lawfully incurred before you filed bankruptcy,
they would consider what your required health care payments
would be before they would order you to pay anything.
Mr. Zywicki. That is absolutely correct, Senator.
Senator Sessions. If they are really high, you may not be
required to pay anything because the court would give you
credit, so to speak, for those extraordinary health care
expenses.
Mr. Zywicki. That is exactly right, Senator, yes.
Senator Sessions. Well, I think that is important.
Mr. Beine, you represent credit unions. You have members.
You are a non-profit. But you heard Mr. Menzies suggest that
the problem of raising costs for people who balance their
checkbook and pay their debts every month when people
manipulate the bankruptcy system. And you cited a young couple
that clearly abused the system. Your credit union took the hit
for that, as I understand it. Does that, in effect, cause you
to raise rates on people who do not abuse the system?
Mr. Beine. In the end, yes. We have implemented risk-based
lending, and we apply rates based on people's credit history.
And individuals who are in that category end up paying more
because their fellow consumers have walked away from something.
We all pay for that.
Senator Sessions. There is no free lunch on it.
Mr. Beine. There is no free lunch.
Senator Sessions. [Presiding.] I will just conclude by
noting that this bill has really had a lot of intensive
interest. It has been passed four times by both Houses of
Congress. That is stunning, really, four times by both Houses.
It had broad bipartisan support. In 1998, we passed a bill in
the Senate 97-1. March 15th it was 83-15. I think the need has
continued to grow. The problems with abuses continue to grow. I
believe the means test is a legitimate factor that will involve
only a small percentage of people who file bankruptcy, and
those would have the chance to show that they cannot pay back
anything if they have extraordinary expenses that the court
could take into consideration.
We have made some progress, I think, on cram-down. We have
made some progress on rental difficulties. We have made
progress on quite a number of issues that have been hotly
contested and debated. And generally we have ended up with real
strong support across the aisle for the final bill.
So I would now recognize our next member, which would be
Senator Kennedy. I will recognize you on behalf of the
Chairman.
Senator Kennedy. Thank you very much, Mr. Chairman.
I would ask, Professor Warren, would you care to comment on
what Professor Zywicki mentioned in terms of the bills in
medicine.
Ms. Warren. Yes, Senator, I would be glad to. Indeed, I
hope that what this colloquy means is that this Committee will
consider adopting a safe harbor so that no family that has an
income below the median will be required to go through all of
the steps and all of the expenses in the means test that are
currently imposed even when it is clear from the first minute
of the petition's being filed that this person would not be
someone who should be--who would ultimately be forced to pay
under the means test.
As I recall, people have asked for that over and over, and
it is a reminder that it is costs that matter to families whose
median income is $25,000. Being forced to file the papers, go
through and run the risk of the traps and tricks are a real
problem.
I also hope that what this means is that there will be an
amendment that will say that every family, when going through
the means test, whether they currently have health insurance or
not, will be permitted an allowance for health insurance. If
that is the case, it would go a long way toward ameliorating
some of these problems. As I understand it, it does not
currently do that.
But I would also point out, Senator, as I said before, this
is one of 217 sections in the bill, the means test. Every other
section in this bill applies regardless of income and
regardless of the reason that you file for bankruptcy. I cannot
fathom why a family that has high medical bills would not be
permitted to file a Chapter 13 repayment plan in a last chance
to try to save their homes because they could not come up with
more money for car lenders, which is what is currently required
under the bill, or more money for appliance lenders.
This bill is grinding everyone through, and everyone has
gotten their nose in for a piece here and a piece there. The
only ones who are not represented in this conversation are the
3.9 million Americans every year who are affected by this bill,
the ones who file, the ones who are the children and other
dependents of those who file.
Senator Kennedy. Yesterday you appeared at a press
conference where they had three individuals who were all
workers and who had been devastated by the health bills. And in
that conference, you referenced a rather detailed study that
you had done about what these people had actually gone through
in order to avoid bankruptcy. Could you summarize that for us,
please?
Ms. Warren. Yes, Senator Kennedy. If we could have the
chart?
We asked families, we did both surveys when they first
filed for bankruptcy, written surveys. We examined their court
records, and then we did extended telephone interviews with
these families after bankruptcy.
These families told us that before they filed for
bankruptcy--these were the medical bankrupts, the people who
filed in the aftermath of a serious medical problem, a million
adults every year. Sixty-one percent did not receive needed
medical care because they didn't have the money. They were
spending their money trying to pay other bills.
Fifty percent did not have prescriptions filled that their
doctors had given to them because they did not have the money
and they were trying to find a way to make ends meet.
Thirty percent had worked so hard at not paying the
electric bill, the gas bill, in order to try to meet their
medical obligations that they suffered utility shut-offs; that
is, they had the power turned off, they lost their telephones.
And among a group of people who are middle class, people
who went to college, got decent jobs, played by the rules, got
health insurance, as they spun out of financial control, in
trouble, 22 percent went without food because they had not
enough money.
And the last group that we identified here, 7 percent of
the households who filed for bankruptcy moved an elderly parent
to cheaper facilities in order to try to be able to meet their
bills.
Professor Zywicki is certain that these people have abused
the system. All I know to do is to let them speak for
themselves, to bring their stories here. We have done the
research. These families have tried their best. Bankruptcy was
not their first option. It was not their second option. It was
not their tenth option.
They told us stories about crying at the hearing, military
people who had to be excused from the hearing because they
cried so hard they could not talk any longer.
There are people who abuse the system. There is no doubt
about it. But that is not what is happening to most of the
people who file for bankruptcy.
Senator Kennedy. Why doesn't the means test protect those?
Ms. Warren. Senator, the means test just forces every
single family, regardless of income, regardless of the reason
that they filed for bankruptcy, to file new papers, to run new
trips, to run new traps, ways to get them forced out of the
system. It increases the cost for the attorney. It forces every
attorney to take on new liability responsibilities, and that
drives up filing fees for these families. There are 100 ways to
squeeze the people among us who have been most desperately hurt
by a broken health care system.
Senator Kennedy. My time is up.
Senator Sessions. Professor Zywicki, I think I will give
you a chance to briefly respond to her mention of your name.
