Supporting the goals and ideals of Financial Literacy Month, and for other purposes.

Mr. Speaker, I thank the gentleman for yielding me time and thank him for his distinguished leadership as the ranking member on the Committee on the Judiciary and his important statements on this bankruptcy bill today.

Mr. Speaker, we all agree that every person in our country must be financially responsible, that we take responsibility for our action, for our debts and we do so in a way that is honorable.

In the course of our country's history, our economy, our government has always provided for people to get a fresh start under the bankruptcy law to enable them to go forward to make a contribution to our economy and our society. Recognizing that tradition and recognizing the appreciation that we have for personal responsibility, I regretfully rise in opposition to this bill because this bankruptcy bill seeks to squeeze even more money for credit card companies from the most hard-pressed Americans.

It would bind hardworking and honest Americans to credit card companies and other lenders as modern day indentured servants. I think it is our duty to speak up for those who would be hurt by this bill.

This duty is paramount because we have been shut out of the process here, the legislative process to bring any amendments to the floor. That would have been an amendment on identity theft, which this week's news accounts demonstrate there are real problems of identity theft, and an amendment was rejected.

We tried to take a legislative course of action in our previous question, which is a technicality, is a procedure here on the floor; but we were not able to get any Republican support to address the issue of identity theft and how individuals can be protected from identity theft under the bankruptcy bill.

According to the sponsors of this bill, 1.6 million Americans who filed for bankruptcy last year are deadbeats who are avoiding their debts. That is really the essence of what they are saying with this bill. Proponents claim that there is a bankruptcy tax in which honest Americans are footing the bill for abusive users of credit cards.

We should be vigilant for any abuse of any legal process. There is no evidence, however, of widespread bankruptcy abuse. In fact, a recent study indicated that 45 percent of those filing for bankruptcy had skipped a needed doctor's visit, 25 percent had utilities shut off, 20 percent went without food. They are not using this money that they should be paying in for luxuries. They just simply do not have money to survive.

As a distinguished group of law professors wrote: ``Some people do abuse the bankruptcy system, but the overwhelming majority of people in bankruptcy are in financial distress as a result of job loss, medical expense, divorce, or a combination of those causes. This bill attempts to kill a mosquito with a shotgun.''

I have a problem with the bill on several counts as to what is contained in the bill. The bankruptcy bill fails miserably, I believe, on its merits. It employs, for the first time, a stringent and unworkable means test that limits access to chapter 7 and forces individuals into payment plans that will fail.

It frustrates a key goal of the bankruptcy code, to give individuals who suffer economic misfortunes through no fault of their own a fresh start. That is an American tradition.

The bill neglects the real causes of bankruptcies, as I just mentioned, medical concerns, divorce, in some cases death, while rewarding irresponsible corporate behavior.

It lets those who truly abuse and game the bankruptcy system, the wealthy debtors who shield their assets in asset trusts and homestead exemptions, keep their loopholes and get off, in some cases, scot-free.

It is wholly unnecessary. Current law already allows a bankruptcy judge to deny a discharge in chapter 7 to prevent abuses. That is why bankruptcy judges are uniformly opposed to the bill.

I just would like to quote Keith Lundin, a Federal bankruptcy judge in Tennessee and an authority on bankruptcy repayment plans. Judge Lundin says, ``The folks who brought you `those who can pay, should pay' are pulling the stuffing out of the very part of the bankruptcy law where debtors do pay.'' He says, ``The advocates aren't trying to fix the bankruptcy law; they're trying to mess it up so much that nobody can use it.''

They interviewed dozens of bankruptcy judges, whose names have been suggested by proponents and opponents of this legislation, for their standing on this issue, to speak out; and the reasons why these judges are opposed are several reasons.

One is the judges now have broad discretion to determine how much a debtor must pay to creditors and on what schedule, and the schedule is very important, after declaring bankruptcy under what is known as chapter 13; but under the legislation, that discretion would be substantially curtailed.

The new legislation would bar courts from reducing the amount that many debtors would have to repay on their cars and other big-ticket items. It

would also extend the length of time people would have to make repayments and impose repayment schedules that critics describe as so onerous that debtors would fall behind. It just prescribes that they would.

The bankruptcy judges say the result would be the collapse of more repayment plans, forcing debtors out of bankruptcy court protection. Creditors could then force debtors to pay the full amount owed, not the reduced amount, and by moving to repossess their belongings. Many people would have to pay creditors far into the future and thus be unable to restart their economic lives, a long-held aim of bankruptcy.

I will submit this article from the Los Angeles Times for the Record at this point.

[From the Los Angeles Times, Mar. 29, 2005]

Judges Say Overhaul Would Weaken Bankruptcy System.

(By Peter G. Gosselin)

For nearly a decade, proponents of overhauling the nation's

bankruptcy laws have described their aim as ensuring that

Americans who enter bankruptcy court do not escape bills that

they can truly afford to pay.

But only weeks before Congress is likely to approve the

long-sought overhaul, bankruptcy judges across the country

warn that the measure would undermine the very section of the

law under which debtors are now repaying more than $3 billion

annually to their creditors.

These judges say the effect of the overhaul would be to

discourage most forms of personal bankruptcy, which--for

nearly two centuries has served as a safety net for people in

economic trouble.

``The folks who brought you `those who can pay, should pay'

are pulling the stuffing out of the very part of the

bankruptcy law where debtors do pay,'' said Keith Lundin, a

federal bankruptcy judge in the eastern district of Tennessee

in Nashville and an authority on bankruptcy repayment plans.

``The advocates aren't trying to fix the bankruptcy law;

they're trying to mess it up so much that nobody can use

it,'' Lundin charged.

In interviews, a dozen current or former bankruptcy judges,

whose names were suggested by proponents as well as opponents

of the overhaul legislation, described what they saw as the

problems that could result from key provisions of the new

measure.

Judges now have broad discretion to determine how much a

debtor must pay to creditors and on what schedule after

declaring bankruptcy under what is known as Chapter 13. But

under the legislation, that discretion would be substantially

curtailed.

The new legislation would bar courts from reducing the

amount that many debtors would have to repay on their cars

and other big-ticket items. It would also extend the length

of time people would have to make repayments and impose

repayment schedules that critics describe as so onerous that

many debtors would fall behind.

The result, the judges said, would be the collapse of more

repayment plans, forcing debtors out of bankruptcy court

protection. Creditors then could try to force debtors to pay

the full amount owed--not the reduced amount a judge had

ordered--by moving to repossess their belongings or bringing

legal actions. Many people would have to pay creditors far

into the future, the critics said, and thus be unable to

restart their economic lives, a long-held aim of bankruptcy.

Repayment plans ``are pretty fragile documents to begin

with, but they're going to get a lot more fragile under these

conditions,'' said Ronald Barliant, a former bankruptcy judge

from the northern district of Illinois in Chicago.

``It's going to take away a lot of the incentives'' for

people to enter repayment plans, said David W. Houston III, a

bankruptcy judge from the northern district of Mississippi in

Aberdeen.

Overhaul proponents respond to such criticisms by

contending that the current bankruptcy system is rife with

fraud and abuse and is stacked against creditors. Many

proponents are deeply scornful of bankruptcy judges, who they

charge have let the system spin out of control.

``They're part of the . . . problem,'' declared Jeff

Tassey, a Washington lobbyist who heads the coalition of

credit card companies, banks and others that has spearheaded

the overhaul drive.

