Providing for consideration of the bill (S. 256) to amend title 11 of the United States Code, and for other purposes.

Mr. Speaker, by direction of the Committee on Rules, I call up House Resolution 211 and ask for its immediate consideration.

Mr. Speaker, for the purpose of debate only, I yield the customary 30 minutes to the gentleman from Florida (Mr. Hastings), pending which I yield myself such time as I may consume. During consideration of this resolution, all time yielded is for the purpose of debate only.

Mr. Speaker, this is a closed rule providing for consideration of S. 256, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

The rule provides for 1 hour debate in the House, equally divided and controlled by the chairman and ranking minority member of the Committee on the Judiciary. It waives all points of order against the bill and its consideration, and it provides for one motion to recommit with or without instructions.

General Leave

Mr. Speaker, I ask unanimous consent that all Members may have 5 legislative days within which to revise and extend their remarks on H. Res. 211.

Mr. Speaker, bankruptcy reform is overdue for passage. Despite its critics, S. 256, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, does not exclude anyone from filing for bankruptcy. Instead, it implements a simple means test to shield debtors who make below their State's median income and to determine if a higher income debtor has the ability to partially pay back his or her creditors.

To phrase it simply, bankruptcy reform is financial accountability. It protects our system against fraud and abuse. And it asks those who have the means to repay as much of their debts as they can.

For at least four previous Congresses, members have been trying to reform our ``when in doubt, bail out society'' in favor of personal responsibility. Bankruptcy should not be a financial planning tool, and it should be available for legitimate emergency situations only. Our bankruptcy system should fit the needs of the individual, no more, no less. With this rule, and

passage of the underlying legislation, S. 256 we will finally see some movement in the right direction.

Bankruptcy reform is important to help speed up court hearings, because it only takes a few fraudulent or misdirected cases to stall a court for hundreds of other legitimate bankruptcy filings. Federal bankruptcy filings per judgeship have increased by 71 percent from 2,998 in 1992 to 5,130 in 2003; and it represents the largest case load in our Federal court system. This creates a backlog that slows down the process for those really in need of bankruptcy protection.

Bankruptcy reform provisions found in S. 256 include, but are not limited to: abuse prevention so debtors who have committed crimes of violence or engaged in drug trafficking are no longer able to use bankruptcy to hide their finances;

Needs-based credentials, where if a debtor has the ability to partially repay debts, he or she must either be channeled into a form of bankruptcy relief that requires repayment or risk having the bankruptcy case dismissed as an abusive filing;

Spousal and child support protections to help single parents and their children by closing a loophole used by some spouses currently avoiding their child support responsibilities. This would put child support and alimony payments as a first priority, ahead of credit card debt and attorney's fees. Child support and alimony payments are currently seventh in the priority list of payments;

Closing the mansion loophole require a debtor to live in a State for at least 2 years before he or she can claim that State's homestead exemption. The current requirement is 91 days, allowing some debtors to shield themselves from creditors by putting all of their equity into their homes;

Debtor protections requiring potential debtors to receive credit counseling before they can be eligible for bankruptcy relief, allowing them to make an informed choice about bankruptcy considering all alternatives and consequences;

Further, small business protections to defend against needless bankruptcy lawsuits. Under current law, a business can be sued by a bankruptcy trustee and forced to pay back monies previously paid by a firm that later files for bankruptcy protection;

Additionally, family farm relief by doubling debt eligibility for chapter 12 filing, allowing periodic inflation adjustment of this debt, and lowering the required percentage of a farmer's income that must be derived from farming operations.

There are business privacy protections to prohibit the disclosure of names of a debtor's minor children with privileged information kept in a nonpublic record. Current law allows nearly every item of information supplied by a debtor in connection with his or her bankruptcy case to be made available to the public.

S. 256 passed the Senate with a clear 74 to 25 majority. The House judiciary markup on March 16 included rollcall votes on 11 amendments. The reforms included in this legislation will be very beneficial to our society without ignoring the need of those suffering financial uncertainty. This legislation deserves a clean up-or-down vote. Mr. Speaker, I ask my colleagues to support this rule and pass S. 256 bankruptcy reform.

Mr. Speaker, I reserve the balance of my time.

Mr. Speaker, I yield myself such time as I may consume.

I want to point out, Mr. Speaker, to the gentleman from Florida that medical expenses are specifically covered in the bill, and all other extenuating circumstances are covered in section 102 of the bill allowing judicial latitude.