You did not suggest that everybody was abusing, did you? Or
what percentage did you suggest may be abusing the system?
Mr. Zywicki. Absolutely not, Senator. First, the FBI
estimate is that roughly 10 percent of bankruptcy petitions
contain some sort of fraud. Empirical evidence tends to suggest
that 7 to 10 percent of bankruptcy filers would qualify for the
means test. And if I could add one final footnote, I would
refer--
Senator Sessions. Repeat that now.
Mr. Zywicki. Roughly 7 to 10 percent of the highest-income
filers would be the ones who are affected by the means test.
Senator Sessions. It would be less--
Senator Biden. Could I ask for clarification? Only 7 to 10
percent?
Mr. Zywicki. Yes, Senator.
Senator Biden. Would be affected by this, is that what you
are saying?
Mr. Zywicki. The estimates are that roughly 7 to 10 percent
of bankruptcy filers today would qualify for the means test and
file Chapter 13 rather than Chapter 7. However, because the
means test captures and targets the highest-income debtors with
the greatest repayment capacity in the system, the people who
are making $80,000, $90,000, $100,000, $120,000 a year, it is
estimated that recoveries from those debtors would be roughly--
that they could pay roughly 60 to 70 percent of their unsecured
debt in bankruptcy. And I think there are two notes to be made
about as it relates to this.
First, with respect to the means test, the allowances, as I
said, are subtracted. I would also refer the Committee to
Section 102(i), which is labeled special allowance for health
insurance, and I believe Professor Warren said that there
should be a special carve-out for health insurance payments.
Section 102(i) is exactly that.
Finally, I think that it is worth considering and I think
that it is worth--the idea of whether or not we truly believe
that medical providers should be treated as second-class
citizens in bankruptcy, that just because a doctor delivers a
baby or your neighborhood drug store sells you prescription
drugs, the idea that they should not be entitled to the benefit
of the means test for people who could repay their debts I
think is troubling.
Senator Sessions. Well, thank you. We do not want to get
too far off base. But I think Senator Biden and maybe others
would like to ask discreetly, just briefly. I had been using
the figure that only about 20 percent of the people would
qualify for the means test. Where do you get the numbers that
now say 7?
Mr. Zywicki. Certainly, Senator. I apologize for the
ambiguity. The means test has two steps. At the first step,
which is do you make above the median income, 80 percent of
debtors make below the median income. That means 20 percent of
filers move on to the second step. The estimates are that at
the second step, you would determine that a number of the
people who make above the median income would not have
substantial repayment capacity after you subtract all of the
allowances that are allowed by the means test. So after you
subtract medical expenses, that sort of thing--
Senator Sessions. Well, we better get back to regular
order.
Mr. Zywicki. And so roughly 10 percent are left over after
you jump both of those hurdles.
Senator Sessions. Senator Cornyn?
Senator Cornyn. Thank you, Mr. Chairman.
I want to express my appreciation to Chairman Specter, but
also to Senator Biden and Senator Grassley for all the hard
work they have done on this, long before people like me even
came to the Senate. And I know this has been long in the
process.
I support bankruptcy reform because I think we need to
restore a greater sense of personal responsibility to our
financial system and prevent the abuses of the bankruptcy law
that we have witnessed in recent years. Bankruptcy relief
should be available to those who are unable to pay, not to
those who are simply unwilling to pay.
I would like to focus my comments and questions, though, on
some new legislation that I filed earlier this week called the
Fairness in Bankruptcy Litigation Act of 2005. And just by way
of background for my colleagues, this arose out of an
experience that I had in a previous life as Attorney General of
Texas during the Enron bankruptcy.
Of course, Enron was headquartered in Houston, Texas, but
lo and behold, its bankruptcy was handled by a bankruptcy court
in New York, where apparently they had had a subsidiary with 57
employees, notwithstanding the fact that 7,500 employees were
located in Houston, Texas, along with many of the creditors and
witnesses and others, certainly the workers and the pensioners
whose lives were directly affected by that bankruptcy.
The purpose of the bill that I filed was to try to prevent
judge-shopping in bankruptcy. We know that sometimes the most
important determination made as far as the outcome of a lawsuit
can be the court in which that case is heard. It is just human
nature, certainly, that the party who benefits, here the
debtor, might try and find the most favorable forum. We
understand that being part of human nature. But it is our job
to try to make sure the playing field is as level as possible
and that nobody gets an unfair advantage going in.
But I was very concerned because I saw the abuse from my
perspective of the venue laws in bankruptcy in the Enron case
where people in my State, my constituents were denied the
opportunity for a forum that was close to home where they could
actually have their claims heard and the case decided.
As I have gotten into this, I have learned that there are a
lot of people concerned about the same problem. For example,
there is a new book written by Professor Lopucki of UCLA, I
believe, called ``Courting Failure: How Competition for Big
Cases Is Corrupting Bankruptcy Court.'' And I know that
Professor Warren, who we have talked to about this, shares some
of those concerns. Professor J.L. Westbrook of the University
of Texas Law School and a lot of other people ranging from--
well, really on both sides of the aisle; my successor, Greg
Abbott, as Texas Attorney General, but also former
Massachusetts Attorney General Scott Harshbarger, a Democrat,
who I guess is still head of Common Cause, or maybe just
immediate past.
So this is a concern shared by an awful lot of people, and
I just want to ask--first I want to ask Professor Warren, first
to express my appreciation for your consulting with my staff on
this issue, but also then maybe to ask Professor Zywicki what
your comments might be on judge-shopping in bankruptcy and the
concerns that you may have. First, Professor Warren, would you
please respond?
Ms. Warren. Yes, Senator. Thank you very much. It has been
my honor to work with your office on this important issue. I do
not think this is an issue of Republicans or Democrats, an
issue of liberals or conservatives. It is a good government
issue. And as I see it, the background system makes a promise,
and that is that there will be full and fair access for
everyone, every creditor, everyone who has been injured or
affected by the process.
In the case of large corporations that can leave their home
venue--Enron, who can leave Houston, Texas, where its
employees, where its pensioners, where its trade creditors
reside--and escape the obligation to make the process open to
the thousands of people who are directly affected by the
bankruptcy, that affects the bankruptcy system overall. A fair
bankruptcy system is one that retains access for the employees,
for the pensioners, for the small creditors, and that means
those cases need to stay home, not go to a distant location
where they think they may get a better deal.