``They're not real judges, not Article 3 judges,'' Tassey

said. He was referring to Article 3 of the U.S. Constitution,

under which judges in the regular federal court system are

appointed for life. Bankruptcy judges are appointed under

Article 1 to 14-year renewable terms.

As matters now stand, financially distressed Americans

generally have two options in bankruptcy. They can file a

Chapter 7 case, in which they forfeit most of their assets in

return for cancellation of most debts and a debt-free ``fresh

start.'' Or, they can file a Chapter 13 case, in which they

get to keep most of their property but must agree to repay a

portion of their debts over a period of time.

Some advocates for changing the system have contended that

these provisions should be rewritten to address a kind of

moral laxness in bankruptcy practices.

``When you have seen a system that has gone from a few

hundred thousand cases to 1.5 million last year--most of that

increase during the fat years of the Clinton administration--

you must conclude something is not right,'' said Edith H.

Jones, a federal appellate court judge in Houston who served

on a blue-ribbon panel to review bankruptcy law in the 1990s

and is widely believed to be seen as on President Bush's

short list for a position on the Supreme Court.

``People have been encouraged to see bankruptcy as an easy

way out of uncomfortable situations,'' Jones said.

Overhaul proponents have also said that the new measure is

so narrowly cast that it would affect no more than 15 pecent

of bankruptcy filers.

The legislation would require courts to check whether

people make more than their state's median income and can

pass a ``means test,'' which gauges whether they have enough

to cover allowable living expenses, pay secured creditors

such as mortgage lenders and still have some left over for

unsecured creditors such as credit card companies. Those who

are above the median and have the means would no longer be

allowed to file under Chapter 7 and wipe out most of their

debts, but would have to file Chapter 13 cases and agree

to a repayment plan.

Nearly all congressional Republicans, together with many

Democrats, support the overhaul measure, which the president

has warmly endorsed and said he would sign. The Senate passed

the measure this month in a 74-25 vote. Approval from the

House is expected next month.

However, largely overlooked in the debate has been a series

of proposed changes in Chapter 13 that critics say would make

it harder for debtors to stick with repayment plans--the

opposite effect of what supporters say they want.

Critics, including bankruptcy judges in California, North

Carolina, Massachusetts, and Florida say there is nowhere

near the fraud in the system that advocates claim.

They cite a study by the nonpartisan American Bankruptcy

Institute, which concludes that only about 3 percent of those

who wipe out their debts in Chapter 7 could afford to repay a

portion in Chapter 13. Lobbyists for the credit card and

banking industries estimate that 10 percent or more would be

able to pay.

Those opposed to the changes contend that most people who

file for bankruptcy are truly distressed finanacially--and

say the success that courts have in collecting as much as

they do under Chapter 13 shows the system is working.

According to figures from the U.S. Trustee Program, a

Justice Department agency, Chapter 13 debtors repaid almost

$3.6 billion in 2003, the latest year for which figures are

available.

But critics say the courts' success with Chapter 13 is

threatened by several little-noticed elements of the proposed

legislation:

Under current law, those who file under Chapter 13 must

repay car loans only up to the amount the car is worth at the

time they enter court, or they risk losing the vehicle. A

debtor who bought a $24,000 sport utility vehicle and filed

for bankruptcy two years later, for example, might have to

pay far less because the vehicle had depreciated.

By reducing what debtors owe auto lenders in this fashion,

the law ensures more money for other creditors. And,

according to bankruptcy experts, it means that auto lenders

are treated on an equal footing with other ``secured''

creditors--they are promised repayment only to the value of

the item they could repossess.

Under the new measure, debtors would have to pay the full

amount on any vehicle purchased within 2 \1/2\ years of

bankruptcy, or risk losing the vehicle. The change may seem

minor to an outsider, but not to Chapter 13 debtors or

bankruptcy judges. ``That's going to be a big deal,''

predicted A. Thomas Small, a bankruptcy judge for the eastern

district of North Carolina in Raleigh. It would mean that

many repayment plans that work now would fail under the new

measure, he said.

Under current law, the debtor and his lawyer work out a

repayment plan that they think represents the most the debtor

can pay and still cover basic living expenses. A bankruptcy

judge must eventually approve the plan, which usually has

reduced or stretched-out payments to creditors. In the

meantime, the debtor immediately begins making payments to a

court-appointed trustee.

Under the legislation, many debtors would have to make full

payments on such big-ticket items as houses, furniture and

appliances. They would have to make those payments directly

to the lenders. And at the same time, they would have to

start paying the court-appointed trustee for debts to

doctors, credit card companies and other unsecured creditors.

Many bankruptcy judges say debtors who come before them

often do not have enough income to make both sets of

payments.

The result, they warned, would be that many debtors' plans

would quickly fail.

Under current bankruptcy law, two guiding principles are

that debtors should not be required to repay indefinitely, or

they effectively become indentured servants to their

creditors, and that they should eventually be given a debt-

free ``fresh start'' on their economic lives.

The legislation would require debtors to agree to repayment

plans with a five-year minimum repayment schedule, up from

the current three-year minimum. It would also

boost the chances that debtors would be required to continue

paying some debts even after a plan's successful completion.

Todd Zywicki, a law professor at George Mason University in

Virginia, said the shift away from the ``fresh start''

philosophy is justified because another bedrock American

value--that people who incur debts should pay them--is being

sullied under the current system.

But many bankruptcy judges and independent experts warn

that equally compelling values would be lost if the proposed

measure becomes law.

Practically, they warn, debtors who would no longer qualify

for Chapter 7 and fail to complete Chapter 13 repayment plans

would either have to keep paying creditors indefinitely or

drop out.

``If you're confronted with a mountain of debt and have no

hope of getting out from under it, you're either going to go

underground or turn to crime,'' said Kenneth N. Klee, a

former Republican congressional staffer who was one of the

chief authors of the last major bankruptcy law change in 1978

and now teaches law at UCLA.

More broadly, say judges and others, the ability to start

over after running into financial problems should not be

discounted.

``Loads of people have filed bankruptcy--Mark Twain, Buster

Keaton, Walt Disney,'' said Lundin, the Nashville-based

bankruptcy judge. ``Bankruptcy is a very American safety net.

``It's part and parcel of the American dream.''

Mr. Speaker, while this bill fails to improve the bankruptcy system, the bill succeeds in being harsh, punitive and mean-spirited.

The bill is particularly harsh on women who are often the primary care givers for their children or their parents and are the largest single group in bankruptcy; on older Americans who are the fastest growing group in bankruptcy due to medical costs; and on children. Parents seeking child support will compete with credit card companies and other lenders in State courts, but will have little protection and fewer resources than the large credit card companies they are up against.

Finally, the bill does a disservice to those who serve our Nation, especially our National Guard troops and Reservists who are not protected by an amendment passed by the other body.

National Guard and Reservists make up nearly 40 percent of those serving in the Iraqi theater. They often leave behind small businesses and jobs and incur debt, but they do not have the benefits and services offered to active duty Armed Forces.

This bill would not stop abusive creditors who are stalking down military families while their loved ones are serving our Nation bravely and heroically.

I would hope that our Republican colleagues would join us in a bipartisan way to support our motion to recommit that would give some opportunities for the National Guard not to be treated this way under the bankruptcy bill.

As for the bill, instead of addressing real causes of bankruptcy, this bill rewards irresponsible corporate behavior and fattens the already large profits of the credit card industry.

