LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

MARCH 11, 1999, THURSDAY

SECTION: IN THE NEWS

LENGTH: 1939 words

HEADLINE: PREPARED TESTIMONY OF
PROFESSOR ELIZABETH WARREN/1
BEFORE THE HOUSE JUDICIARY COMMITTEE
SUBCOMMITTEE OF THE COMMERCIAL AND ADMINISTRATIVE LAW
SENATE JUDICIARY COMMITTEE
SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT AND THE COURTS
SUBJECT - BANKRUPTCY REFORM

BODY:

The Need for Reform
All legal systems benefit from periodic adjustment to account for changed circumstances, to address unforeseen consequences, and to reconcile divergent court interpretations. The bankruptcy system is no different. For one hundred years, Congress has periodically adjusted the Bankruptcy Code to reflect these kinds of adjustments. This is a healthy process that helps insure efficiency, effectiveness and, most importantly, public confidence in the system.
No one doubts that the bankruptcy system could be improved by amending the Bankruptcy Code to address identified and documented ambiguities and problems. But any reform must be balanced. The bankruptcy community--judges, lawyers, accountants, academics, trustees, and others--has been engaged in a continuing dialogue. I favor reform. But not all change is reform.
The key to bankruptcy reform, like other types of real reform, is to make changes in a narrowly targeted and carefully crafted fashion so that the cost of these changes does not outweigh the anticipated benefit for parties in these cases and for the public at large.
A good example of the failure of the cost-benefit analysis is evident in the proposed means test. The credit industry for forty years has pressed for a means test of the kind proposed in H.R. 833. Twenty years ago, they claimed that without means testing consumer credit would dry up. They claim today that without these reforms bankruptcy costs every American family $550. The accuracy of that statement has been challenged by research supported by the American Bankruptcy Institute, an independent organization of professionals representing both debtors and creditors. That research, conducted by Professors Marianne Culhane and Michaela White, suggests that the means test in H.R. 833 would produce very little benefit. If even the most optimistic estimates of the debtors' capacity to repay come true (what Culhane and White deem "the impossible dream") and even if many of the administrative costs of implementing and enforcing a means test were ignored, the independent study shows that the proposed change would increase recoveries for creditors by a total of about 90 cents each year for each household? This is not narrowly tailored, cost-effective reform.
When dealing with the bankruptcy system, it is especially important to take a careful costbenefit approach. Bankruptcy is a collective proceeding involving a limited pool of resources. If the law gives more benefits to one creditor, other creditors suffer. Bankruptcy is the ultimate zero-sum system. Creditors compete for the limited dollars of the people who have declared themselves bankrupt. More to one creditor is necessarily less for another.
Who are these creditors? Creditors are not just car lenders, credit unions, and credit card companies--the people we hear from today. Some creditors are women and children collecting support. In addition, they are utilities, landlords, doctors, hairdressers, plumbers, the paper girl, neighbors, federal state and local taxing authorities, and many others. These creditors have interests that, by definition, are adverse to each other--not just to the debtor. More money for retailers issuers means less money for car lenders; more money for banks is less money for landlords; more money for credit card issuers is less money for mothers collecting child support. And more money for administrative costs means less money for everyone. Bankruptcy does not create money; it creates only collection priorities among creditors for the very limited dollars of the debtors.
H.R. 833 is not reform
Almost every day, someone asks me about this bill. And, almost every day, I respond that I am deeply, deeply concerned about this bill. Am I concerned because I oppose reform? Am I concerned because I think that some people should get a free ride at the expense of everyone else because I do not care whether I pay a hidden bankruptcy tax?
Am I concerned because I do not care if people exercise personal responsibility?
Of course, the answer to all of these questions is no, a loud and resounding no.
Then why does this bill worry me so much? Because change does not equal reform. The definition of reform is "to improve by correction of error or removal of defects." A secondary meaning is "to abolish abuse." This bill does neither.
Instead, the bill will cause chaos. It is loaded with complicated and conflicting policy choices added to try to satisfy competing special interests. It is rife with sloppy technical work that will create ambiguities to be litigated for twenty years or more.
Moreover, the bill is one-sided. It has more than 120 pages of amendments affecting consumer cases, and they all head in the same direction: They give a few creditor interests more opportunities to try to recover from their debtors while they reduce the protection for other creditors and for debtors. Although the bill contains a few provisions bearing labels that suggest they provide needed protections for consumer or address creditor abuse, a careful reading of those provisions reveals that they will do little in practice.
Among the most objectionable features of the current proposals are:
- The failure to introduce real reform for debtor abuses by limiting property exemptions
- Provisions to increase the number of nondischargeable debts for every family in bankruptcy, including the very poorest
- Changes that will permit fewer debtors to qualify for repayment plans, thereby reducing-not increasing--the number of Chapter 13 s
- Conflicts among provisions that push debtors out of Chapter 7 (means testing) but restrict access to Chapter 13 (increasing payments to secured creditors required to confirm a plan)
- A means tests that is impossible to administer, that will swamp the bankruptcy courts, and that invites creditors to use their superior resources to leverage debtors into making improvident repayment agreements
- No review of reaffirmation agreements despite the scandals in the bankruptcy courts in the last two years Let me be clear.