Senator Cornyn. Well, I have been impressed by the range of
people that are concerned about this, everyone from the Enron
employees committee, which has endorsed this particular bill,
the National Federation of Business, and it is really quite a
broad range of people. But is it your impression, Professor
Zywicki, that creditors and employees, pensioners and others
who are forced to litigate a bankruptcy in a far-flung forum,
that some of them just simply give up or perhaps the costs of
litigating in that far-off forum simply exceed the value of
their claim and so ultimately it benefits the debtor rather
than the creditor, someone with a valid claim?
Mr. Zywicki. Senator Cornyn, that is probably the case, but
I have not studied this particular issue closely enough to
render an opinion on your piece of legislation.
Senator Cornyn. I appreciate that answer, and let me
clarify. I am not asking you to endorse the legislation now,
anyway. I would appreciate it if you would look at it and tell
us what you think.
Mr. Zywicki. Certainly.
Senator Cornyn. But is it a widely recognized problem not
just among legal scholars, academia, but also practicing
bankruptcy lawyers, as well as debtors, creditors and others
that forum-shopping, judge-shopping, if I may say, is a cancer
on our bankruptcy system?
Mr. Zywicki. Senator Cornyn, I think there is no doubt that
it substantially increases the cost to creditors and that there
are a number of people, including Professor LoPucki and others,
who have expressed concern for quite some time about this
problem. There are others who have not seen it as quite a
problem, but certainly it is the case that it makes it more
difficult for creditors, employees and others to vindicate
their rights in a distant forum than it would be otherwise.
Senator Cornyn. Mr. Chairman, before I relinquish the
floor, let me just ask unanimous consent that letters of
endorsement that we have received from a variety of scholars,
practitioners and people who are vitally concerned with this
issue be made part of the record.
Senator Sessions. They will be made a part of the record.
Senator Cornyn. Thank you very much.
Senator Sessions. I believe Senator Biden is next. Without
objection, we will go to Senator Biden.
Senator Biden. Thank you very much. I will refrain from
what I assure my friend from Texas will be an incredibly long
fight over this amendment. I find the language that is used
kind of fascinating--escape from the obligation to be open.
Is the colleague suggesting that the Delaware chancery
court is not open, is somehow an unfair court? I find it
outrageous such a statement. Maybe you can tell me. Is it not a
competent court? Is it not an open court?
Ms. Warren. Are you asking me, Senator?
Senator Biden. Well, yes. You are the one that said
``escape the obligation of making the process open.''
Ms. Warren. Actually, Senator, bankruptcy cases are not
heard in Delaware chancery court.
Senator Biden. Excuse me, in Delaware, in Delaware.
Bankruptcy courts in Delaware are not open?
Ms. Warren. They are not open to employees of companies
like Enron who cannot afford--
Senator Biden. In what sense do you mean open?
Ms. Warren. Excuse me, Senator?
Senator Biden. In what sense do you mean open? The record
is not open or they can't conveniently get there?
Ms. Warren. Employees of companies like Enron literally
cannot go to Delaware and hire local counsel, which the
Delaware bankruptcy court requires of them before they can make
an appearance, and that effectively cuts thousands of small
employees, pensioners and local trade creditors out of the
bankruptcy process. If they can't afford it, they are not
there.
Senator Biden. Can they afford it in the States in which
they reside?
Ms. Warren. In the States that they reside in, they have
local counsel, and local counsel can go down the block and
appear on their behalf.
Senator Biden. No, but can they afford it in those States?
Ms. Warren. Yes, and they do and they appear.
Senator Biden. Well, I only have seven minutes and I should
talk about the Bankruptcy Act that is before us because this is
a proposed additional law and there will be plenty of time to
debate it.
Let me ask a couple of questions here. By the way, this did
start 8 years ago, this legislation, but there have been
numerous changes to it in 8 years. Eight years ago, the person
who stopped its passage was me because it did not have a safe
harbor in it, it did not put women and children at the front of
the line, it did not do a whole range of things that
subsequently have occurred. We relitigated this 2 years ago,
not in this Committee, but on the floor of the Senate, in
conference, and we did it in great detail.
I would ask unanimous consent that a statement that I have,
Mr. Chairman, be entered for the record, if I may, at this
point.
Senator Sessions. Without objection.
[The prepared statement of Senator Biden appears as a
submission for the record.]
Senator Biden. I think one of the very important amendments
that should be added to this legislation is the Schumer
amendment, which, in fact, was part of the legislation, was
part of an agreement that was crafted between the House and the
Senate, and was part of what passed out of here as part of the
bill overwhelmingly. The numbers that the Chairman cited--87,
88, 89 votes, whatever the numbers were the several times it
was passed out--contain the Schumer amendment.
I am confused about one thing here. There is no question,
coming from a family that has been, unfortunately, an excessive
consumer of medical health care expenses, how someone can be
absolutely crippled by these medical expenses. There is no
question about that, in my view.
What I have difficulty trying to figure out is should the
irresponsibility of the Federal Government and the State
government be thrust upon the creditor. Let me move away from
health care for just a moment. There are an awful lot of people
in the National Guard right now who are being sent overseas.
They have jobs where their combined income of the husband and
wife may be $80, $90,000 a year, but the male or female who is
sent overseas, called up by the National Guard or the Reserves,
who maybe was making $60,000 a year is now, based on their
rank, making $24,000 a year. They have the same car payments,
they have the same house payments, they have the same tuition
payments, they have the same bills.
My question is if they cannot pay those bills because of an
extended tour, which many are going through, and they have to
declare bankruptcy, should the creditors who have lent money to
them based upon their initial income--should they be the ones
that pay the cost, in effect, of their inability to pay, or is
that a larger responsibility of the public at large?
That is what confuses me about your arguments, Professor
Warren. They are very compelling, they are literally true, but
in a sense they beg the question. It seems to me that the
Federal Government should be seeing to it that every American
is put in a position where their health care costs are such
that if, in fact, they have these extraordinary expenses, it is
the social responsibility of the community to help them, as
opposed to the social responsibility of the particular doctor
or the particular bank that lent the money or the particular
creditor who has put forward money, assuming there was any
ability to pay.
