LEXIS-NEXIS® Congressional Universe-Document
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Copyright 1999 Federal Document Clearing House, Inc.
Federal Document Clearing House
Congressional Testimony
March 25, 1999, Thursday
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 1639 words
HEADLINE: TESTIMONY March 25, 1999 MARK MCCLELLAN ASSISTANT SECRETARY
SENATE BANKING, HOUSING
& URBAN AFFAIRS
BANKRUPTCY REVISION
BODY:
Hearing on
Bankruptcy Reform and Financial Services Issues Prepared Testimony of Mr. Mark McClellan Deputy
Assistant Secretary for Microeconomic Analysis Office of Economic Policy United
States Treasury 9:30 a.m., Thursday, March 25, 1999 Thank you Mr. Chairman,
Senator Sarbanes, and other Members of the Committee for the opportunity to
provide Treasury's views on issues related to
bankruptcy reform. As you know, last year the Administration supported the balanced
bankruptcy bill that you and your colleagues in the Senate approved by an overwhelming
bipartisan majority. We look forward to working with the Congress this year to
craft
bankruptcy legislation that the President can enthusiastically sign. It is important to
consider
bankruptcy reform in the context of the dynamic financial services industry. The changes
occurring in financial services--the result of competition, innovation, and new
technologies in such
areas as information management and electronic commerce--have had enormous
benefits for consumers and the economy, and offer potentially even greater
benefits in the future. However, these changes have also increased the
complexity of consumer financial services and business financial transactions,
and have implications for putting consumers and the economy at risk. In the
remainder of my testimony, I highlight some particular concerns we have about
proposed
bankruptcy reforms. Consumer
bankruptcy reform One motivation for consumer
bankruptcy reform is the growth in consumer
bankruptcies in recent years, despite very healthy economic growth and low unemployment.
Experts have offered a large number of competing explanations for this trend,
which increases the cost of credit to all consumers, and it is likely that many
factors are responsible.
Balanced
reform of consumer
bankruptcy law is essential to address the multiple causes. There is evidence of abuses
by creditors as well as debtors that: - may allow some debtors who are able to
repay a substantial share of their debt to evade responsibility for repayment;
and - may prevent some debtors, especially those with limited means for
obtaining sophisticated advice, from having equal opportunities for the
"fresh start" of the
bankruptcy system.
Bankruptcy reform should not take indiscriminate aim at either side alone, and should not treat
only the symptom rather than the underlying causes of the rise in
bankruptcies. Furthermore, it is essential that
reforms to the bankruptcy system address these problems in ways that do not jeopardize the repayment of
debts with very high policy priority, including family support. The essential
features of a balanced
reform bill include the following: Consumer Protection. Consumers need
better and more relevant information on their credit opportunities in order to
manage their finances effectively and to get the most benefit from the diverse
credit-related services now available. In the last decade, there has been an
explosion in the kinds and amounts of financial services available to
consumers. These changes have had many beneficial effects--making it easier for
consumers to obtain the credit needed to start a household, pay college
tuition, and make other investments to achieve their financial goals. But they
have also made personal financial planning much more complex. The evidence
indicates that, with limited time and resources, many households are not able
to make many of the calculations and informed judgments needed in this new
financial era to develop and follow a financial plan effectively. Fair and
effective determinations of access to Chapter 7 debt relief. The balance
between
requiring debtors responsibly to honor their contracts with creditors, and
providing debtors a fresh start sufficient to ensure their return to economic
health, is critical to maximizing the benefits of
bankruptcy law to our society and economy. It is also important to minimize the
administrative, judicial, and personal costs of achieving this balance. The
President believes that a means test should deny access to Chapter 7 debt
relief only for those who genuinely have the ability to repay a portion of
their debts successfully under a Chapter 13 plan. The Administration is
strongly opposed to a rigid and arbitrary approach to determining whether a
debtor can use the relief offered in Chapter 7, which would not allow debtors
an opportunity to have their specific circumstances considered adequately by
bankruptcy courts with discretion to determine whether they genuinely have the capacity
to repay a portion of their debts. Consideration must also be given to cost in
implementing a means test. There is little to be gained by requiring debtors
who have little ability to repay to present detailed evidence and justification
for an inflexible means test that must be reviewed at substantial additional
cost by trustees and courts. More costs are added if debtors with little
capacity to repay are inappropriately referred to Chapter 13 proceedings to set
up repayment plans destined to fail. We believe that it is possible to draft
legislation that will work significantly better than HR 833--to try to identify
at relatively low cost the small fraction of potential Chapter 7 filers who
have a reasonable chance of successfully repaying their debts under a Chapter
13 plan. Curbs on predatory creditor practices.