At this point, I would like to yield 4 minutes to the gentleman from Wisconsin (Mr. Sensenbrenner), the distinguished chairman of the Judiciary Committee.

Mr. Speaker, I yield to myself such time as I may consume.

I want to thank the gentleman from Wisconsin, distinguished chairman of the Committee on the Judiciary, for bringing forth those statistics and that stack of documents that he just went over; and I want to add one more statistic to that, and this is that since the 105th Congress, the House and the Senate have passed bankruptcy reform legislation a dozen times, with a vote tally of 2,455 for and 871 against.

To my distinguished colleague from Florida, in regard to the amendment process in the Committee on Rules, my colleague knows that the other side was offered an amendment in the nature of a substitute. That substitute amendment could have included all 35 Democrats, who my colleagues allege were shut out. Every one of those 35 amendments could have been included in an amendment in the nature of a substitute; but apparently they just could not get their act together, did not have an amendment and passed on that opportunity.

In regard to the gentlewoman from California and the concerns about identity theft, opponents of the means test of the bankruptcy legislation have attempted to claim that a debtor should be except from the means test if the debt is related to identity theft. This is a red herring, Mr. Speaker, because consumers who are victims of identity theft do not owe the debts that result from identity theft; and, therefore, it is not an issue addressed by the bankruptcy court.

We all understand the sentiment of trying to help identity theft victims. Amendments related to identity theft, though, are not necessary. They would inadvertently do serious harm to consumers and create a significant potential for fraud and abuse. A consumer who is victimized when an identity thief establishes credit in the consumer's name is not liable for any of the debts incurred by the identity thief. The maximum amount I think is $50, and that is even waived by the credit card companies if it is proved to be fraudulent. Bankruptcy relief is, therefore, not necessary in regard to identity theft.

Mr. Speaker, I reserve the balance of my time.

Mr. Speaker, I yield 2 minutes to the gentleman from Wisconsin (Mr. Sensenbrenner).

Mr. Speaker, I yield myself such time as I may consume.

In the 105th Congress, H.R. 3150, bankruptcy reform, passed 306-118.

In the 106th Congress, H.R. 8333 passed the House, 313-108.

In the 107th Congress, H.R. 333 passed the House 306-108.

In the 108th Congress, H.R. 975 passed the House 315-113.

The gentleman from Virginia (Mr. Scott) was not one of those voting in the affirmative on any of those occasions, but I want to point out to the gentleman in regard to his concern over medical and health- related expenses for a debtor, spouse, and dependents, on line 23, page 8, continuing through line 10 page 9, this covers the treatment of medical expenses for the debtor, spouse of the debtor, and dependents of the debtor. It expressly includes not just actual medical expenses but expenses for health insurances, disability insurance, and health savings accounts.

Mr. Speaker, put another way, contrary to misrepresentations by opponents, the needs-based test not only takes into account the full range of medical expenses by the debtors, but it also covers the spouse and dependents. This is just one of three provisions for a member of the household or immediate family. The provision includes for the monthly expense of the debtor, expenses incurred for the care and support of an elderly, chronically ill or disabled member of the debtor's immediate family. This includes parents, grandparents, siblings, children and grandchildren of the debtor, among others.

So medical in any situation, Mr. Speaker, medical or otherwise, no debtor is denied access to bankruptcy relief. All S. 256 says is that, in a limited range of cases, a debtor with meaningful capacity to repay may have to file in chapter 13 as opposed to chapter 7. In no case is a debtor denied access to the bankruptcy system.

Mr. Speaker, I reserve the balance of my time.

Mr. Speaker, I yield such time as he may consume to the gentleman from California (Mr. Dreier).

(Mr. DREIER asked and was given permission to revise and extend his remarks.)

Mr. Speaker, I yield myself such time as I may consume.

In response to the gentlewoman from Texas, Mr. Speaker, a substitute amendment was offered in every other Congress that bankruptcy reform was considered. Every other Congress in which bankruptcy reform was considered, the minority submitted a substitute amendment. Why not now? I have asked that question several times, and I still have no answer.

