S. 945 INTRODUCTORY STATEMENT
Posted by the Amerian Bankruptcy Institute
CONSUMER BANKRUPTCY REFORM ACT OF 1999
Mr. President, today, joined by colleagues, Senator Leahy, Senator Kennedy, Senator Feingold and Senator Sarbanes, I am introducing the bankruptcy reform bill that passed the Senate last year by a vote of 97-1.
A constant theme that has guided me throughout the consideration of bankruptcy legislation is balanced reform. You cannot have meaningful bankruptcy reform without addressing both sides of the problem--irresponsible debtors and irresponsible creditors.
Unfortunately, the bill we worked so hard to develop, was decimated in conference and the result was a one-sided bill designed to reward the credit industry and penalize American consumers. I could not support it. I hope this year will be different.
The bankruptcy code is delicate balance. When you push one thing, almost invariably something else will give. For that reason, it is crucial for bankruptcy reform to be thoughtful and for the changes to be targeted and not create more problems than they attempt to solve.
This year, Senator Grassley has introduced S.625, the bankruptcy reform bill of 1999. This bill has more similarities to last year's conference report than the bipartisan measure that passed the Senate last year by an overwhelming margin.
The Durbin-Leahy bill is fairer. S.625 uses a means test adopted from IRS collection allowances. The test would require every debtor, regardless of income, who files for Chapter 7 bankruptcy to be scrutinized by the U.S. trustee to determine whether the filling is abusive. The bill creates a presumption that a case is abusive if a debtor can pay the lesser of 25% of unsecured nonpriority claims or $15,000 over 5 years. The IRS means test was designed for use on a case by case basis, not as an automatic template.
In my home state, the average annual income for bankruptcy filers in the Central District of Illinois for 1998 was $20,448, yet the average amount of unsecured debt was $22,900. This figure shows that many filers were hopelessly insolvent. They owed more money on debt that had no collateral than their total income for the entire year. These debtors don't even come close to meeting the standards that would require them to convert their case to a
chapter 13 case, but they will be forced to go through additional scrutiny at extra costs to everyone involved.
In contrast, the Durbin-Leahy bill gives courts discretion to dismiss or convert a Chapter 7 bankruptcy case if the debtor can fund a Chapter 13 repayment plan. One of the factors for the court to consider in making the decision is whether the debtor is capable of paying 30% of unsecured claims under a 3 year plan. This reform can address abuses without the complexity of certifying ability to pay in every case as required by S.625.
The Durbin-Leahy bill is cheaper because every case does not go through means testing. By requiring the trustee to submit reports on all filers the cost to trustees is dramatically increased with little reward.
The means test in S. 625 looks a lot like the means test in the House bill. We now know that the means test in the House bill would only apply to far less than 10% of Chapter 7 filings. A study released by the American Bankruptcy Institute found that by using the test from the House bill, 97% of sample Chapter 7 debtors had too little income to repay even 20% of their unsecured debts over five years. As a result, only 3% of the sample Chapter 7 filers had sufficient repayment capacity to be barred from Chapter 7 under the rigid means test. This means 100% of the filers would have to go through a process that would only apply to 3% of the cases.
Beyond the administrative costs, there is the unneeded stress on poor families. According to the National Conference on Bankruptcy Judges, a review of surveys of Chapter 7 cases from 46 judicial districts in 33 states reveals that the median gross annual income for the 3151 cases in 1998 was $21,540, some $15,000 lower than the 1997 national median income for all families in the United States. Yet, the median amount of unsecured nonpriority debt for these same debtors was $23,411. These people are insolvent, and forcing them to go through unnecessary hoops for little reward is unfair and ineffective. The Durbin-Leahy bill is more balanced. The Durbin-Leahy bill includes credit disclosures designed to help families understand their debt and prevent them from incurring debt which makes them financially vulnerable. Many families file for bankruptcy after a health crisis or some other catastrophic event that prevents them from paying their debts. For example, the survey conducted by the bankruptcy judges shows that on average over 25% of bankruptcy cases involve debtors with medical debts over $1000. By requiring more complete information for debtors, they can make better credit decisions and avoid bankruptcy altogether.
The Durbin-Leahy bill addresses abusive creditor practices. The Durbin-Leahy bill protects the elderly from predatory lending practices. Much of our discussion concerning reform of the nation's bankruptcy laws has focused upon perceived abuses of the bankruptcy system by consumer debtors. Far less discussion has occurred with regard to abuses by creditors that help usher the nation's consumers into bankruptcy. I believe that abuses exist on both sides of the debtor-creditor relationship and that bankruptcy reform is incomplete if it fails to address documented abuses among creditors.
Last year, I worked to protect elderly Americans by prohibiting a high-cost mortgage lender who extended credit in violation of the provisions of the Truth-In-Lending Act from collecting its claim in bankruptcy. If the lender has failed to comply with the requirements of the Truth-in-Lending Act for high-cost second mortgages, the lender will have absolutely no claim against the bankruptcy estate. This provision is not aimed at all lenders or at all second mortgages. Indeed, it is aimed only at the worst, most predatory, of these by and large worthy lenders. It is aimed only at practices that are already illegal and it does not deal with technical or immaterial violations of the Truth in Lending Act.
Disallowing the claims of predatory lenders in bankruptcy cases will not end these predatory practices altogether. Yet it is one step we can take to curb creditor abuse in a situation where the lender bears primary responsibility for the deterioration of a consumer's financial situation.
I encourage my Senate colleagues to join Senator Leahy and me in this effort. Bankruptcy reform must be balanced and must not create a nation of financial outlaws.
Mr. President, I ask unanimous consent that a copy of the bill be printed in the Record.
There being no objection, the bill was ordered to be printed in the Record, as follows: See http://www.abiworld.org/legis/bills/99mays945.html