While bankruptcy filings have increased 17 percent in the last 8 years, credit card profits have increased more than 160 percent, from $11 billion to more than $30 billion. There are now 5 billion credit card solicitations a year stuffed into our mail boxes and many targeted at teenagers with no jobs, no income, no visible means of support to pay these credit card bills.

It is an industry with little oversight and loose underwriting that charges enormous fees and unfair interest payments. The legislation does nothing to address these failings. In fact, the other body rejected an amendment to tell customers how much it would cost in additional interest if they make only minimum payments on their credit card bills.

For these and other reasons, Mr. Speaker, I sadly oppose this bill. I say sadly because this is an area where there should not be any major disagreement. If the point is to honor a tradition in our country where people are entitled to a fresh start so they can begin contributing back to our economy and to our society, then we should uphold that; and if people are abusing the system, existing law already covers that.

Instead, we have a situation where it is mean and harsh to those who can least afford to pay back and gives opportunity to the wealthiest, the wealthiest, and corporate abusers of the system.

With that, Mr. Speaker, I am giving my reasons for why I oppose the bill.

Mr. Speaker, this bill hurts Americans. One group who will be especially hurt are family forced into bankruptcy because of a medical crisis.

A recent study conducted by professors at Harvard Medical and Law School showed that about half of all personal bankruptcies can be attributed to medical costs.

Among those who cited illnesses as a cause of bankruptcy, the average unreimbursed medical costs totaled nearly $12,000 even though more than three-quarters had health insurance.

How does the bill hurt the families? Under the bill for the first time there will be a presumption that many of these families abuse the bankruptcy system. Under current law, people facing a medical bankruptcy can seek several forms of relief. Chapter 7 is by far the most common. Under 7 debtors are required to forfeit all of their property other than the exempt assets in exchange for having their debts extinguished.

Current law already gives bankruptcy courts discretion to deny chapter 7 relieve where the filing is found to be a substantial abuse. But unlike this bill, current law provides a presumption in favor of granting relief to the debtor.

The other option is chapter 13 where a debtor is required to continue paying creditors. This makes it more difficult for debtors to get back on their feet.

This bill will hurt families facing medical bankruptcy because it will force many of them into chapter 13. That is because it presumes that these families are abusing the bankruptcy system if they fail the means test. The means tests starts with a family's income and then subtracts monthly expenses permitted by IRS guidelines. But instead of using a debtor's actual projected income, the means tests uses the debtor's average income over the prior 6 months. Thus, if a family's bankruptcy was triggered by a loss of income resulting from a serious illness, the means test would still attribute the lost income for the purpose of determining whether the family is abusing the bankruptcy system.

Further, the means test uses the median income for a State. My constituents in Santa Clara County live in a

high-cost area. Almost nobody will be able to discharge their debts in bankruptcy from Santa Clara County because of that high cost, no matter how meritorious for their claim for relief.

Similarly, instead of using the debtor's actual expenses, the inflexible guidelines developed by the IRS is used. As a result, more families facing medical bankruptcy will be presumed to be abusing the system, will be forced into chapter 13 and will never be able to stand on their feet again. That is not right.

The Harvard study found that these struggling families did everything they could to pay their medical bills to avoid bankruptcy. One in five skipped meals. One-third had their electricity cut off. Almost half lost their phone service. One in five was forced to move.

Incredibly, they also cut back on needed medications to try to avoid bankruptcy. In fact, half went without needed prescriptions. And a full 60 percent went without a needed doctor appointment.

Please join me in opposing this unfair bill.

[From Market Watch]

Illness and Injury as Contributors to Bankruptcy

(By David U. Himmelstein, Elizabeth Warren, Deborah Thorne, and Steffie

Woolhandler)

ABSTRACT: In 2001, 1.458 million American families filed

for bankruptcy. To investigate medical contributors to

bankruptcy, we surveyed 1,771 personal bankruptcy filers in

five federal courts and subsequently completed in-depth

interviews with 931 of them. About half cited medical causes,

which indicates that 1.9-2.2 million Americans (filers plus

dependents) experienced medical bankruptcy. Among those whose

illnesses led to bankruptcy, out-of-pocket costs averaged

$11,854 since the start of illness; 75.7 percent had

insurance at the onset of illness. Medical debtors were 42

percent more likely than other debtors to experience lapses

in coverage. Even middle-class insured families often fall

prey to financial catastrophe when sick.

``If the debtor be insolvent to serve creditors, let his

body be cut in pieces on the third market day. It may be cut

into more or fewer pieces with impunity. Or, if his creditors

consent to it, let him be sold to foreigners beyond the

Tiber.''

--Twelve Tables, Table III, 6 (ca. 450 B.C.)

Our bankruptcy system works differently from that of

ancient Rome; creditors carve up the debtor's assets, not the

debtor. Even so, bankruptcy leaves painful problems in its

wake. It remains on credit reports for a decade, making

everything from car insurance to house payments more

expensive. Debtors' names are often published in the

newspaper, and the fact of their bankruptcy may show up

whenever someone tries to find them via the Internet.

Potential employers who run routine credit checks (a common

screening practice) will discover the bankruptcy, which can

lead to embarrassment or, worse, the lost chance for a much-

needed job.

Personal bankruptcy is common. Nearly 1.5 million couples

or individuals filed bankruptcy petitions in 2001, a 360

percent increase since 1980. Fragmentary data from the legal

literature suggest that illness and medical bills contribute

to bankruptcy. Most previous studies of medical bankruptcy,

however, have relied on court records--where medical debts

may be subsumed under credit card or mortgage debt--or on

responses to a single survey question. None has collected

detailed information on medical expenses, diagnoses, access

to care, work loss, or insurance coverage. Research has been

impeded both by the absence of a national repository for

bankruptcy filings and by debtors' reticence to discuss their

bankruptcy, in population-based surveys, only half of those

who have undergone bankruptcy admit to it.

The health policy literature is virtually silent on

bankruptcy, although a few studies have looked at

impoverishment attributable to illness. In his 1972 book,

Sen. Edward Kennedy (D-MA) gave an impressionistic account of

``sickness and bankruptcy.'' The likelihood of incurring high

out-of-pocket costs was incorporated into older estimates of

the number of underinsured Americans: twenty-nine million in

1987. About 16 percent of families now spend more than one-

twentieth of their income on health care. Among terminally

ill patients (most of them insured), 39 percent reported that

health care costs caused moderate or severe financial

problems. Medical debt is common among the poor, even those

with insurance, and interferes with access to care. At least

8 percent, and perhaps as many as 21 percent of American

families are contacted by collection agencies about medical

bills annually.

Our study provides the first extensive data on the medical

concomitants of bankruptcy, based on a survey of debtors in

bankruptcy courts. We address the following questions: (1)

Who files for bankruptcy? (2) How frequently do illness and

medical bills contribute to bankruptcy? (3) When medical

bills contribute, how large are they and for what services?

(4) Does inadequate health insurance play a role in

bankruptcy? (5) Does bankruptcy compromise access to care?

a brief primer on bankruptcy

``Bankrupt'' is not synonymous with ``broke.'' ``Bankrupt''

means filing a petition in a federal court asking for

protection from creditors via the bankruptcy laws. A single

petition may cover an individual or married couple. The

instant a debtor files for bankruptcy, the court assumes

legal control of the debtor's assets and halts all collection

efforts.

Shortly after the filing, a court-appointed trustee

convenes a meeting to inventory the debtor's assets and debts

and to determine which assets are exempt from seizure. States

may regulate these exemptions, which often include work

tools, clothes, Bibles, and some equity in a home.

