WASHINGTON — Sen. Chuck Grassley today won Senate passage – by a vote of 70 to 28 – of landmark legislation he authored to overhaul the nation's bankruptcy code.
The stamp of approval was the final action needed by Congress; the House of Representatives earlier this year last week passed the bill by a voice vote. The bill offered by Grassley is now on its way to the President's desk.
The Iowa senator said his plan is aimed at reducing the number of bankruptcies filed each year by fixing weaknesses in the code and designing a more balanced, fair approach for debtors and creditors. The number of bankruptcies have soared during the last decade despite a historically strong economy. And, according to a recent study, experts are predicting a 15 percent increase in bankruptcies next year.
In addition, the reform package includes permanent status and an expansion of Chapter 12*, which is tailored to help farmers reorganize debt and stay in the business of farming. It also includes a "patients' bill of rights" for residents of nursing homes and hospitals that declare bankruptcy. Another key provision helps to strengthen the Medicare Trust Fund by prohibiting the discharge of debts arising from inflated bills and fraudulent claims.
The original Senate version of the bankruptcy bill earned strong bipartisan support last February with senators voting 83 to 14 for the bill. The final version of the legislation passed today continues to reflect a bipartisan, bicameral agreement between the Senate and the House of Representatives on bankruptcy reform. The measure is the most comprehensive reform of bankruptcy law since 1978.
Grassley urged President Clinton to sign this important legislation because "reforming the system is good for consumers and families. It would bring more fairness for those who work hard to pay their bills. Every bankruptcy filed puts upward pressure on interest rates, so decreasing the number is good for people trying to buy a new house or pay for a car. Reforming the bankruptcy system will help usher in a new era of greater personal responsibility."
The Iowa senator began his effort to reform the bankruptcy system more than three years ago when he held a hearing on the relationship between credit card debt and consumer bankruptcy. Since then, Grassley has worked to put together a balanced bill that addresses the problems caused by irresponsible consumerism, an aggressive credit industry, lax bankruptcy laws and lawyer-run bankruptcy mills.
Since 1990, the rate of personal bankruptcy filings has increased almost 100 percent. Since 1980, the number of Americans declaring bankruptcy has exploded from 331,264 to just under 1.4 million last year. Filings began to increase dramatically after 1985, despite the booming economy.
The overwhelming majority of debtors file under Chapter 7, which effectively wipes away their debts, whereas only about one-third of debtors opt to file under Chapter 13, which requires some repayment plan to reimburse creditors. The bill that Grassley co-authored with Sen. Robert Torricelli sets up a flexible formula for bankruptcy judges to channel those with repayment capacity to Chapter 13.
The measure also seeks to improve the bankruptcy system for consumers by promoting credit counseling services and educational courses for debtors prior to filing a bankruptcy petition. The plan strengthens enforcement and penalties against coercive tactics by creditors. It penalizes creditors who seek a double-payment and establishes tough penalties for creditors who use threats to coerce debtors into voluntarily agreeing to pay a debt which could be wiped away in bankruptcy.
The legislation will minimize court dockets and keep costs down. It promotes the alternative dispute resolution process by saying that if someone in financial trouble tries in good faith to work out a reasonable repayment plan, but a creditor rejects this, then the ability of the creditor to collect in bankruptcy will be sharply curtailed.
Today's bill is also a major victory for Grassley's effort to make Chapter 12 for farmers a permanent part of the bankruptcy code. The package strengthens this tool for farmers by making an increased number of farmers eligible for Chapter 12 protections and making the federal government last on the list of creditors when a farmer sells farm assets during reorganization. Changing the treatment of capital gains taxes under Chapter 12 would give farmers greater flexibility in reorganizing their financial affairs.
In addition, a number of amendments were added to the reform proposal during months of congressional consideration, including:
* Grassley's amendment to protect quality of care for patients — especially nursing home residents — when a health care provider is in bankruptcy. Current law does not guarantee the well-being of patients in a bankruptcy case. Two years ago, residents of a California nursing home were literally evicted onto the street by a bankruptcy trustee.
* Torricelli and Grassley's amendment to set new requirements for credit card companies and protect consumers. Grassley said these provisions reflect some of the most significant pro-consumer legislation considered by the Senate in a decade.