Just a philosophic question: should anyone who has
extraordinary medical expenses that unquestionably exist--
should they be able to say, when there is an inability to pay
all other bills, whatever they are--I mean, if they were going
to pay those medical expenses, they wouldn't be able to pay
another bill, from the gas company to whoever. Is it a societal
requirement we should write into the Bankruptcy Code that says
that the gas company should subsidize the payment of those
medical bills, that the local drugstore should subsidize the
payment of those medical bills?
Maybe we should. I am being deadly earnest here, because
you make a very compelling and mildly demagogic argument that
talks about what is true. All of these things are true, and so
my question is, from a philosophic standpoint, is it the
responsibility of the gas company and the drugstore and whoever
else you named to make sure that these people do not have to
make these hard choices, or is that a responsibility of the
Government or the people at large? That is my only question I
will ask, and I am asking you, Professor.
Ms. Warren. Senator, I think you have put your finger on
the heart of what the bankruptcy bill--or bankruptcy, in
general, not this bill--
Senator Biden. No. Forget bankruptcy. I am asking a larger
question. Forget about bankruptcy.
Ms. Warren. But that is what I mean. It is the question of
what role bankruptcy plays--
Senator Biden. That is not my question. I would like you to
answer my question. What role is there under what you would
consider to be an appropriate form of Government where we
legislate? Do we say that people who, in good faith, provide a
service for an individual that the individual is later unable
to meet because of a legitimately horrific and extraordinary
dilemma that was an act of God--who should be responsible for
taking them out from under that crushing burden?
Should it be the automobile company who lent the money to
purchase a car, the drugstore that provided a service and, in
effect, lent the money because there is a bill, the drug bill,
the utility company, the guy who has the lawn service company?
Whose responsibility is it? That is really the question,
because if you buy into this argument, which is very
compelling, in my view, you are saying the creditors should be
the ones to buy into that philosophically, enshrined in a piece
of legislation obligation. That is my question.
Ms. Warren. Senator, I think you are exactly right, and
that is that we need fewer families to need to turn to the
bankruptcy system. We have a broken health care finance system
in the United States, and all I can do is point out that it is
bankrupting families.
Senator Biden. Absolutely right.
Ms. Warren. Until we fix the broken health care finance
system, those families have to turn somewhere and that means
now they turn as a last-ditch effort to the bankruptcy courts.
Senator Biden. And that means they turn to asking the
people that they borrowed money from to pay for their health
care costs, right?
Ms. Warren. Senator, the costs--
Senator Biden. Isn't that literally correct?
Ms. Warren. It is literally correct that the costs of a
broken health care system are borne throughout the economy.
Senator Biden. We are asking--and I may be ready to do
this. We are going to ask the gas company, the drugstore, the
automobile dealer to pay for the broken system instead of
having the nerve to come and say it is a moral obligation of a
nation to pay for that broken system.
Why should it not be someone who sits there, living in a $2
million home, who lent no money to that person--why do they not
have an obligation to pay for that instead of the guy who owns
the drugstore at the corner pay for that? That is my only
point. Let's just be honest about what we are doing here. It
may make sense.
I would like to put in the record a Forbes article, and I
would like to ask you whether it is an accurate quote,
Professor. They quote you in an article entitled ``Everybody
Knows It's Credit'' in Forbes magazine saying, quote, ``The
lobbyists are going to be the only ones who really profit,
scoffs Elizabeth Warren, Harvard Law professor.'' I think you
are dead right because as you point out in here, we have to
find new bogeymen. The people who aren't going to benefit under
this are the credit card companies, as you point out in here.
I submit this for the record, if I may.
Chairman Specter. Without objection.
Senator Biden. I would invite any response in writing from
anyone who would like to respond to the article. We will make
it available to you.
But I just think we should be honest about this thing.
Making the gas company--and I don't like the gas company. I
don't like many companies, but at any rate, we just ought to
acknowledge what we are doing here when we make these kinds of
assertions.
Chairman Specter. Thank you, Senator Biden.
Senator Kennedy. Can Professor Warren just respond to the
quote? Do you want to just respond to the quote?
Ms. Warren. I think the Senator makes an entirely fair
point about externalizing the costs and I would add only one
caveat to it. Not only does this bill treat all debtors alike.
In many ways, it treats all creditors alike. The gas company
doesn't have the capacity to change its pricing to reflect
these risks, or has very limited capacity. But I remind you of
what the credit card companies have already--
Senator Biden. Should it? That applies they should.
Ms. Warren. No.
Senator Biden. Should the gas company be required to change
their prices to reflect these--
Ms. Warren. No. Of course, they shouldn't, Senator.
Senator Biden. The way you stated it, you said they don't
have the capacity. The implication is maybe they should have
that capacity.
Ms. Warren. No. My point is the losses will go to some
creditors who cannot reflect this in their prices. But look at
the cases cited in my testimony where credit card companies--I
have a specific case, In re McCarthy, but nothing unusual about
it, a woman who borrowed $2,200. She paid back $2,100 over the
2 years preceding bankruptcy, and at the end of that period of
time she was told she still owed $2,600.
With fees and interest, I submit, Senator, that there are
many in the credit industry right now who are getting their
bankruptcies prepaid; that is, they have squeezed enough out of
these families in interest and fees and payments that never
paid down principle.
Senator Biden. Maybe we should talk about usury rates,
then. Maybe that is what we should be talking about, not
bankruptcy.
Ms. Warren. Senator, I will be the first. Invite me.
Senator Biden. I know you will, but let's call a spade a
spade. Your problem with credit card companies is usury rates
from your position. It is not about the bankruptcy bill.
Ms. Warren. But, Senator, if you are not going to fix that
problem, you can't take away the last shred or protection from
these families.
Senator Biden. I got it, okay. You are very good,
Professor.
[Laughter.]
Chairman Specter. Thank you very much, Senator Biden.
I am advised that Senator Kennedy has questioned, so we
have four more Senators to question. The vote is scheduled at
12:30, which is 30 minutes from now, so we have time for 7-
minute rounds if we observe the limits. I will take my seven
minutes now.