About 70 percent of all consumer debtors file under Chapter

7 of the Bankruptcy Code; most others file under Chapter 13.

In Chapter 7 the trustee liquidates all nonexempt assets--

although 96 percent of debtors have so little unencumbered

property that there is nothing left to liquidate. At the

conclusion of the bankruptcy, the debtor is freed from many

debts. In Chapter 13 the debtor proposes a repayment plan,

which extends for up to five years. Chapter 13 debtors may

retain their property so long as they stay current with their

repayments.

Under both chapters, taxes, student loans, alimony, and

child support remain payable in full, and debtors must make

payments on all secured loans (such as home mortgages and car

loans) or forfeit the collateral.

study data and methods

This study is based on a cohort of 1,771 bankruptcy filings

in 2001. For each filing, a debtor completed a written

questionnaire at the mandatory meeting with the trustee, and

we abstracted financial data from public court records. In

addition, we conducted follow-up telephone interviews with

about half (931) of these debtors.

Sampling strategy. We used cluster sampling to assemble a

cohort to households filing for personal bankruptcy in five

(of the seventy-seven total) federal judicial districts. We

collected 250 questionnaires in each district, representative

of the proportion of Chapters 7 and 13 filings in that

district. These 1,250 cases constitute our ``core sample.''

For planned studies on housing, we collected identical data

from an additional 521 homeowners filing for bankruptcy. We

based our analyses on all 1,771 bankruptcies with responses

weighted to maintain the representativeness of the sample.

Data collection. With the cooperation of the judges in each

district, we contacted the trustees who officiate at meetings

with debtors. The trustees agreed to distribute, or to allow

a research assistant to distribute, a self-administered

questionnaire to debtors appearing at the bankruptcy meeting.

Questionnaires (which were available in English and Spanish)

included a cover letter explaining the research project and

human subjects protections and encouraging debtors to consult

their attorneys (who were almost always present) before

participating.

The questionnaire asked about demographics, employment,

housing, and specific reasons for filing for bankruptcy, it

also asked whether the debtor had medical debts exceeding

$1,000, had lost two or more weeks of work-related income

because of illness, or had health insurance coverage for

themselves and all dependents at the time of filing, and

whether there had been a gap of one month or more in that

coverage during the past two years. In joint filings, we

collected demographic information for each spouse.

During the spring and summer of 2001 we collected

questionnaires from consecutive debtors in each district

until the target number was reached.

Follow-up telephone interviews. The written questionnaire

distributed at the time of bankruptcy filing invited debtors

to participate in future telephone interviews, for which they

would receive $50; 70 percent agreed to such interviews. We

ultimately completed follow-up telephone interviews with 931

of the 1,771 debtor families, a response rate of 53 percent.

The telephone interviews, conducted between June 2001 and

February 2002 using a structured, computer-assisted protocol,

explored financial, housing, and medical issues. Many debtors

also provided a narrative description of their bankruptcy

experience.

Detailed medical questions. Each of the 931 interviewees

was asked if any of the following had been a significant

cause of their bankruptcy: an illness or injury; the death of

a family member; or the addition of a family member through

birth, adoption, custody, or fostering. Those who answered

yes to this screening question were queried about diagnoses,

health insurance during the illness, and medical care use and

spending. Interviewers collected information about each

household member with medical problems. In total, we

collected in-depth medical information on 391 people with

health problems in 332 debtor households.

Data analysis. We used data from the self-administered

questionnaires (and court records) obtained from all 1,771

filters to analyze demographics, health coverage at the time

of filing, and gaps in coverage in the two years before

filing.

We also used the questionnaire to estimate how frequently

illness and medical bills contributed to bankruptcy. We

developed two summary measures of medical bankruptcy. Under

the rubric ``Major Medical Bankruptcy'' we included debtors

who either (1) cited illness or injury as a specific reason

for bankruptcy, or (2) reported uncovered medical bills

exceeding $1,000 in the past years,

or (3) lost at least two weeks of work-related income because

of illness/injury, or (4) mortgaged a home to pay medical

bills. Our more inclusive category, ``Any Medical

Bankruptcy,'' included debtors who cited any of the above, or

addiction, or uncontrolled gambling, or birth, or the death

of a family member.

Data from the 931 follow-up telephone interviews were used

to analyze hardships experienced by debtors in the period

surrounding their bankruptcy, including problems gaining

access to medical care. The in-depth medical interviews

regarding 391 people with medical problems are the basis for

our analyses of which household members were ill, diagnoses,

health insurance at onset of illness, and out-of-pocket

spending. Two physicians (Himmelstein and Woolhandler) coded

the diagnoses given by debtors into categories for analysis.

SAS and SUDAAN were used for statistical analyses,

adjusting for complex sample design. To extrapolate our

findings nationally, we assumed that our sample was

representative of the 1,457,572 households filing for

bankruptcy during 2001. Human subject committees at Harvard

Law School and the Cambridge Hospital approved the project.

study findings

Who files for bankruptcy? Exhibit 1 displays the

demographic characteristics of our weighted sample of 1,771

bankruptcy filers. The average debtor was a forty-one-year-

old woman with children and at least some college education.

Most debtors owned homes; their occupational prestige scores

place them predominantly in the middle or working classes.

On average, each bankruptcy involved 1.32 debtors

(reflecting some joint filings by married couples) and 1.33

dependents. Extrapolating from our data, the 1.5 million

personal bankruptcy filings nationally in 2001 involved 3.9

million people: 1.9 million debtors, 1.3 million children

under age eighteen, and 0.7 million other dependents.

Medical causes of bankruptcy. Exhibit 2 shows the

Mr. Speaker, I rise in opposition to the bankruptcy bill before the House.

This legislation has two fundamental flaws. The first problem is that the bill does not distinguish between those individuals who abuse their credit and then seek to wipe the slate clean through Chapter 7, and those who enter bankruptcy as the result of a costly medical emergency or after one of the breadwinners in a family loses their job. We need to make a distinction between a family who is struggling to pay for a medical operation for a child and a person who maxes out their credit cards on a shopping spree at the mall. This bill does not do so.

A recent Harvard University study underscores the fact that the bankruptcy bill's impact will extend well beyond cracking down on people who abuse credit. The study looked at 1771 bankruptcy filers in five states. The results were striking: Half of the people in the study said that illness or medical bills drove them into bankruptcy. Most of these people actually had some health insurance; but high co-payments, deductibles, exclusions from coverages left them liable for thousands of dollars in out-of-pocket costs when serious illness struck. Other people in the study suddenly lost their jobs and therefore their health insurance. In many cases, people were let go from their jobs soon after the onset of a debilitating illness, so the medical bills begin to arrive just as the insurance and paychecks disappear.

The second fundamental problem left unaddressed by the bill is the credit card industry's role in the surge of bankruptcy filings in recent years. The industry hands out credit cards like popcorn, and then loads on extraordinary penalty fees and higher interest rates after a payment is late. The result is that even if someone wants to pay off their credit debts, they are unable to do so because of thousands of dollars of punitive fees and penalty interest rates that can run as high as 40 percent. The lending policies of the credit card companies themselves is a major factor in driving consumers into bankruptcy, yet the legislation before the House does nothing to end these abuses.

I include with my statement an article from the March 6 edition of the Washington Post entitled, ``Credit Card Penalties, Fees Bury Debtors; Senate Nears Action on Bankruptcy Curbs.''