Bankruptcy reform should curb abuses by creditors as well as debtors. For example, debtors
should be
protected against predatory creditor tactics to coerce inappropriate and unwise
reaffirmations of debt. Last year's Senate bill took laudable steps in this
direction. Protection of priority debts after
bankruptcy. Bankruptcy reform should not create substantial new categories of nondischargeable debt that
could compete, post-bankruptcy, with child support, alimony, taxes, or other debt with high public priority.
If new categories of nondischargeable debt are to be created, they should be
narrowly tailored for situations where the debtor is clearly abusing the
system. We and the rest of the Administration stand ready to work with you in
the days ahead to craft a consumer
bankruptcy bill that achieves needed and balanced improvements in the
bankruptcy system, and that helps consumers manage their debts more effectively. Netting
and termination of certain financial contracts in insolvencies I would now like
to turn to our views on the netting and termination of certain
financial contracts in business
bankruptcies. The increasing significance of certain financial transactions has motivated
the President's Working Group on Financial Markets to examine the U.S. legal
regime governing netting and termination of certain financial contracts in
insolvencies. On March 16, 1998, as Chairman of the Working Group, Secretary
Rubin sent the Group's legislative proposals to Congress. Since its adoption
in 1978, the
Bankruptcy Code has been amended several time in order to provide that certain financial
transactions, including securities contracts, commodities and forward
contracts, repurchase and swap agreements, are excepted from the automatic stay
that
bankruptcy imposes for general commercial contracts. In each of these cases, the
exception from the stay is justified to minimize systemic risk to financial
markets that could result if such contracts were not permitted to be enforced.
The amendments that the Working Group has proposed are designed to strengthen
the provisions of the Code
relating to termination and close-out netting and related provisions for
certain financial agreements and transactions. These provisions include
clarifying that cross-product close-out netting is permitted for positions in
securities contracts, commodity contracts, forward contracts, repurchase
agreements and swaps; and that the provisions are applicable in the case of a
municipality filing. We have attempted to limit the provisions to areas in
which public policy goals are clearly served; we are seeking to protect
markets, not particular types of creditors. In addition, the Working Group
proposed amendments to the banking laws that, along with the proposed
amendments to the
Bankruptcy Code, harmonize the definitions of financial contracts receiving the special
treatment and provide protection for the federal deposit insurance funds with
exposure in the case of a depository institution insolvency. Under the proposed
amendments, exercise of the right of counter parties to terminate or net
qualified financial contracts is suspended for a short grace period, to allow
receivers of failed depository institutions to transfer financial contracts to
another institution. Cross-border insolvencies and
bankruptcy tax provisions
Reform of cross-border insolvency laws and
bankruptcy tax issues are germane to
bankruptcy reform but may not fall within the jurisdiction of the Banking Committee. Title VIII
of S. 625 would add a new chapter 15 to the
Bankruptcy Code to address insolvencies that cut across international borders. These
provisions are based on a model law on cross-border insolvency that was adopted
on May 30, 1998 by the United Nations Commission on International Trade Law.
Title VII of S. 625 makes amendments to
bankruptcy tax provisions. Conclusion Thank you again for this opportunity to discuss
issues
related to
bankruptcy reform. The revolution in technology and increased competition in financial services
are giving Americans more numerous and complex financial choices than ever
before, and are making possible larger and more complex business financial
transactions than ever before. We look forward to working with you and others
in Congress to construct balanced
bankruptcy legislation that keeps pace with these changes in financial services. I am
happy to answer any questions you may have.
LOAD-DATE: March 29, 1999