In regard to health care expenses, and I am reading from a March 29, 2005, CRS report for Congress titled ``Treatment of Health Care Expenses under the Bankruptcy Abuse Prevention and Consumer Protection Act'':

``Conclusion. Health care expenses will generally be considered in one of two contexts in a bankruptcy filing. Significant expenses incurred prior to the bankruptcy filing may be calculated as unsecured claims; if the debtor cannot afford to pay 25 percent of unsecured claims or $100 a month, the debtor may be eligible to file under chapter 7.

``Ongoing health care expenses and health insurance premiums may be deducted from the debtor's monthly income. Factoring in these expenses may also reduce the debtor's disposable income under the means test.''

Mr. Speaker, I reserve the balance of my time.

Mr. Speaker, I yield myself 1 minute.

The gentlewoman from California brought up the issue about bankruptcy reform harming veterans. In speaking to that, Senate 256 needs-based test includes several safeguards and exceptions for special circumstances, including those of veterans: a specific reference to a debtor who is subject to a call or ordered to active duty in the Armed Forces to the extent that such occurrences substantiate special circumstances.

S. 256 means test has a special exception just for debtors who are disabled veterans if the indebtedness occurred primarily during a period when the debtor was on active duty or performing a homeland security activity. The bill excuses a debtor if he or she is on active military duty in a military combat zone from the mandatory credit counseling and financial management training requirements.

I could go on and on, Mr. Speaker; but we are addressing, as we always have on this side of the aisle, the special needs of our great veterans of this country.

Mr. Speaker, I yield myself 1 minute.

In response to the gentlewoman, I have got a letter from the National Child Support Enforcement Association, February 8, 2005, that I will insert for printing in the Record.

Let me just read one paragraph, the first and most important:

``The National Child Support Enforcement Association is a membership organization representing the child support community--a workforce of over 63,000 child support professionals. For the past 5 years, it has strongly supported the enactment of bankruptcy reform because the treatment of child support and alimony under present bankruptcy law so desperately needs reform. We applaud your continuing efforts since the mid-1990s to reform the bankruptcy system and welcome your introduction of S. 256. The bankruptcy bill, S. 256, like the reform bills of the last three Congresses and the signed conference report of 2002, includes provisions crucial to the collection of child support during bankruptcy.''

National Child Support

Enforcement Association,

Washington, DC, Feb. 8, 2005.

Re: Child Support Provisions in S. 256

Hon. Chuck Grassley,

Hart Senate Office Building,

Washington, DC.

Dear Senator Grassley: The National Child Support

Enforcement Association is the membership organization

representing the child support community--a workforce of over

63,000 child support professionals. For the past 5 years it

has strongly supported the enactment of bankruptcy reform

because the treatment of child support and alimony under

present bankruptcy law so desperately needs reform. We

applaud your continuing efforts since the mid 1990s to reform

the bankruptcy system and welcome your introduction of S.

256. The Bankruptcy Bill, S. 256, like the reform bills of

the last three Congresses and the signed conference report of

2002, includes provisions crucial to the collection of child

support during bankruptcy.

With each day that passes under current law, countless

numbers of children of bankruptcy debtors are subject to

immediate interruption of their on-going support payments. In

addition, during the lengthy 3 to 5 years duration of

consumer bankruptcies as they happen every day under present

law, debtors often succeed in significantly delaying or even

avoiding repayment of child support and alimony arrearages

altogether. Hardest hit by these effects of current

bankruptcy law are former recipients of welfare who are owed

support arrears but are stuck waiting until the bankruptcy is

completed before such debts can be collected. Families who

are dependent on obtaining their share of marital property

for survival may now find under present bankruptcy law that

such debts are discharged. And, worst of all, under present

law significant collection tools used to require the payment

of current child support needed by the custodial parent to

feed and clothe children may be rendered ineffective after a

bankruptcy petition is filed. Today, a bankruptcy filing may

delay or halt the collection of support debts through the

federally mandated earnings withholding and tax refund

intercept programs, the license and passport revocation

procedures, and the credit reporting mandates.

S. 256 would provide these children with first priority in

the collection of support debts, allow the enforcement of

medical support obligations, prevent any interruption in the

otherwise efficient process of withholding earnings for

payment of child support, and insure that during the course

of a consumer bankruptcy all support owed to the family would

be paid, and paid timely. It will allow state court actions

involving custody and visitation, dissolution of marriage,

and domestic violence to proceed without interference from

bankruptcy court litigation.

We, therefore, urge the members of the Conference Committee

and the leadership of Congress to enact this important piece

of legislation with its long overdue bankruptcy reforms.