[From the Washington Post, Mar. 6, 2005]

Credit Card Penalties, Fees Bury Debtors; Senate Nears Action on

Bankruptcy Curbs

(By Kathleen Day and Caroline E. Mayer)

For more than two years, special-education teacher Fatemeh

Hosseini worked a second job to keep up with the $2,000 in

monthly payments she collectively sent to five banks to try

to pay $25,000 in credit card debt.

Even though she had not used the cards to buy anything

more, her debt had nearly doubled to $49,574 by the time the

Sunnyvale, Calif., resident filed for bankruptcy last June.

That is because Hosseini's payments sometimes were tardy,

triggering late fees ranging from $25 to $50 and doubling

interest rates to nearly 30 percent. When the additional

costs pushed her balance over her credit limit, the credit

card companies added more penalties.

``I was really trying hard to make minimum payments,'' said

Hosseini, whose financial problems began in the late 1990s

when her husband left her and their three children. ``All of

my salary was going to the credit card companies, but there

was no change in the balances because of that interest and

those penalties.''

Punitive charges--penalty fees and sharply higher interest

rates after a payment is late--compound the problems of many

financially strapped consumers, sometimes making it

impossible for them to dig their way out of debt and pushing

them into bankruptcy.

The Senate is to vote as soon as this week on a bill that

would make it harder for individuals to wipe out debt through

bankruptcy. The Senate last week voted down several

amendments intended to curb excessive fees and other

practices that critics of the industry say are abusive. House

leaders say they will act soon after that, and President Bush

has said he supports the bill.

Bankruptcy experts say that too often, by the time an

individual has filed for bankruptcy or is hauled into court

by creditors, he or she has repaid an amount equal to their

original credit card debt plus double-digit interest, but

still owes hundreds or thousands of dollars because of

penalties.

``How is it that the person who wants to do right ends up

so worse off?'' Cleveland Municipal Judge Robert J. Triozzi

said last fall when he ruled against Discover in the

company's breach-of-contract suit against another struggling

credit cardholder, Ruth M. Owens.

Owens tried for six years to pay off a $1,900 balance on

her Discover card, sending the credit company a total of

$3,492 in monthly payments from 1997 to 2003. Yet her balance

grew to $5,564.28, even though, like Hosseini, she never used

the card to buy anything more. Of that total, over-limit

penalty fees alone were $1,158.

Triozzi denied Discover's claim, calling its attempt to

collect more money from Owens ``unconscionable.''

The bankruptcy measure now being debated in Congress has

been sought for nearly eight years by the credit card

industry. Twice in that time, versions of it have passed both

the House and Senate. Once, President Bill Clinton refused to

sign it, saying it was unfair, and once the House reversed

its vote after Democrats attached an amendment that would

prevent individuals such as anti-abortion protesters from

using bankruptcy as a shield against court-imposed fines.

Credit card companies and most congressional Republicans

say current law needs to be changed to prevent abuse and make

more people repay at least part of their debt. Consumer-

advocacy groups and many Democrats say people who seek

bankruptcy protection do so mostly because they have fallen

on hard times through illness, divorce or job loss. They also

argue that current law has strong provisions that judges can

use to weed out those who abuse the system.

Opponents also argue that the legislation is unfair because

it ignores loopholes that would allow rich debtors to shield

millions of dollars during bankruptcy through expensive homes

and complex trusts, while ignoring the need for more

disclosure to cardholders about rates and fees and curbs on

what they say is irresponsible behavior by the credit card

industry. The Republican majority, along with a few

Democrats, has voted down dozens of proposed amendments to

the bill, including one that would make it easier for the

elderly to protect their homes in bankruptcy and another that

would require credit card companies to tell customers how

much extra interest they would pay over time by making only

minimum payments.

No one knows how many consumers get caught in the spiral of

``negative amortization,'' which is what regulators call it

when a consumer makes payments but balances continue to grow

because of penalty costs. The problem is widespread enough to

worry federal bank regulators, who say nearly all major

credit card issuers engage in the practice.

Two years ago regulators adopted a policy that will require

credit card companies to set monthly minimum payments high

enough to cover penalties and interest and lower some of the

customer's original debt, known as principal, so that if a

consumer makes no new charges and makes monthly minimum

payments, his or her balance will begin to decline.

Banks agreed to the new rules after, in the words of one

top federal regulator, ``some arm-twisting.'' But bank

executives persuaded regulators to allow the higher minimum

payments to be phased in over several years, through 2006,

arguing that many customers are so much in debt that even

slight increases too soon could push many into financial

disaster.

Credit card companies declined to comment on specific cases

or customers for this article, but banking industry

officials, speaking generally, said there is a good reason

for the fees they charge.

``It's to encourage people to pay their bills the way they

said they would in their contract, to encourage good

financial management,'' said Nessa Feddis, senior federal

counsel for the American Bankers Association. ``There has to

be some onus on the cardholder, some responsibility to manage

their finances.''

High fees ``may be extreme cases, but they are not the

trend, not the norm,'' Feddis said.

``Banks are pretty flexible,'' she said. ``If you are a

good customer and have an occasional mishap, they'll waive

the fees, because there's so much competition and it's too

easy to go someplace else.'' Banks are also willing to work

out settlements with people in financial difficulty, she

said, because ``there are still a lot of options even for

people who've been in trouble.''

Many bankruptcy lawyers disagree. James S.K. ``Ike''

Shulman, Hosseini's lawyer, said credit card companies

hounded her and did not live up to several promises to work

with her to cut mounting fees.

Regulators say it is appropriate for lenders to charge

higher-risk debtors a higher interest rate, but that negative

amortization and other practices go too far, posing risks to

the banking system by threatening borrowers' ability to repay

their debts and by being unfair to individuals.

U.S. Bankruptcy Judge David H. Adams of Norfolk, who is

also the president of the National Conference of Bankruptcy

Judges, said many debtors who get in over their heads ``are

spending money, buying things they shouldn't be buying.''

Even so, he said, ``once you add all these fees on, the

amount of principal being paid is negligible. The fees and

interest and other charges are so high, they may never be

able to pay it off.''

Judges say there is little they can do by the time cases

get to bankruptcy court. Under the law, ``the credit card

company is legally entitled to collect every dollar without a

distinction'' whether the balance is from fees, interest or

principal, said retired U.S. bankruptcy judge Ronald

Barliant, who presided in Chicago. The only question for the

courts is whether the debt is accurate, judges and lawyers

say.

John Rao, staff attorney of the National Consumer Law

Center, one of many consumer groups fighting the bankruptcy

bill, says the plight consumers face was illustrated last

year in a bankruptcy case filed in Northern Virginia.

Manassas resident Josephine McCarthy's Providian Visa bill

increased to $5,357 from $4,888 in two years, even though

McCarthy has used the card for only $218.16 in purchases and

has made monthly payments totaling $3,058. Those payments,

noted U.S. Bankruptcy Judge Stephen S. Mitchell in

Alexandria, all went to ``pay finance charges (at a whopping

29.99%), late charges, over-limit fees, bad check fees and

phone payment fees.'' Mitchell allowed the claim ``because

the debtor admitted owing it.'' McCarthy, through her lawyer,

declined to be interviewed.

Alan Elias, a Providian Financial Corp. spokesman, said:

``When consumers sign up for a credit card, they should

understand that it's a loan, no different than their mortgage

payment or their car payment, and it needs to be repaid. And

just like a mortgage payment and a car payment, if you are

late you are assessed a fee.'' The 29.99 percent interest

rate, he said, is the default rate charged to consumers ``who

don't meet their obligation to pay their bills on time''

and is clearly disclosed on account applications.