Senator Biden. May I be excused, Mr. Chairman? I am going
to another tsunami hearing.
Chairman Specter. We will miss you.
Professor Warren, you testified in the opening comments
about new problems such as the Enron executive problem. What
would your suggestion be as to how the bill ought to be
modified to deal with that issue?
Ms. Warren. Senator, I think that Senator Durbin had a
series of amendments proposed, I believe it has been 2 years
ago now, that tried to address that directly, the notion that
the bankruptcy courts need to be much more scrupulous about
executive compensation and about insiders who take money out
during the course of a Chapter 11, particularly when the
consequence is to leave nothing for their employees, their
pensioners, their health care plans. I think there is actually
already drafted potential legislation here, sir.
Chairman Specter. Mr. Strauss, you have emphasized the
support orders as being a priority item. Would you have any
suggestions as to how this bill might be made stronger to
provide for support?
I think there is a decided public policy in favor of seeing
to it that those who owe support for children pay it and don't
leave children in the hands of the mothers, absconding. What
suggestions, if any, would you have to make the bill stronger
on that important item?
Mr. Strauss. I had actually in the last go-around suggested
another exception to the automatic stay. The Federal Government
requires that when a debtor is not paying support, his passport
be taken. That was not included in this, so I would--it is a
minor addition, but I think it would be helpful in enforcing
child support obligations to remove from the effects of the
automatic stay the right of the Government to withhold
passports. Other ones are so technical it would just really
take me too long to explain.
Chairman Specter. Mr. Bennett, I note that you are the
founder of the Minority Apartment Owners Association. Do you
think that this bankruptcy bill fairly treats minorities, or
would you have any suggestions on that line?
Mr. Bennett. Well, as the study reports, the majority of
small properties are owned by individuals, some 47 percent. So
it really adversely affects not only the minorities, but the
smaller property owners. Whereas most people have a belief that
all apartments are owned by big conglomerates and REETs and
things like that, the study shows that 47 percent are owned by
individuals just like myself. So we certainly are adversely
affected by bankruptcies.
And not only that, but I pointed out in my testimony that
we have cases where we have multiple bankruptcy filings where
the husband will file and then the wife will file, and then we
turn around and we have an 18-year-old son on their file. We
have even had to request in some cases that the judge put on
their order ``no additional bankruptcy filing.'' So it is a
real concern.
Chairman Specter. Mr. McCall, bankruptcies have certainly
taken a very heavy toll on the economy and a very heavy toll on
loss of jobs. The steel industry has been beset by quite a
number of problems. The imports--we have done a little good on
that. United States Steel Corporation has made profits in the
last year and I think we are doing better, although more
recently we have had a surge.
I would be interested in your thinking on the asbestos
problem which has caused some 74 bankruptcies and the
tremendous loss of jobs in America. To what extent has that
impacted on the interests of the labor movement?
Mr. McCall. Certainly, it is a very similar situation and
related to the health care issues that we were talking about
earlier. There comes a point in time where companies by their
creditors are loaned money, and whether or not they are doing
responsible things with that money, whether or not they are
investing that money responsibly, whether or not there are
overpayments to executives, and even then once bankruptcy is
initiated, whether there is a planned reorganization and the
company reemerges paying part of that debt or whether they
spend a vast majority of that money on professional
professionals in bankruptcy, or whether they spend a great deal
of money on, as I said before, KERPs and incentive plans for
executives to downsize and downsize and downsize, leaving no
jobs available, leaving no health care for the workers. So I
think it is similar and related to the health care issue.
There are probably other issues that enter into the
Bankruptcy Code and issues of responsibility and fairness and
justice and equity for all of the stakeholders in a company
that is entering bankruptcy.
Chairman Specter. Professor Zywicki, would you be able to
expand on what Ms. Vullo testified? She had to leave before the
question-and-answer session. She testified, as you heard, about
going through a large series of efforts to enforce judgments.
Does your expertise extend to that field to give some guidance
to the Committee as to what we might do to avoid the kind of a
problem she articulated?
Mr. Zywicki. Senator, I have not in the context of
preparing for today's hearing studied the specific language
which has been proposed in the past because it is not part of
this bill. What she reflects is, of course, similar to what all
creditors go through in the current bankruptcy system, which is
the difficulty of trying to collect debts. With respect to the
particular amendment that she has proposed, I would have to
study the language more specifically before I could render a
full opinion on it.
Chairman Specter. Well, I am sorry she wasn't able to stay
longer. I intend to telephone her to get some more
specification as to what she had to say. It sounded like a long
chase. We have had the inability to complete this bill because
of the provisions relating to collection of judgments and
avoidance through bankruptcy by those who have judgments
against them under the abortion laws. So we will be pursuing
that.
Well, I have four seconds left and I will terminate on time
and yield now to Senator Feinstein.
Senator Feinstein. Thanks very much, Mr. Chairman. I
neglected to introduce the two participants from California,
and so I would like to acknowledge Mr. Bennett and Mr. Strauss'
participation. It is a long way from California, as they say,
so we are delighted to have your testimony today. Thank you so
much.
I think Dr. Warren's op ed piece that says that almost 50
percent of bankruptcy petitioners have health care problems is
really something that we need to take into consideration. In
the last Congress, the 107th Congress, I proposed an extreme
hardship amendment, and essentially what it did was provide a
rebuttable presumption.
I would like to just read to the panel part of this because
if you take one of Mr. McCall's, for example, union members,
and because someone close to me is going through this right
now, just to get a cancer diagnosis can run over $100,000 in
tests. It is possible to have a health problem and you are
never able to repay the debt. Therefore, the question comes
whether this kind of debtor really should be pushed into
Chapter 13 or remain in Chapter 7. So we proposed this last
time. It went down, but I would like to work on it for the
markup for this Committee, and let me read it to you.
``In addition to the other grounds by which presumption of
abuse may be rebutted under this subparagraph, the debtor may
rebut the presumption by showing that the debtor's financial
problems are the result of extreme hardship and extraordinary
circumstances beyond the control or reasonable expectation of
the debtor for which the debtor should not be held justly
accountable. If there is another ground by which the
presumption may be rebutted, this clause shall not be construed
to require a finding of abuse if the debtor's financial
troubles arose from circumstances that were either within the
debtor's control or for which the debtor should be held
accountable.''