Sincerely,

Margot Bean,

President. National Child Support Enforcement Association

Mr. Speaker, I reserve the balance of my time.

Parliamentary Inquiries

Mr. Speaker, I yield myself 1 minute.

In response to the gentleman from Illinois, the reform bill significantly limits two practices that some wealthy filers use to hide assets from bankrupt creditors. Under the current system, in States with unlimited homestead exemptions, debtors can shield the full value of their residencies from creditors. To discourage debtors from relocating to the State to hide assets prior to a bankruptcy filing, the legislation requires a 3-year residency before a debtor can take advantage of the State's full homestead exemption. Currently, that is 91 days.

In addition, the bill adds a specific provision that prevents filers from shielding funds in an asset protection trust when fraud is involved. In fact, these practices will continue unabated unless this legislation is passed.

Mr. Speaker, I reserve the balance of my time.

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 thank the gentleman from Georgia (Mr. Gingrey) for yielding me the time.

Before yielding myself such time as I may consume, I yield to the distinguished gentleman from California (Mr. Stark) for a unanimous consent request.

(Mr. STARK asked and was given permission to revise and extend his remarks.)

Mr. Speaker, I yield myself such time as I may consume.

Mr. Speaker, I rise today to oppose this closed rule and S. 256. Once again, the majority has squelched debate on a controversial piece of legislation for no legitimate reason.

More than 35 Democratic amendments were offered in the Rules Committee yesterday. Yet none have been made in order. Why? There is no reason for limiting the debate in this manner.

The House came into session on Tuesday and Members will leave town later this afternoon after just 2 days of work. Even more, there was only one other bill of substance before the House this week. The time to debate this bill and its offered amendments is available. The willingness to conduct meaningful business, however, is the missing ingredient. A 1-hour debate on legislation containing such sweeping reforms is not the way to conduct the people's business.

The argument will be made that this has been 9 years in the making. But a lot of this measure has been overcome by time, and that will be discussed by others later.

I am particularly disappointed that an amendment I offered is not being allowed to come before this body for consideration. My amendment seeks to prevent the very bankruptcies that are

causing this Congress so much consternation and is germane to the discussion. It requires credit card companies to preserve a customer's interest rate prior to incurring medical expenses if the customer is unable to pay off the full medical expenses on time. It also prohibits hospitals from reporting delinquent patients for 5 years, provided that the patient is paying 20 percent of his or her monthly mandated medical expenses.

All the information we have available suggests that medical bills are the second leading cause of personal bankruptcy in the United States. It is, in my opinion, hypocritical to prevent debate on an amendment that could ameliorate some of the issues facing this bankruptcy reform legislation. Is not the whole point of this bill to make bankruptcy less frequent? If Members of Congress have ideas about how to accomplish that, should they not be heard?

Many other Members sought to introduce amendments, but have also been denied their opportunity to be heard. These amendments could have improved this legislation.

For example, the gentleman from Virginia (Mr. Scott) offered an amendment to exempt from the means test provision of debtors who have business losses incurred by a spouse who has died or deserted the debtor.

The gentleman from California (Mr. Filner) offered an amendment that would exempt victims of identity theft. And the ranking member of the Rules Committee, the gentlewoman from New York (Ms. Slaughter), offered an amendment that imposes restrictions on issuing credit cards to college students. But none of those amendments, or the 31 others, will be debated today because the rule on this bill is closed.

At this point, Mr. Speaker, I will insert a list of all 35 amendments which the Republican majority has blocked from being considered in the Congressional Record.

Amendments Submitted to the Rules Committee for S. 256 and Denied

Consideration by the Rule (H. Res. 211)

1) Emanuel/Delahunt/Dingell--prevents debtors from

shielding their funds from bankruptcy liquidation through so-

called ``asset protection trusts;''

2) Filner--exempts disabled veterans from the bill's means

test;

3) Filner--exempts from the bill's means test consumers who

are victimized by identity theft;

4) Inslee--exempts from the bill's means test consumers

whose debts are the result of serious medical problems;

5) Delahunt--requires debtor corporations to file for

bankruptcy where their principal place of business is

located;

6) Sanders--establishes a ``usury rate'' for credit card

companies, above which credit card companies cannot charge

consumers;

7) Sanders--caps fees credit card companies can impose on

consumers at $15;