Feddis, of the banker's association, said the nature of

debt means that interest will often end up being more than

the original principal. ``Anytime you have a loan that's

going to extend for any period of time, the interest is going

to accumulate. Look at a 30-year-mortgage. The interest is

much, much more than the principal.''

Samuel J. Gerdano, executive director of the American

Bankruptcy Institute, a nonpartisan research group, said that

focusing on late fees is ``refusing to look at the elephant

in the room, and that's the massive levels of consumer debt

which is not being paid. People are living right up to the

edge,'' failing to save so when they lose a second job or

overtime, face medical expense or their family breaks up,

they have no money to cope.

``Late fees aren't the cause of debt,'' he said.

Credit card use continues to grow, with an average of 6.3

bank credit cards and 6.3 store credit cards for every

household, according to Cardweb.com Inc., which monitors the

industry. Fifteen years ago, the averages were 3.4 bank

credit cards and 4.1 retail credit cards per household.

Despite, or perhaps because of, the large increase in

cards, there is a ``fee feeding frenzy,'' among credit card

issuers, said Robert McKinley, Cardweb's president and chief

executive. ``The whole mentality has really changed over the

last several years,'' with the industry imposing fees and

increasing interest rates if a single payment is late.

Penalty interest rates usually are about 30 percent, with

some as high as 40 percent, while late fees now often are $39

a month, and over-limit fees, about $35, McKinley said. ``If

you drag that out for a year, it could be very damaging,'' he

said. ``Late and over-limit fees alone can easily rack up

$900 in fees, and a 30 percent interest rate on a $3,000

balance can add another $1,000, so you could go from $2,000

to $5,000 in just one year if you fail to make payments.''

According to R.K. Hammer Investment Bankers, a California

credit card consulting firm, banks collected $14.8 billion in

penalty fees last year, or 10.9 percent of revenue, up from

$10.7 billion, or 9 percent of revenue, in 2002, the first

year the firm began to track penalty fees.

The way the fees are now imposed, ``people would be better

off if they stopped paying'' once they get in over their

heads, said T. Bentley Leonard, a North Carolina bankruptcy

attorney. Once you stop paying, creditors write off the debt

and sell it to a

debt collector. ``They may harass you, but your balance

doesn't keep rising. That's the irony.''

Mr. Speaker, I think it is important as we debate this question that the opponents of this bill not be defined or classified as opposing responsibility and opposing the responsibility of being a good citizen and adhering to the debt that you accrue. I think that is a wrong-headed definition of the opponents.

We have been described as non-patriot in other debates; in war and peace, scoundrels and socialists. But I think it is important for the American people to understand that we are engaging in a democratic process to be able to allow a voice of opposition to be heard for a tainted, stale and stagnant piece of legislation that has been bought and paid for by special interests.

Our desire is to possibly encourage our colleagues in the House to take a serious and deliberative review of S. 256.

Now, we have heard already that we were refused and denied amendments and one would ask the question why. If we are a deliberative body, why not make a bill that is as dated almost as the Gulf War, not the Iraq war, to make it better.

Now, I hear my colleagues talking about $400 that will go to each household. What a misnomer. Someone said that there was a tax refund a couple of years ago, $350, $400. I can tell you that the constituents in the 18th Congressional District never saw that money. I would like to suggest to you that really what is happening is what Professor Elizabeth Warren has said, that this is an overreaching problem, the overreaching problem with this bill this time is that the American economy has passed it by.

We are in the depth almost of a deficit that is about to stagnate and stifle us. This bill will close the door to working and middle class persons. Since this bill was written, Mr. Speaker, Enron, WorldCom, Adelphia, United Airlines, LTV Steel, M-Mart, Polaroid, Global Crossing have filed bankruptcy and they did not have to use a means test.

So let me suggest to you as I look at the medical conditions, I would ask my colleagues on the other side of the aisle does their stale old bill, this stack of old papers respond to the medical causes of bankruptcy that shows that because there is death in the family, illness or injury, people who go try to repay their bills and they fall into bankruptcy and this old stale 1998 bill does not respond to that.

My next question, Mr. Speaker, is whether or not this old stale bill deals with the military, the military who is in Iraq right now, does this old stale bill deal with it? Does the old stale bill deal with the loan sharks. That is a travesty and should be defeated.

Testimony of Elizabeth Warren Before the Senate Committee on the

Judiciary

My name is Elizabeth Warren. I teach bankruptcy law. As

some of you know, I have followed this issue with interest

for some time.

The overarching problem with this bill is that time and the

American economy have passed it by. It was drafted--never

mind by whom--eight years ago. Even if it had been a flawless

piece of legislation then, and it surely was not, the events

of the past eight years have dramatically changed the

economic and social environment in which you must consider

this bill.

In the eight years since this bill was introduced, new

cases have burst on the scene. The names are burned in our

collective memories: Enron, Worldcom, Adelphia, United

Airlines, USAirways and TWA, LTV Steel, K-Mart, Polaroid,

Global Crossing.

While the actual number of consumer bankruptcy cases has

declined slightly in the past year, many of the largest

corporate bankruptcy cases in American history have occurred

since the Senate last reevaluated the bankruptcy laws, and

some of those cases are already legend for the corporate

scandals that accompanied them. Because it was written eight

years ago, this bill has nothing to deal with these abuses,

with these dangers, with the needs that these cases have made

so painfully clear.

Problems not even on the horizon when this bill was written

are now front and center.

Companies in Chapter 11 that cancel pension plans and

health benefits, leaving thousands of families economically

devastated.

Companies that continue to pay executives and insiders tens

of millions of dollars, while they demand concessions from

their creditors.

Military families targeted for payday loans at 400%

interest, insurance scams, and other forms of financial

chicanery.

Scandals have rocked the so-called non-profit credit

counseling industry, exposing how tens of thousands of

consumers struggling desperately to pay their bills and not

file for bankruptcy were cheated.

Sub-prime mortgage companies, financed by some of the best

names in American banking, have unlawfully taken millions of

dollars from homeowners, then fled to the bankruptcy courts

to protect their insiders and bank lenders.

In the eight years since this bill was introduced, there

has been a revolution in the data available to us. Unlike

eight years ago, we need not have a theoretical debate about

who turns to the bankruptcy system. We now know:

One million men and women each year are turning to

bankruptcy in the aftermath of a serious medical problem--and

three-quarters of them have health Insurance.

A family with children is nearly three times more likely to

file for bankruptcy than an individual or couple with no

children.

More children now live through their parents' bankruptcy

than through their parents' divorce.

Unlike eight years ago, we need not have a theoretical

debate about the homestead exemption because we have had

example after example of abuse tied directly to the failure

of American companies. Millions of jobs have been lost but

not the Florida and Texas fortunes of their corporate

executives. Others are welcome to use the unlimited homestead

exemption as well.

After he lost a $33 million lawsuit in California, O.J.

Simpson moved to Florida, explaining to a reporter that the

unlimited exemption would permit him to protect a

multimillion-dollar house.

Abe Grossman ran up $233 million in debts in Massachusetts

and Rhode Island, then fled to Florida to purchase a 64,000

square foot home valued at $55 million.

Some physicians are reportedly dropping their malpractice

insurance and putting all their assets in their homes--where

they can't be touched by bankruptcy.