Although I believe that this bill can be improved from its current state, I fear that it is flawed to its core. It is flawed because its underlying structure is not designed to stop abuse or to increase personal responsibility. Whatever the intent of the drafters, the bill will make the system dysfunctional. This is why bankruptcy professionals in organized groups (such as the National Bankruptcy Conference), on their own (such as the bankruptcy judges and the bankruptcy law professors), and as representatives of responsible creditors (such as the Commercial Law League) have opposed this approach to reform.As lawmakers, you are entitled to make the policy decision to shut down the bankruptcy system. If this is your goal, however, it would be more efficient to simply repeal parts or all of Title 11.
Elements of real bankruptcy reform
Real reform is within your reach. Among the provisions that would improve the system for everyone--both debtors and creditors--are:
- Restrict repeat filings
- Limit property exemptions that are too high
- Deny bankruptcy distributions to creditors who do not play by the rules, particularly creditors who violate rules on predatory lending practices
- Implement systematic audits in combination with data collection, making it possible to develop a more accurate picture of what is happening in the system
- Reduce creditor overreaching by restricting access to reaffirmations
- Improve credit disclosures so that borrowers can know their actual balances, amortization rates, and effective interest rates
- Require that advertisements and applications for home equity loans and lines of credit disclose limits on the tax deductibility of such loans
- Restrict the use of teaser rates, hidden fees, shortened payment periods, and other practices that are designed to take advantage of unsuspecting consumers
- Give courts wider latitude to dismiss Chapter 7 cases for debtors who do not need bankruptcy relief, while avoiding arbitrary guidelines that are easy for abusers to evade
Why do all this work?
Meaningful bankruptcy reform is a lot of work. Twenty-six disparate groups ranging from the Family Law Section of the American Bar Association to the Leadership Conference on Civil Rights to Mothers Against Drunk Driving have told you that this bill is not a good approach and that it is in fact counter-productive.The effort is worthwhile. The people who rely on this system are the people who are not here today.
- They are the owners of small businesses who struggle to get back on their feet after their businesses have failed
- They are divorced women trying to raise families and stabilize their financial lives
- They are elderly Americans who are disproportionately victims of creditor scams and fraud
- They are families in which one or both parents have lost a job or been downsized or outsourced into a job that pays less and provides fewer benefits
- They are African American and Hispanic American homeowners who, facing every form of housing, mortgage and insurance discrimination, are making a last ditch effort to hang on to their homes
- They are students, beginning their adult lives already so deeply in debt with credit cards that they will never be able to buy a home or support a family
- They are families without insurance and families with too little insurance for the medical catastrophes that have come their way
These people don't see themselves as debtors. They see themselves for what they are: nurses and construction workers, factory workers and shopkeepers, retired people and college students, teachers and cabinetmakers. They could be anyone in this room.
The people who rely on this system are the people who live in your districts. On average, about one out of every 72 of the households in your districts will file for bankruptcy this year. Since 1994, about one in 20 of the households in your hometowns has declared bankruptcy.3 These are your constituents. They vote, use our public schools and libraries, go to our churches or other religious services, pay taxes. Most of them, as even the most aggressive proponents of the bill have conceded, find themselves in bankruptcy due to a catastrophic event that they could not weather. Some are profligate; most are not. All of them are overwhelmed by debt.
Bankruptcy law is the last safety net of the middle class. A change that unbalances the system is not reform--it is wholesale revision that substitutes complex special interest legislation for a carefully balanced system that has worked for more than a hundred years. Bankruptcy is the last hope for the small businessman, the divorced woman, the African-American homeowner, the displaced executive, and the elderly couple facing a sharp slide out of the middle class into the lower class. It is a system worth saving.
FOOTNOTES:
1 Leo Gottlieb Professor of Law, Harvard Law School, Cambridge MA 02138; (617) 495-3101; ewarren@law, harvard, edu. Because the invitation to Professor Warren could not be extended until two days before this testimony, she did not have the opportunity to provide a full report at this time. Her more detailed testimony will be added to the record at a later date.
2 Marianne B. Culhane and Michaela M. White, Taking the New Consumer Bankruptcy Model for a Test Drive: Means-Testing Real Chapter 7 Debtors, American Bankruptcy Law Review (forthcoming 1999).
3 Calculated from data provided by the Administrative Office of the United States Courts, March 1, 1999.
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LOAD-DATE: March 13, 1999