8) Sanders--prohibits credit card companies from changing

interest rates based on changes in consumers' credit

information;

9) Sanders--prohibits credit card companies from raising

interest rates based on consumer credit reports;

10) Ruppersberger--requires credit card solicitations to be

accompanied by a brochure explaining the consequences of the

irresponsible use of credit;

11) Schiff--exempts from the bill's means test consumers

who are victimized by identity theft, if at least 51% of the

creditor claims against them are due to identity theft;

12) Lofgren--exempts from the bill's means test 1) families

facing bankruptcy due to a serious medical hardship that

drains at least 50% of their yearly income, and 2) families

who lose at least one month of needed pay or alimony due to

illness;

13) Lofgren--exempt from the bill's means test a single

parent who failed to receive child or spousal support

totaling more than 50% of her or his household income;

14) Scott (VA)--exempts from the bill's means test

provisions: 1) debtors who have business losses incurred by a

spouse who has died or deserted the debtor 2) debtors who

have had serious illness in their family and 3) debtors who

have been laid off;

15) Scott (VA)--exempts from the bill's means test

provisions debtors who have business losses incurred by a

spouse who has died or deserted the debtor;

16) Scott (VA)--exempts from the bill's means test

provisions debtors who have had serious illness in their

family;

17) Scott (VA)--exempts from the bill's means test

provisions debtors who have been laid off from their jobs

through no fault of their own;

18) Nadler--sunsets the bill after 2 years;

19) Watt--prohibits annual credit card rates higher than

75%;

20) Watt--includes the costs of college in the calculation

of debtor's monthly expense;

21) Ruppersberger--exempts from the bill's means test

debtors who have declared bankruptcy due to high medical

expenses;

22) Hastings (FL)--prevents credit card companies from

increasing rates on consumers who use their credit cards to

pay for extraordinary medical expenses; also prevents

hospitals from generating negative credit information on

consumers who are paying their bills in good faith;

23) Meehan--Exempts from the means test disabled veterans

whose indebtedness occurred primarily as a result of an

injury or disability resulting from active duty or homeland

defense activities; closes a loophole in S. 256, which

exempts only disabled veterans whose indebtedness occurs

primarily while on active duty while failing to exempt

disabled veterans whose indebtedness occurs after they have

left active duty;

24) Jackson Lee--makes debts arising out of state sex

offenses non-dischargeable in bankruptcy proceedings;

25) Jackson Lee--clarifies Congress' intent that nuclear

liabilities be covered by the Price-Anderson Act, and not by

bankruptcy laws;

26) Jackson Lee--makes debts arising out of penalties

imposed on businesses for false tobacco claims non-

dischargeable;

27) Jackson Lee--strikes the bill's means test provision;

28) Woolsey--requires credit counseling agencies to provide

free services to recent veterans of the military who served

in combat zones;

29) Slaughter--requires credit card companies to determine,

before they approve a credit card, whether a student

applicant has the financial means to pay off a credit card

balance; it restricts the credit limit to minimum balances if

the student has no independent income; and it requires

parental approval for credit limit increases in the event

that a parent cosigns the account;

30) Slaughter--applies the highest median income of any

county or Metropolitan Statistical Area in the state to all

residents of the state petitioning for bankruptcy protection;

31) Millender-McDonald--provides the bankruptcy courts a

higher percentage of the fees collected when a debtor files

for bankruptcy;

32) Maloney--ensures that debtors emerging from bankruptcy

make child credit payments first, before payments on credit

card debt. The current version of the bill does not ensure

that child support payments will have priority over the other

types of unsecured debts, such as credit card debt;

33) Meehan and Berman--provides a modest homestead

exemption for people who have suffered a major illness or

injury;

34) Jackson Lee--provides additional protections to debtors

who are the victims of identity theft;

35) Jackson Lee--increases the means test limit on

parochial school tuition expenses from $1,500 to $3,000, so

that families Chapter 13 bankruptcy can keep their children

in schools that conform to their deeply held religious

beliefs.

Mr. Speaker, the House has adopted a new modus operandi. We saw it earlier this year with the class action bill, and we are seeing it again today.

It seems that if the Republican leadership deems legislation important, and that is their prerogative, it is willing to push through the other body's version without the opportunity for debate here in the people's House on any amendments. This new method does a great disservice to the people of this Nation. Even more, it stops Members, Democrats and Republican, from serving as thoughtful, effective legislators.