Under S. 256, they would still be welcome to file for

bankruptcy and to keep their fortunes and properties intact

while leaving their creditors with nothing.

Unlike eight years ago, we need not have a theoretical

debate about the effects of the proposed legislation on small

business.

It takes time to negotiate a reorganization, even for a

small company. The time-lines in S. 256 would have denied

reorganization to more than a third of the small businesses

that eventually saved themselves--destroying value for the

companies, their creditors, their employees and their

communities.

This bill would be the first in American history to

discriminate affirmatively against small businesses. For the

first time ever, Congress would pass a law that says

companies like Enron and Worldcom don't have to file extra

forms, Enron and Worldcom don't have to schedule meetings

with the Office of the United States Trustee, and Enron

and Worldcom don't have to meet fixed deadlines that a

judge cannot waive for any reason--but every troubled

small business in the Chapter 11 system would have to file

those papers, undergo that supervision and meet those

deadlines or be liquidated. No exceptions allowed for

small companies.

Unlike eight years ago, we need not have a theoretical

debate about the economic impact of bankruptcies on credit

card company profits.

In the eight years since this bill was introduced, credit

has not been curtailed. Minors--under 18 years of age--with

no incomes and no credit history are now described as an

``emerging market'' for the credit industry. Credit card

solicitations have doubled to 5 billion a year. Bankruptcy

filings have increased 17 percent, while credit card profits

have increased 163 percent, from $11.5 billion to $30.2

billion.

Some courts have demanded that credit card companies

disclose how much of their claims are the amounts actually

borrowed and how much are fees, penalties and interest.

Companies have admitted that for every

dollar they claim the customer borrowed, they are demanding

two more dollars in fees and interest.

With increased fees and universal default clauses that

drive up interest rates even for customers paying on time, a

growing number of people have no option but to declare

bankruptcy. Cases continue to surface like In re McCarthy, in

which a woman borrowed $2200, paid back $2010 in the two

years before bankruptcy, and was told by her credit card

company that she still owed $2600 more. Ms. McCarthy had two

choices: She could either declare bankruptcy or she could pay

$2000 every year for life--and die owing as much as she owes

today.

The means test in this bill, Section 102, has been one of

its most controversial provisions. Proponents like to say

that the means test will put pressure only on the families

that can afford to repay. And yet, the bill has 217 sections

that run for 239 pages. The means test aside, virtually every

consumer provision aims in the same direction. The bill

increases the cost of bankruptcy protection for every family,

regardless of income or the cause of financial crisis, and it

decreases the protection of bankruptcy for every family,

regardless of income or the cause of financial crisis.

There are provisions that will make Chapter 13 impossible

for many of the debtors who would file today, provisions that

make it easier than ever to abuse the unlimited homestead

provisions in some states and yet at the same time hurt

people with more modest homesteads in those same states.

Other provisions will compromise the privacy of millions of

families by putting their entire tax returns in the court

files and potentially on the Internet, making them easy prey

for identity thieves. Women trying to collect alimony or

child support will more often be forced to compete with

credit card companies that can have more of their debts

declared non-dischargeable. All these provisions apply

whether a person earns $20,000 a year or $200,000 a year.

But the means test as written has another, more basic

problem: It treats all families alike. It assumes that

everyone is in bankruptcy for the same reason--too much

unnecessary spending. A family driven to bankruptcy by the

increased costs of caring for an elderly parent with

Alzheimer's disease is treated the same as someone who maxed

out his credit cards at a casino. A person who had a heart

attack is treated the same as someone who had a spending

spree at the shopping mall. A mother who works two jobs and

who cannot manage the prescription drugs needed for a child

with diabetes is treated the same as someone who charged a

bunch of credit cards with only a vague intent to repay. A

person cheated by a sub-prime mortgage lender and lied to by

a credit counseling agency is treated the same as a person

who gamed the system in every possible way.

If Congress is determined to sort the good debtors from the

bad, then it is both morally and economically imperative that

they distinguish those who have worked hard and played by the

rules from those who have shirked their responsibilities. If

Congress is determined to sort the good from the bad, then

begin by sorting those who have been laid low by medical

debts, those who lost their jobs, those whose breadwinners

have been called to active duty and sent to Iraq, those who

are caring for elderly parents and sick children from those

few who overspend on frivolous purchases.

This Congress wants to set a new moral tone. Do it with the

bankruptcy bill. Don't press ``one-size-fits-all-and-they-

are-all-bad'' judgments on the very good and the very bad.

Spend the time to make the hard decisions. Leave discretion

with the bankruptcy judges to evaluate these families. Based

on the Harvard medical study and other research, I think you

will find that most debtors are filing for bankruptcy not

because they had too many Rolex watches and Gameboys, but

because they had no choice.

You have a choice. It's a choice that you're making for the

American people. Adopt new bankruptcy legislation. Establish

a means test that targets abuse. But do not enact a proposal

written to address myth and mirage more than reality. Do not

enact a proposal written for 1997 when the problems of the

American corporate economy in 1997 deserve far more attention

and the problems of the American middle class can no longer

be ignored.

Overwhelmingly, American families file for bankruptcy

because they have been driven there--largely by medical and

economic catastrophe--not because they want to go there. Your

legislation should respect that harsh reality and the

families who face it.

Announcement by the Speaker Pro Tempore

Mr. Speaker, I rise in support of Senate bill 256 and urge its adoption by the House.

Whether or not we have a cost of $400 per household or some other cost, I think it is clear to all Americans that we pay a cost if we have excessive bankruptcies in America. What we are looking for here is workable markets where consumers have the opportunity to borrow money at the lowest cost. Hopefully, they are not above 18 percent; certainly not at 75 percent. The market does a remarkable job for that purpose.

For more than 7 years now, almost as long as I have been in Congress, we have struggled with the rising tide of bankruptcy abuse which threatens the delicate balance in this country between creditors and debtors. As this reform measure has developed, slowly, inexorably, we have dealt with each issue: framing, debating, considering, and ultimately resolving each controversy. Progressive Congresses have moved toward ultimate resolution, until finally today the House has been presented with a bill that it can send directly to the President for signature.

As chairman of the Subcommittee on Commercial and Administrative Law, I take considerable satisfaction that, through collective effort, we would be able to achieve what many said would never happen. We have crafted fair and balanced legislation dealing in a straightforward manner with a problem that has vexed the Nation for the past decade and threatens economic growth and stability. By the way, the Bankruptcy Act has not been amended for 25 years in a serious way.

The American people will truly be well served by this effort. This bill is a rare achievement of reducing disparity in the bankruptcy system. It establishes more uniform and predictable standards. It strengthens the integrity of the bankruptcy process. It deals with the continuing wave of bankruptcy filings and abuse of State homestead exemptions. It will reinforce the public perception that the system is fair for all participants. It improves the administration of the bankruptcy process. And, finally, it restores a measure of personal responsibility to the bankruptcy system that is spiraling out of control.

Mr. Speaker, my constituents need this legislation, and America needs this legislation, and I urge support today for S. 256.

I would also note that the need for additional bankruptcy judgeships may need to be considered to reflect the numbers submitted by the Judicial Conference's most recent report. Additional judgeships are sorely needed in a number of districts across the country, including my State of Utah. I was heartened by the assurance of the chairman of the Committee on the Judiciary during the markup of Senate 256 that this matter will be considered later this year. In that regard, I would like to thank the gentleman from Georgia (Mr. Kingston) who has worked tirelessly on the issue of expanding the number of bankruptcy judges we have to meet this need.