I don't know whether this is perfect or not, but it seems
to me that to push somebody into Chapter 13 and require that
they repay a debt for which they bear no personal
responsibility and have encountered an extraordinary and
extreme hardship is not something that we should do,
particularly as medical costs go up.
I was told last week that the cost of one use of certain
machines is $3 to $4,000 for diagnosis. Well, if you are on
Social Security or if you are one of Mr. McCall's union members
or if you are the average for my State, there are health care
costs which you can never repay. It is just impossible.
Now, Senator Biden's theory is, well, the Government should
do that. That is not this bill. I don't really want to get into
that, but it seems to me that there are some bona fide
situations in which a debtor facing this kind of unavoidable
and extreme hardship should not be pushed into Chapter 13.
I would like the panel's response.
Ms. Warren. Professor Zywicki, would you like to go first?
Mr. Zywicki. Senator, I understand what you are saying. I
would urge this Committee caution with respect to the premise,
which is with respect to the conclusion that half of
bankruptcies are substantially caused by health care. I have
reviewed the study on which that is based. That number is
substantially larger than any other study that has ever been
done with respect to the relationship. The authors of the study
consider a serious health care problem to be anything more than
$1,000 in health care expenses over some period of time.
Senator Feinstein. But that is not what I am saying. I
mean, I am not talking about a study. I am saying we all know
that health care costs can bankrupt you.
Mr. Zywicki. Absolutely, yes.
Senator Feinstein. The question is whether you have the
possibility in your lifetime of repaying these costs.
Mr. Zywicki. Senator, I believe that it is appropriate that
the same rules should apply to everybody, which is if you can
repay some or all of your debt, whatever it is, whether it is
20 percent, I think that is appropriate. I think, secondly, the
bill as it is written takes account of health care problems,
health care expenses and that sort of thing. So I think that
with respect to the problem we are trying to deal with, the
bill is adequate as it currently stands to deal with the
problem.
Senator Feinstein. Anybody else? Dr. Warren.
Ms. Warren. Thank you, Senator. I think, Senator, you have
put your finger exactly on the key point, and I think, with
respect, Professor Zywicki has given exactly the other side. He
doesn't care what happened to these families or why it
happened. The only question is you put them in, you turn the
crank, and if it is possible to use public dollars to squeeze
some more pennies out of them on behalf of their creditors,
then do it.
I think you ask exactly the right question. If we are to
inject morality into this system, if we are to make the hard
judgments, then it is incumbent on us collectively to ask what
happened. Why did these families get into trouble?
I think you are exactly right. Provide the escape, provide
the safe harbor for the family who did everything right--good
educations, decent jobs, paid for health insurance, got
married, bought houses, aren't the abusers, the people who
really wanted to play by the rules, the people who the last
thing they ever wanted to do was end up in bankruptcy, but who
discovered that in America today one medical diagnosis can take
a solid, hard-working middle-class family and turn them upside
down financially. You are offering them a chance to turn
rightside up again.
Senator Feinstein. Well, I would appreciate it if anyone on
the panel would take a look at the language, at least. I am
going to move something like this in the markup. It may well go
down again, but I would appreciate any input that you could
give to it.
Could I make one other point, and that is on credit cards
and sending these credit cards out to children. One of the
things that I tried to do in another amendment was put a limit
of $2,500 per card for a minor. I would like to have your
comment on that.
Mr. Beine. Number one, we do not send out unsolicited
credit card mailings. And, number two, our limit is $500 for
minors.
Senator Feinstein. Would you repeat that?
Mr. Beine. At our credit union, our limit for minors is
$500. We require the parent's signature. We do not give out
unsolicited--
Senator Feinstein. How about throughout the industry?
Mr. Beine. I cannot speak for the industry overall.
Senator Feinstein. Thank you. That is helpful.
Ms. Warren. Senator, I would just point out that the
industry now refers to minors, those under the age of 18--I was
looking for the exact language, but as a growing market for
them, the last group that isn't already carrying credit cards.
They are a new profit center--children.
Senator Feinstein. I think this is something that we need
to take a look at, Mr. Chairman, and I need certainly to get
updated. But I saw where 8- and 9-year-olds are getting
solicitations with toys through the mail if they pick up a
credit card.
Now, it seems to me that with respect to a minor, there
ought to be some limit on the amount of credit, without a
signature of a parent and a guarantee by the parent to repay
the debt.
Chairman Specter. If they contract with an 8-year-old or a
9-year-old or another minor, it is unenforceable.
Senator Durbin, I believe under the early-bird rule, you
were here early and you are next.
Senator Durbin. Thank you very much, Mr. Chairman, and
thank all the witnesses. Can I make a general observation,
since we don't have any opening statements, about this session
of Congress?
It is curious to me that this is such a high priority, that
this needs to be fast-tracked, that we need to move on this
bill right now and get it out, a 500-page bill. We are going to
have two hours-and-a-half, we are going to discuss it and we
are going to mark it up next week. That is my understanding.
As we look at the witnesses at the table, there are so many
people not there. Where is the credit card industry? I will you
in the back rows. Don't hold up your hands, but you are not at
the table. Yet, you are the big player and the big push behind
this bill for a decade. Ten years, you have been begging for
this bill to preserve credit card debt through bankruptcy. Yet,
you won't come up and testify.
I don't understand that, Mr. Chairman, why the most
important industry behind this bill will not have the courage
to step forward and explain why they want this bill. It tells
us a lot.
I think as you listen to the testimony here from the
witnesses, you come to understand that the face of bankruptcy
is a lot different than the industry describes it. Professor
Warren has told you what she has found. Professor Zywicki, a
visiting professor at my Georgetown Law School, may see it
otherwise. But I happen to believe Professor Warren is closer
to the truth because, Mr. McCall, I know your steel workers and
I know what has happened to them.
I can tell you in the State of Illinois, in southern
Illinois, that we have a coal miner with emphysema, worked his
whole life in the coal mine, did everything right, retired
early because of his illness, and then the Horizon Mining
Company went into bankruptcy and canceled his health care. The
man is hoping that he will get enough health care to live until
he reaches Medicare. If he doesn't, he will be facing
bankruptcy.