The House of Representatives is the people's House. The Founding Fathers envisioned a forum for lively debate on the issues of the day, not the controlled steering of selected legislation with no opportunity for meaningful change.

What also concerns me is the unworkable means test contained in this legislation. I am greatly disturbed, as I know all the residents of south Florida will be, that this means test includes disaster assistance as a source of revenue.

People forced into dire financial circumstances through natural disasters should find bankruptcy a source of relief. Considering disaster assistance as a source of revenue adds insult to injury and contradicts the government's efforts to help people get back on their feet.

This legislation, masquerading as protection against bankruptcy abuse, is really a protection for credit card companies and their predatory lending practices. This legislation does not protect the American people. This legislation protects the credit industry at the expense of the American people.

Increasingly, credit card companies market their product to riskier consumers, and now they want the Congress to protect them from the losses that are the foreseeable result of this ill-sighted business strategy. Why are we not debating legislation that would address those practices, instead of eviscerating a crucial safety net that Americans rely on when all else fails?

Mr. Speaker, should it pass, this bill will severely curtail the ability of Americans to obtain relief from bankruptcy without solving any of its underlying causes. Medical bills, unemployment, and predatory lending practices are at the root of this problem. In the long run, the net effect of this legislation will drive more Americans deeper into financial crisis and weaken our social structure and the Nation's economy.

I will not, and cannot, support such an attack on American consumers. I urge my colleagues to vote ``no'' on this closed rule and ``no'' on

Mr. Speaker, I yield myself such time as I may consume.

My respect for the chairman of the Committee on the Judiciary is immense, and he has thrust all of these hearings and all that were in committee where 40 Members of the Committee on the Judiciary had an opportunity to participate.

What we are talking about is today, 35 Members of the House of Representatives, 35 amendments are not being permitted today. So I guess the 40-plus people are the ones who are representing the near 395, 40-plus none for the American people. That would be what I would put on the table from the minority side.

Mr. Speaker, I am delighted to yield 3 minutes to the gentlewoman from California (Ms. Matsui), our newcomer, who is making her first statement as a Committee on Rules member.

(Ms. MATSUI asked and was given permission to revise and extend her remarks.)

Mr. Speaker, I yield myself such time as I may consume before yielding to the distinguished ranking member to respond to my colleague from Georgia by indicating, the last time I looked at the rules, it allowed that individual Members have a right to make amendments, and we are not required to offer a substitute.

Mr. Speaker, I yield 3 minutes to the gentlewoman from New York (Ms. Slaughter), my good friend.

(Ms. SLAUGHTER asked and was given permission to revise and extend her remarks, and include extraneous material.)

Mr. Speaker, I yield 2 minutes to the gentleman from Virginia (Mr. Scott).

Mr. Speaker, I yield 2 minutes to the gentleman from Massachusetts (Mr. Delahunt).

Mr. Speaker, I am pleased to yield 2 minutes to my good friend, the gentlewoman from Texas (Ms. Jackson-Lee).

Mr. Speaker, I yield 2 minutes to my good friend, the gentlewoman from California (Ms. Waters).

Mr. Speaker, I am pleased to yield 1 minute to my friend, the gentlewoman from California (Ms. Lee).

Mr. Speaker, I am pleased to yield 2 minutes to my good friend, the gentlewoman from New York (Mrs. Maloney).

(Mrs. MALONEY asked and was given permission to revise and extend her remarks.)

Mr. Speaker, I yield 5 seconds to the gentlewoman from New York (Mrs. Maloney) for the purpose of making a unanimous consent request.

Parliamentary inquiry, Mr. Speaker. What was the objection about?

Mr. Speaker, further parliamentary inquiry, what is the ruling of the Chair?

Further parliamentary inquiry, so the gentlewoman from New York's request to put in the Record the material?

Mr. Speaker, there is objection to a Member's placing in the Record, a Member who had made a statement supporting the things that she asked to be submitted, that is being denied?

Mr. Speaker, with the Speaker's permission, I ask unanimous consent that the extraneous material offered by the gentlewoman from New York (Mrs. Maloney) be made a part of the Record following her remarks.

Mr. Speaker, I yield 1 minute to the gentleman from Illinois (Mr. Emanuel).

Mr. Speaker, I yield for the purposes of making a privileged motion to the gentlewoman from California (Ms. Woolsey).

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,