LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

MARCH 11, 1999, THURSDAY

SECTION: IN THE NEWS

LENGTH: 1503 words

HEADLINE: PREPARED STATEMENT BY REP. JAMES P. MORAN
BEFORE THE HOUSE JUDICIARY COMMITTEE
SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW
AND THE SENATE JUDICIARY COMMITTEE
SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT AND THE COURTS
SUBJECT - BANKRUPTCY REFORM ACT OF 1999 (HR. 833)

BODY:

Introduction.
Chairman Gekas, Chairman Grassley, and Members of the Subcommittees, thank you for allowing me to come before you today to speak on behalf of the Bankruptcy Reform Act of 1999 (HR. 833). I am sponsoring this bill with Chairman Gekas, Representative Boucher, and Representative McCollum because the current bankruptcy system is broken. Somewhere over the past decade, the integrity of the bankruptcy process has been corrupted and an important moral principle has been eviscerated. The time- honored principle of moral responsibility and personal obligation to pay one's debts has been eroded by the convenience and ease with which one can discharge his or her obligations. What was once the option of last resort has too often become the preferred option of choice. A legislative fix is vital to distinguish between those who truly need a "fresh start" and those capable of assuming greater responsibility and making good on at least some of what they owe. I look forward to working with your Committees to bring needs-based bankruptcy reform to fruition this year.
The System is Broken and Lacks Integrity.
Despite this country's strong economy -- wages are up, unemployment is down, and interest rates and inflation are low -- the rate of personal bankruptcy filings has increased dramatically. Personal bankruptcy filings have now reached startlingly record highs of more than 1.3 million filings annually. More people filed for personal bankruptcy in 1997 than graduated from college. Instead of bankruptcy being a safety net, it has become for some a convenientfinancial management tool. The Bankruptcy Reform Act will help to bring this equation back into balance.
I find it unacceptable and inherently unfair that those who do pay their bills have to foot the bill for those who, in many instances, have the ability to pay, but choose not too. It has been conservatively estimated that personal bankruptcies cost $400 per household per year, and it takes fifteen responsible borrowers to cover the cost of one bankruptcy of convenience. The system will continue to be void of integrity if debtors persist in using it as a tool of first resort rather than a tool of last resort when all other financial options have been exhausted. Clearly, this nation's bankruptcy system is broken when it enables individuals to avoid paying their debts despite their ability to do so. What this Congress must do is to undertake genuine needs-based bankruptcy reform to require those who have the ability to repay a portion of their debts to enter a Chapter 13 repayment plan, while also preserving the historic "fresh start" in Chapter 7, for people who have fallen on hard economic times. The goal of our bankruptcy system has always been to protect those who need protecting -- to provide those who experience genuine and serious financial hardship the opportunity to wipe the slate clean. What we must do is return our system back to its original mission through a simple legislative fix.
Bankruptcy Reform is a Consumer Issue Because it Preserves the "Fresh Start."
Bankruptcy reform is not a Republican or a Democrat issue - it is a consumer issue. According to the National Consumer League's 1997 survey, 76 percent of Americans believe that individuals should not be allowed to erase all of their debts in bankruptcy if they are able to repay a portion of what they owe. This survey merely reflects the American public's belief that individuals should be responsible for their own actions. Our bill would help to remedy the glaring problems of today's bankruptcy system by creating a needs-based system, subject to judicial oversight, which would continue to protect the rights of those citizens who need a fresh start, while at the same time requiring those who don't to carry their fair share of the load. The needs-based bankruptcy system, as outlined in the Bankruptcy Reform Act, does not prevent anyone from receiving bankruptcy relief. In fact, the needs-based approach applies only to debtors with an income greater than the national median income by family size. Even then, the a debtor's income, expenses, obligations and any special circumstances are taken into account when determining whether he or she has the capacity to repay a portion of their debts. However, the bill preserves the right of any filer earning less than the national median income (currently about $51,000 for a family of four) to automatically choose either Chapter 7 or Chapter 13, thereby preserving, protecting and enhancing the ability to obtain a legitimate fresh start in bankruptcy.
Moderate and low-income families are not the target of this legislation and they are specifically exempted from the legislation, but they may be the victims of restricted credit if we do not fundamentally reform the present system. Because of the rise in bankruptcies, financial service companies, even credit unions, may be left with little recourse but to restrict the credit currently available to those low-income families who need it most.
Credit Cards are not the Reason for the Increase in Bankruptcies
Despite all the anecdotal evidence to the contrary, the credit card industry is not the impetus for the bankruptcy crisis in the nation. The vast majority of individuals recognize the personal responsibility they take on in using a credit card. More than 96 percent of credit card holders pay their bills as agreed to and only 1 percent ever end up in bankruptcy. Bank credit cards represent less than 16 percent of total debt on the average bankruptcy petitions. According to a Federal Reserve Board survey last year, credit cards account for a mere 3.7 percent of consumer debt -- hardly large enough to cause the bankruptcy crisis.
Bankruptcy Reform Act Has Important Pro-Consumer Provisions
I am also pleased to mention that the Bankruptcy Reform Act includes a number of proconsumer provisions. In order to provide debtors with the best possible information before they take the step of bankruptcy, the bill requires the distribution of information on bankruptcy and its alternatives to all potential filers. This is extremely important because a study done in April of 1997 found that 50 percent of those individuals who filed for bankruptcy were not aware of their options besides bankruptcy. Of this group, 65 percent indicated they would have chosen financial counseling had they been aware of it as an option. Many people do not understand that repayment plans can often be worked out with creditors without having to file for bankruptcy. In addition, the bill provides for a test program through the U.S. Trustees office in which consumers who discharge their debts will have to attend a financial management training class. It is our hope that this class will teach consumers how to better handle their money and avoid bankruptcy in the future. Also the bill includes a unique Debtor's Bill of Rights, which requires credit card lenders to fully disclose on each periodic statement a warning that the minimum payment may increase the finance charge or extend the length of time it takes to repay the loan. The Debtor's Bill of Rights also provides protection from so called "bankruptcy mills" for those who legitimately need a bankruptcy's safety net. Regretibly, there are some within the bankruptcy profession operating like a "mill," steering many consumers into bankruptcy without adequately informing them of their choices and the potential harm that bankruptcy can have on their future financial records. The bill of rights would require any for-profit debt counseling agency to fully disclose the services they perform and the fee for this service up-front. The bill also provides for a full refund to the consumer if he or she is not represented fairly and adequately.I believe that the Debtor's Bill of Rights and the consumer protection provisions provide the correct balance needed to restore our bankruptcy system to one of fairness and responsibility.
Conclusion
Many in Congress have already embraced the concept of needs-based bankruptcy reform. In fact, this legislation mirrors last year's conference report that received 300 votes on the House floor on October 9, 1998.
The needs-based formula of H.R. 833 is designed simply to require that high income debtors who can afford to pay their debts do so. It adopts a formula that protects low income debtors, retains the discretion of Bankruptcy Judges, takes the unique circumstances of individual debtors into account, and, for the first time, requires high income debtors who can afford to pay their debts to do so. The only "losers" in a needs-based approach are those individuals who have enjoyed the safety net of Chapter 7 despite their lack of need, and they, my colleagues, do not need our protection.
I urge your Committees to expeditiously consider needs-based bankruptcy reform legislation and look forward to working with each and every one of you to accomplish this very important goal.
Thank you.
END

LOAD-DATE: March 14, 1999