I don't think he is morally flawed, Professor Zywicki. I
think he is a man who, because of misfortune, has no other
choice. And I hope that as you acknowledge 7 percent of the
people guilty of fraud and abuse in bankruptcy, if it is that
number, that you will acknowledge that a much greater number
come into bankruptcy under the circumstances Professor Warren
has described, not because they want to, in the hopes that they
don't have to and want to get out of it.
Professor Warren, on that earlier comment about 7 percent
fraud and abuse, would you reflect on that?
Ms. Warren. As I understand this, it does not come out of
any study. It is the FBI's estimate, as I understand it, of how
many people have mistakes in their forms. People make mistakes.
These are people whose median income in the year before filing
is $25,000. These are people for whom two out of three have
lost their jobs. These are people half of whom have had serious
health crises and they don't always get every number right.
There is no doubt about that. Should they? Yes, sir, but to
refer to this as a system that has 7 percent abuse in it--there
is simply no evidence of that.
Senator Durbin. I would just say I think it is nothing
short of an outrage that we are not looking at the corporate
bankruptcies that are stripping away health care retiree
benefits, pension benefits and contract agreements that people
have lived by for a lifetime. We are not even considering that.
We are talking about the victims of that process and how to
make life more difficult for them. That is what this hearing is
about. That is what this bill is about.
Why aren't we talking about that, and why won't we spend 5
minutes talking about health care in America, for goodness
sake, this looming crisis in America that no one will address?
It is hitting businesses and families and individuals, and now
the victims of that crisis that we won't even talk about are
the ones who are going to be disadvantaged again.
Professor Warren, will you try to bring this into a context
that is very important for this conversation? The argument is
that if you are below median income, why are you worried about
this means test? It is not going to affect you. Why is it going
to affect you if you are below median income?
Ms. Warren. Senator, in two principal ways. The first is
there is no safe harbor; that is, you are not exempt from the
forms, the requirements of filing, the tricks, the traps, the
deadlines, the increased attorneys' fees in order to have
someone tell what they could tell on the very first day, and
that is you are not part of the means test.
If there were a safe harbor for the 80 percent of the
families for whom one sheet of paper tells you they don't
belong in the means test--if they were safe harbored and taken
out, we would be having a very different conversation. That is
part one.
But I want to say about part two it is only one section in
the bill. This bill changes Chapter 13. It changes the number
of places where credit card companies will get the right to
threaten to object to someone's discharge, which means more
often that those people will agree to pay their debts,
notwithstanding bankruptcy.
There is one cut after another, provision after provision.
And on whom does it fall the hardest? The families in the worst
financial trouble. Be clear here, Senator. A multi-millionaire
can still skate through bankruptcy, even if every provision in
this bill were adopted.
Senator Durbin. And hang on for the most embarrassing
amendment on the floor when we talk about homestead exemption
and tell the story of Bowie Kuhn, the former Commissioner of
Baseball, who hung on to a multi-million-dollar mansion in
Florida that he was able to keep through bankruptcy, and Burt
Reynolds, the actor, who did the same thing. Yet, we are
hammering away at people who can't pay for cancer surgery. Does
this make sense?
The second point I want to make: are there as a result of
this bill going to be more debts that are non-dischargeable in
bankruptcy that when it is all over, despite your best efforts,
you are stuck with for life?
Ms. Warren. Yes, Senator, that is what this bill is
designed to do. That is why every women's group that has looked
at this bill has opposed it, because their real concern is that
this forces them into competition with Citibank and Bank One
when they are trying to collect from an ex-husband who has been
through bankruptcy. This is the central concern.
Every single family who gets pushed out of the system
because the fees are too much now, every single family who ends
up with non-dischargeable debts literally will be responsible
for those debts until they die. It is important to remember
that for most of the families who file for bankruptcy, they
don't have enough income to pay the interest. So what that
means is it is like Ms. McCarthy. She can pay $2,000 a year for
the rest of her life and she will die owing Providian as much
as she owed them the day she filed for bankruptcy.
Senator Durbin. And it is our highest priority to make sure
we pass the bill that says that she will continue to make that
payment.
Thank you.
Chairman Specter. Thank you, Senator Durbin.
Senator Feingold.
Senator Feingold. Thank you, Mr. Chairman. I want to
welcome our witnesses, particularly Ken Beine from Wisconsin. I
am always glad when I can hear the scholarship of Professor
Warren, and I also want to commend Senator Durbin's very
powerful remarks.
Mr. Chairman, I appreciate your holding this hearing rather
than taking this bill directly to markup this week, as was
originally planned. Let me respectfully suggest that the
testimony we are hearing makes it very clear that a markup of
this bill in this Committee next week would be premature.
This bankruptcy bill was essentially written in 1998, seven
years ago. The last time the Judiciary Committee held hearings
or took any action on the bill was in early 2001. It is now
2005. It is simply inconceivable that this Committee will be
ready next week to do the job that it needs to do on a bill
this complex and a topic this important to our economy and the
lives of many of our most vulnerable citizens.
The last significant bankruptcy reform legislation in this
country was passed in 1978. This is not a topic that Congress
gets back to every few years. We need to get this job done
right and we need to do it comprehensively. That means
addressing the important issues raised by the effect of
increasing corporate bankruptcies on the pensions and health
care of employees, rather than saying that those issues can
wait for another bankruptcy bill sometime in the future. These
are pressing issues that this Committee must face up to now,
and it certainly will not be an acceptable answer to those who
point out real problems with how the current bill will operate
that we can somehow fix this at a later date. That is not
reality.
So I hope, Mr. Chairman, that this Committee will serve its
proper role in the Senate to examine legislation carefully and
completely before sending it to the floor. I hope that every
member of this Committee, even those who support this bill,
will recognize that a real amendment process is appropriate
here, in contrast to what we have seen on the class action bill
over the past few weeks.
My questions today, although they will be brief, will
highlight some of the problems with S. 256 that practitioners
and academics and trustees have identified. We need to listen
to those non-partisan experts before we enact this bankruptcy
bill or we will do grave harm to a system that is a crucial
part of the safety net that the law offers to our most
vulnerable citizens.