Mr. Speaker, at this point I will place additional information on the bill in the Record.

During the course of the Senate Judiciary Committee's consideration of S. 256, a provision was added to deal with excessive retention bonuses, severance payments and other forms of inducements paid by a debtor to retain key personnel or otherwise induce a debtor's management to remain with the debtor.

This provision addresses serious conserns and I support the intent of its drafters. Nevertheless, this provision should not be construed to invalidate all key employee retention programs for companies that may someday wind up in Chapter 11. It is very important that a Chapter 11 debtor be able to retain management that is dedicated to maintaining the company's value for the benefit of its creditors, investors, employees, and other stakeholders. All too often, companies that fail to reorganize successfully are converted to Chapter 7 for liquidation, where creditors receive pennies on the dollar and employees face job dislocation.

Where appropriate, key employee retention programs may be necessary to bring a company in financial distress successfully through the Chapter 11 process. Accordingly, section 331 of S. 256 should not be applied to invalidate such programs where there is no evidence of insider negligence, mismanagement, or fraudulent conduct contributed to a company's insolvency--in whole or in part.

Given the possibility that the intent of the Congress with respect to this provision and the interpretation of Section 331's text may not be consistent, legislation clarifying language may be necessary. If so, I will work with my colleagues in the House and Senate to address any such inconsistencies.

I ask that a letter from the Association of Insolvency and Restructuring Advisors be printed at this point in the Record.

Association of Insolvency,

and Restructuring Advisors,

Medford, OR, March 1, 2005.

Senator Arlen Specter,

Chairman, Committee on the Judiciary, U.S. Senate,

Washington, DC.

Dear Mr. Chairman: The undersigned are financial and legal

professionals who serve as the Board of Directors of the

Association of Insolvency and Restructuring Advisors (AIRA).

As board members we work to further the AIRA's goal of

increasing industry awareness of the organization as an

important educational and technical resource for

professionals in business turnaround, restructuring, and

bankruptcy practice, and of the Certified Insolvency and

Restructuring Advisor (CIRA) designation as an assurance of

expertise in this area.

We write to make you aware of serious concerns we have

regarding a provision contained in S. 256, the ``Bankruptcy

Abuse Prevention and Consumer Protection Act of 2005.'' The

provision in question effectively prohibits the use of key

employee retention plans in Chapter 11 reorganizations. It

was added during the Judiciary Committee mark-up of the bill

and elicited little attention at the time. However, we

believe this provision will cause considerable harm to a

number of companies that will become subject to bankruptcy

proceedings, and, most importantly, to their employees,

customers, and creditors.

When a company is operating in Chapter 11, a primary

responsibility of management is to maintain and grow the

company's value for the benefit of all of its stakeholders. A

company that is well-managed through its restructuring

benefits its creditors, employees, retirees, unions and the

local communities of which the company is a part. Companies

that fail to successfully reorganize in Chapter 11 are

liquidated. Creditors receive pennies on the dollar and

employees see their jobs and retirement savings destroyed.

When companies enter Chapter 11, it is critical that they

attract and retain top management talent. But Chapter 11 is

also the most difficult time to attract and retain such

talent. Managers of Chapter 11 companies are faced with

intense scrutiny, stress, insecurity, and an enormously

complex process. Compensation and incentive tools used by

non-bankrupt companies such as equity compensation programs

are not available to assist with attracting and retaining the

type of management talent necessary to bring the company

successfully through the Chapter 11 process--this is because

the pre-petition equity is almost always without value. Key

employee retention plans (``KERPs'') have become common

practice since the early 1990's and have been viewed by

courts, debtors, and creditors alike as an important and

useful way to help reorganization by retaining key employees.

Bankruptcy courts have agreed with this reasoning, and many

judges have used their judicial discretion to approve KERPs.

For a court to approve a KERP under existing law, however, a

debtor must use proper business judgment in formulating the

program, and the court must find the program to be reasonable

and fair. Creditors have the right to object to proposed

KERPs, and judges are presented with a full evidentiary

record upon which to make a determination. If a KERP is

not appropriate or if it is not in the best interest of

the company's creditors, the judge can refuse to approve

it.

In the last few years, there has been a trend, with which

we agree, towards stricter judicial scrutiny of proposed

KERPs by bankruptcy judges. Such a trend seems appropriate in

the wake of numerous high profile bankruptcy filings where

management's misconduct or mismanagement has led to the

Chapter 11 filing. Judges have discretion to deny KERPs in

these circumstances, and they do so when the facts and

circumstances warrant.

Unfortunately, S. 256 as reported by the Senate Judiciary

Committee includes an amendment authored by Senator Edward M.

Kennedy (the Kennedy amendment) that places significant

limits on retention bonuses and severance payments to

employees of companies in Chapter 11. It would prohibit a

bankruptcy judge from approving retention bonuses in every

Chapter 11 case unless he or she finds that the company in

question has proven that the employee has a bona fide job

offer at the same or greater rate of compensation; was

prepared to accept the job offer; and the services of that

employee are ``essential to the survival of the business.''

The amendment also places significant caps on the amount of

such bonus and payments.

The Kennedy amendment appears to be motivated by a desire

to combat KERPs in Chapter 11 cases where employee-related

fraud substantially contributed to the bankruptcy of the

company. Yet, by painting with such a broad brush, the

Kennedy amendment will, if enacted, effectively eliminate all

companies' ability to ever receive court approval for a KERP.

Federal bankruptcy judges would have little or no discretion

to approve KERPs. In turn, bankrupt companies would have less

flexibility in trying to retain or attract necessary

employees. This result will cause considerable harm to

companies in bankruptcy, their employees, and their

creditors.

It is apparent that the Kennedy amendment is designed to

prevent abuses of the system, where creditors', employees'

and retirees' monies are unnecessarily expended for the

enrichment of management. Whether there currently is or is

not sufficient judicial scrutiny of KERPs is a valid

question, insofar as the overall bankruptcy system allows

debtors a fair amount of flexibility in exercising reasonable

judgment--but there must be an approach better than

handcuffing the judiciary and stakeholders in bankruptcy

cases by essentially precluding all use KERPs. The proper use

of KERPs requires an analysis of all facts and circumstances

of the case, and not what is essentially a blanket

proscription of these tools.

Senator Kennedy has advanced an important public policy

discussion with his amendment. Managers who have had

responsibility for driving a company into bankruptcy should

not be paid a bonus to remain. Similarly, if the retention of

an employee would not enhance a company's value for its

stakeholders, they should not be paid a bonus to stay.

Current law provides bankruptcy judges with the discretion

necessary to deny a KERP in such circumstances and bankruptcy

judges do deny KERP payments in these circumstances. Still,

if the Congress wishes to improve the operation of current

law while still safeguarding the ability of the courts to

approve legitimate KERPs, we would welcome a discussion on

how best to achieve that end. Unfortunately, S. 256, as

reported by the Committee, goes too far and should be amended

so as not to unnecessarily limit the bankruptcy court's

ability to determine what is in the best interest of each

individual bankruptcy estate.

Mr. Chairman, we thank you for considering our views on

this important matter. We would be pleased to address any

questions you or other members of the Committee on the

Judiciary may have.

Sincerely,

The members of the board and management of the Association

of Insolvency and Restructuring Advisors.

Soneet R. Kapila, CIRA, Kapila & Company; President, AIRA.

James M. Lukenda, CIRA, Huron Consulting Group; Chairman,