Under the measure, creditors are required to display prominently a minimum payment warning on every credit card statement. This feature would include a toll-free number for credit card holders to learn how many months it would take to repay a certain balance with minimum monthly payments. It also requires credit card solicitations to disclose when a low introductory rate ends and what the subsequent rate will be. And, it requires credit card solicitations via the Internet to comply with the Truth in Lending Act.
* Unprecedented new protections for child support claimants. The reform bill allows claimants to access otherwise off-limits property and has the support of key child support advocates.
* The bill also limits the ability of individuals to protect assets by purchasing an expensive home. Right now, there are no limits on the value of a homestead that is off-limits to creditors. Although the General Accounting Office found only scant evidence of systemic abuse of the homestead exemption, the bankruptcy reform bill includes changes long-advocated by Sen. Herb Kohl of Wisconsin and Sen. Jeff Sessions of Alabama to put a $100,000 cap on home equity acquired within two years prior to declaring bankruptcy. The Kohl-Sessions proposal requires that an individual establish residency for two years prior to bankruptcy in order to claim the homestead exemption of a particular state. The bill also allows creditors to seize any home equity acquired with the intent to delay or hinder collection efforts within seven years prior to declaring bankruptcy. And it says the home equity built up applies to the $100,000 cap even if an individual relocates from one state to another.
The House of Representatives passed its own consumer bankruptcy reform last summer, during the first session of the 106th Congress. The original House bill was sponsored by Reps. George Gekas of Pennsylvania and Rick Boucher of Virginia passed by 313 to 108.
Grassley advanced this comprehensive proposal from his position as chairman of the Judiciary Subcommittee on Administrative Oversight and the Courts. He held his first hearing on consumer bankruptcies in April 1997. This followed a congressionally-mandated report of the National Bankruptcy Review Commission, which was created by legislation Grassley co-authored in 1994.
"This bill strikes the balance needed to strengthen the safety net for people who need a fresh start after a hardship, while closing the loopholes exploited by big spenders to walk away from debts they could repay," Grassley said. "For instance, the reform bill closes an increasingly popular Chapter 11 loophole that lets the very wealthy off scot-free."
The comprehensive bankruptcy reform bill co-authored by Sens. Chuck Grassley and Robert Torricelli includes permanent status and an expansion of Chapter 12, which is tailored to help family farmers reorganize debt and stay in the business of farming.
Chapter 12 is a proven success as a leverage tool for farmers and their lenders. It helps the borrower and the banker sit down and work out alternatives for debt repayment. And the current depression in the farm economy underscores the need to get this safety net on the books for good. Chapter 12 expired on June 30, 2000.
Chapter 12 was enacted in 1986, as part of Sen. Grassley's effort to help Iowa farmers survive the economic crisis of the mid-1980s. Since 1986, Sen. Grassley has lead the effort to make Chapter 12 a permanent part of the bankruptcy code.
In addition to making Chapter 12 permanent, the legislation included in S.625 would change the tax treatment of capital gains taxes under Chapter 12. Current law requires those federal taxes to be paid first when a farmer sells assets. By making the government last on the list of creditors, Grassley's proposal would give farmers more flexibility in reorganizing their operations. For example, a farmer may need to sell livestock to generate cash for the farming operation. This provision would keep the government from taxing away the cash.
The legislation also expands the definition of family farmer to make more farmers and ranchers eligible for Chapter 12 protection. The debt limit for Chapter 12 eligibility has not been adjusted since Chapter 12 was first approved in 1986, even though farm expenses have risen significantly. Indexing the debt limit to inflation will modernize Chapter 12 to reflect current economic realities.
Unlike Chapter 11 of the bankruptcy code, which governs corporate reorganizations, Chapter 12 does not require a financially-distressed farmers to obtain the consent of creditors prior to reorganization. The ability of lenders and other secured creditors to veto a farmer's reorganization plan often led to farm families being forced off their land and out of the business of farming. In addition, unlike Chapter 7 of the bankruptcy code, which is a form of liquidation, a financially-distressed farmer doesn't have to surrender the farm to the creditors. Chapter 12 prohibits lenders from foreclosing on property if the farmer is unable to make rental payments.
An Iowa State University study found that at least 80 percent of Iowa farmers who filed for Chapter 12 protection in 1986 and 1987 stayed in farming. One Iowa farmer who filed Chapter 12 during the 1980s went on to be designated a Master Farmer by Wallaces Farmer in 1995.