Let me first turn to my friend and constituent, Mr. Beine.
I wanted to especially thank you for being here. It is always
good to see somebody from Wisconsin in Washington, and I wanted
to say to you that I know how tough it is for everyone who has
suffered from the devastation of our manufacturing sector. I
know firsthand from my own visits that Two Rivers, or Trivers,
as some say, and Manitowoc have been hit especially hard by
this.
Wisconsin has lost tens of thousands of manufacturing jobs
in the last few years, and the biggest sector of the economy by
far in Two Rivers and Manitowoc is the manufacturing sector. So
the whole area has been affected dramatically. In a recent
study, 37 percent of businesses in Manitowoc and Two Rivers
reported that they had to lay off employees in the past year.
So it is not surprising for me to hear you say that there has
been an increase in bankruptcy filings, although it is
certainly terrible news.
There are a number of important steps Congress could be
taking to help people in Manitowoc and Two Rivers, including
changing our tax code to help beleaguered domestic
manufacturers and rethinking international trade agreements
that have been devastating for American businesses.
The problems you are facing are very real, but I want to
make sure we don't pass a bill here that will actually compound
the burden on Manitowoc citizens, Two Rivers citizens and
Wisconsin citizens. I don't want to take any action that is
going to further harm people who I know have borne the brunt of
this administration's failed economic policies by undermining a
law that stands between them and complete destitution.
I am a big fan of, as you know, and a friend of the credit
union industry. You are wonderful people and you serve your
communities very well. I think this bill is a bad deal for my
constituents and your customers, so I am afraid we have to part
ways on this issue. This bill hasn't changed all that much
since it was introduced 8 years ago, before the problems with
the erosion of our manufacturing base became so severe. So it
may not really be designed to address your problems. So I would
like to give you a chance to respond to what I have said, and I
would like to ask Professor Warren if she would like to comment
as well.
Mr. Beine.
Mr. Beine. First of all, thank you for the kind words. I
guess I respectfully disagree with some of the statements. We
are convinced that the current law hurts financial institutions
because there are a number of individuals who abuse it. Under
no circumstances are we looking to hurt those individuals, the
80 or 90 percent, or if it turns out to be 95, that still need
the ability to be able to completely walk away and start over.
The bankruptcy law is here to enable people to start over, and
that is an important right in this country.
Thank you.
Senator Feingold. Professor Warren.
Ms. Warren. I would only add that I too am a big fan of
credit unions. I was explaining to Mr. Beine earlier I have
family members who have really relied on their credit unions to
help them get past tough times, and I have cosigned more than
one loan to the credit unions which were paid off in full. I
want to be clear, sir.
But I really want to go back to a key point here. I think
credit unions are responsible lenders who are very careful
about the money they put out. I believe the thrust of this
bill, by forcing more families out of bankruptcy, by driving up
the costs, by making more debts non-dischargeable, is a reward
to irresponsible lenders.
I believe that what happens is that good people come in,
like credit unions and like small landlords, who really are
affected. There are changes we could make to make things better
for them. But they are here, when it is credit card companies
who have behaved irresponsibly and who have already raked
billions of dollars of profits off these families before they
file for bankruptcy that are the real problem. If we wanted to
make this bill work, part of what we would ask is how to sort
out the good lenders from the bad.
Senator Feingold. Thank you, Professor.
Professor Zywicki, as you know, I have mentioned that the
Bankruptcy Act was first introduced 8 years ago, and you have
long supported it. However, as Professor Warren has stated, the
8 years since this bill was introduced have seen many
developments with significant implications for bankruptcy law.
Furthermore, we now have significantly more data about who
files for bankruptcy and why they do than when the bill was
first introduced.
Given all the things that have changed since the original
bill was drafted and given all the new information that has
emerged since that time, is there anything about this bill that
you think should be changed, or do you endorse S. 256 without
any adjustments whatsoever?
Mr. Zywicki. Senator, first, let me clarify that I believe
that the majority of bankruptcy filers are legitimate, honest
bankruptcy filers, and I would not endorse this bill if I
believed that in trying to eliminate fraud and abuse we would
be harming people, the honest, innocent people for whom
bankruptcy is intended.
Having said that, this bill has been around for 8 years.
The problems that this bill attacks have not disappeared during
8 years; they have worsened during that 8-year period. There
may be additional new abuses that have come on the scene,
additional new problems that have come on the scene. But that
is not, I don't believe, a reason to ignore the fact that this
bill targets real problems. It targets the homestead exemption
abuses, it targets fraud and those sorts of things. So this
bill responds to problems that are still endemic in the system.
Senator Feingold. What about my question? Are there any
changes to the bill that need to be made at all or is it
exactly the way it should be? We are marking this thing up next
week. The train is leaving the station, apparently, and there
is probably not going to be another bankruptcy bill for a very
long time. This is it. Should this bill be changed?
Mr. Zywicki. I believe that this bill is fine as it is.
Senator Feingold. Not one word?
Mr. Zywicki. There is no word that I would change in this
particular piece of legislation.
Senator Feingold. Well, Mr. Chairman, I know my time is up,
but the idea that after 8 years and all the economic changes in
this country that there wouldn't--
Chairman Specter. If you need some more time, Senator
Feingold, go ahead.
Senator Feingold. Let me just say that after 8 years, the
notion that there wouldn't be anything different about the
Bankruptcy Code--with all the economic changes and
dislocations, that there wouldn't be a word to change is not
credible to me and is a further reason why I am very concerned
about the speed with which this bill is moving.
Thank you for the extra time, Mr. Chairman.
Chairman Specter. Thank you, Senator Feingold.
The timing on the bill has been set. We are moving ahead.
This hearing was designed to give us opinions of experts in the
field on problems in the bill. We will have many communiques
from interested citizens in all walks of life, and when the
Judiciary Committee meets next Thursday to consider the bill,
there will be time between that session and the full floor
debate. So there is time for consideration of any changes that
ought to be made.
We thank you all for coming, ladies and gentlemen. We very
much appreciate it. Many of you have come from long distances
and it has been a very productive hearing. That concludes our
hearing, and thank you.
[Whereupon, at 12:34 p.m., the Committee was adjourned.]
[Questions and answers and submissions for the record
follow.]
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