03/10/99 Committee on the Judiciary

U.S. House of Representatives

Committee on the Judiciary

Henry J. Hyde, Chairman

News Advisory

For immediate release Contact: Sam Stratman/Michelle Morgan

(202) 225-2492

March 10, 1999

Bankruptcy Reform Hearings Begin Thursday;

Continue for Three Days Next Week; Floor Action Soon

What: Hearings on H.R. 833, Bankruptcy Reform Act of 1999

Subcommittee on Commercial & Administrative Law

When: Thursday, March 11 at 2 p.m.

Tuesday, March 16 at 10 a.m.

Wednesday, March 17 at 10 a.m.

Thursday, March 18 at 10 a.m.

Where: 2141 Rayburn House Office Building

Witness List for March 11: Sen. Herbert Kohl (D-WI); U.S. Rep. Pete Sessions (R-TX); Dean Sheaffer, National Retail Federation; Bruce L. Hammonds, MBNA America Bank; Judge Carol J. Kenner, United States Bankruptcy Court; Larry Nuss, Credit Union National Association, Inc.; Gary Klein, National Consumer Law Center; Judge Edith Hollan Jones, U.S. Court of Appeals for the Fifth Circuit; Judith Greenstone Miller, Commercial Law League of America; Prof. Todd Zywicki, George Mason University School of Law; Prof. Elizabeth Warren, Harvard Law School

America's bankruptcy law - one of the most progressive of its kind in the world - offers vital protection for individuals seeking to repay and restructure outstanding debts. But misuse of the law for the sake of mere convenience is on the rise and propelling Congress to propose reforms to the bankruptcy code.

The problem: An Absence of Personal Responsibility

In recent years personal bankruptcy filings have topped an unprecedented level of one million annually despite a national economy that is producing record high employment and personal income growth levels. From 1986 to 1996 per capita disposable income grew by 13 percent, but personal bankruptcies more than doubled.

Bankruptcy no longer carries with it the social stigma that it did 20 years ago. "Bankruptcies of convenience" are contributing to the enormous increase in bankruptcy filings. Bankruptcy is becoming a first stop for some rather than a last resort, because our current bankruptcy system encourages people to walk away from their debts regardless of whether they have the ability to repay any portion of what they owe.

Reasons cited by individuals who file for bankruptcy have historically included divorce, loss of job or health care emergency. But a 1997 study of 4000 bankruptcy petitions revealed that only 12 percent of filers cited job loss as a reason. The same study revealed that one-in-four filers have some ability to repay a portion of their debts.

By some estimates, it requires 33 responsible consumers to pay for one bankruptcy of convenience, a hidden tax (in the form of higher interest rates on consumer debt and higher prices for goods and services) that amounts to more than $550 per household, per year.

The Solution: Highlights of HR 833, Bankruptcy Reform Act of 1999

The bill establishes a requirement that a debtor demonstrate that he or she actually needs bankruptcy relief and, if so, provides only the amount of relief that is needed. The needs-based system relies on a formula that includes a debtor's income and obligations to determine exactly how much relief the debtor is entitled to have.

Individuals who can repay a portion of their debts would file under Chapter 13 and begin a repayment plan based on what they can afford to pay. Individuals with no means to repay debts could file for bankruptcy under Chapter 7 and obtain relief from many debt obligations.

The reform legislation also changes the priority given child support and alimony payments in bankruptcy proceedings - elevating both to a higher priority status in the rank of claims made against assets in bankruptcy cases.

Credit card companies will also be required to disclose costs incurred by their customers who make only the required minimum payment on outstanding debt. Under the proposal, these companies must also assist customers in understanding existing debt obligations and the impact of assuming more debt.

The legislation is bipartisan, introduced by Reps. George Gekas (R-PA). Rick Boucher (D-VA, Bill McCollum (R-FL and Jim Moran (D-VA). The legislation is identical to the conference report approved in October 1998 with 300 House votes.