Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005 -- (Senate - March 04, 2005)

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Mr. SESSIONS. Mr. President, I am pleased we have had a good week of debate on the bankruptcy bill, which I believe is a very important piece of legislation. It is something this Congress has a responsibility to deal with since bankruptcy procedures are Federal court procedures and bankruptcy judges, although not article III judges, are Federal judges.

The court system, over the last 20, 30 years, has grown incredibly. We have gone from a few hundred thousand bankruptcies a year, to 1.6 million personal bankruptcies in 2003. It has been driven by a lot of things. Some say it is economic problems, but our economy compared to other times has not been as bad. We have had some tough years, but we have also had some good years. We have seen bankruptcies exceeding everything that could be based on the economy. I suspect a good part of it is because of the advertising of lawyers in the newspapers.

People who have built up some debt and are having a hard time dealing with it, and creditors are calling, they see an ad that says something like this: Come on down. We can take care of those debts and help you. So people have been filing bankruptcies at a record pace, caused somewhat by these ads. Many of the people work their way out of it; many of them cannot.

We absolutely believe and support the classic American view that you should be able to have a fresh start; that if debts overpower a family or individual, they can go to bankruptcy court and wipe out those debts and not pay a dime. That is the way the law is, no matter the income of the person who files. A person who has a quarter of a million in income today can go into bankruptcy court, if they have, say, $150,000 in debts, debts they could pay if they put their mind to it, they can just wipe out those debts and keep making $250,000 a year and not pay their local banker, their local hospital, doctor, car dealer, or whoever they bankrupt against. It is an unhealthy practice.

We thought a lot about how to deal with the problems and how to deal with the abuses. Having practiced law a good bit, I have a hard time blaming the lawyers who take advantage of the laws that we in Congress have provided. They look at the legal system, they see what helps the debtor the absolute most, and they file the bankruptcy in that fashion, taking full advantage of the law.

It is appropriate for the Senate, for the first time since 1978, to pass a reform of those laws to deal with the problems we know arise, to help people who legitimately need relief from their debts to start afresh. Those who can pay some of it ought not to get off scot-free. That is the fundamental principle of this bill.

Let me mention one of the best things about bankruptcy. When people fall behind in their debts, penalties get assessed against them. They have to take out even higher interest rate loans to stay afloat, and they begin a downward spiral. They have creditors--in most instances, many creditors. These creditors call debtors, they file lawsuits and they file liens against the debtor's property. It can be a crushing, hard time for them.

When they file bankruptcy--either in chapter 7 where all the debts are wiped out, or in chapter 13 where they pay back a portion of those debts--the creditors cannot keep bothering them. They cannot be sued. Any lawsuits that have been filed against them are stayed, stopped. The court manages their money under chapter 13. They wipe away all their debts if they file under chapter 7, and they can start afresh. That is a provision of law in America that is worthy of continuing. But we also see there are some problems and abuses.

As we look at the changes in this legislation, I will mention a few as we get started this morning.

One is there was a consensus of those working on the bill that if individuals had a higher income and could pay back a portion of their debts, at least--perhaps all of them, but most likely not all of them--they ought to do so. Why should they not pay back something if they are able to do so? So we put in the bill a means test.

This has been in the legislation for the last 8 years. It has come before this Congress four separate times. This is the fourth time. And it has received a strong majority vote, bipartisan vote every single time. But for one reason or other, we have not been able to make the bill law. We are going to do that this time, I am confident.

But on the question of, What about the changes? How does it impact a person who would go and file in bankruptcy? We know that 80 percent of the people who file for bankruptcy make below median income. That means under the provisions of this bill, no fundamental changes will occur. They cannot be made to go into chapter 13 unless they choose to do so. They can wipe out all their debts, not pay a single one, under the provisions of chapter 7, unless it is a debt that is not dischargeable, such as a result of an intentional or fraudulent act.

If they make above median income, and there are no special circumstances that apply that might excuse them from that, such as a health problem or a problem with an ill child or something that requires extra expense, then they could be moved into chapter 13, where they pay back a portion of their debts. The judge would decide how much they could pay, and they could be made to pay a portion of those debts for a period of up to 5 years.

We think that is a reasonable and fair approach. In fact, this Senate certainly did during the 107th Congress when we passed a similar bill 83 to 15. So I think that is the basic procedure.

It also provides that before you file in bankruptcy, you should at least examine the possibility of credit counseling. There are credit counseling agencies all over America. They have proven to be effective for a large number of creditors. These agencies are able to negotiate reduced payments for the debtors, to reduce interest rates and to help the debtor sit down and work out a family budget. They bring in the whole family. They sit around the table. They work out a budget. They help teach them how to manage their money. They reduce interest rates. They reduce debts through negotiation. Many families are finding they can work their way out of debt without filing for bankruptcy, without walking out on their solemn obligations and actually feeling better about themselves, as well as learning a lesson for the whole family.

So we say they at least ought to know about this option and ask them to consider that. It can be to go by and have a brief meeting, a discussion, and receive some paperwork on it, and discuss it before they file for bankruptcy. We think that can make a big difference for a lot of people. How many bankruptcies might be avoided by that? I don't know--5 percent, 10 percent--but I think it could be a significant improvement in our system.

We also say that before you can be discharged and finally walk away from your debts, you should go through a financial course on how to manage money because we want to see people manage money wisely, to avoid high interest debts when they can, to keep their interest rates low, their borrowing low, to manage their money wisely. This bill would also require that. These are things that have gained strong bipartisan support. I know I offered the amendment on credit counseling. I visited credit counseling agencies in Alabama and talked to them. I think they provide a tremendous service for a lot of people.

That is where we are with the fundamentals of the bill. It has, as I said, come before Congress four different times. In 1998, during the 105th Congress, we passed the bill with a 97-to-1 vote. The most recent vote, as I noted, was in 2001, and it was 83 to 15. We reported this bill out of the Judiciary Committee last week with a vote of 12 to 5, with strong bipartisan support again. So we are confident that if we go forward and we have an up-or-down vote on the bill, it will pass. I believe the House of Representatives will pass it again this time, and we can make some progress in that Federal court system that we have the responsibility to monitor.

We have the responsibility to analyze it on a regular basis, and if it is not performing up to standards, we ought to fix it. That is what we are doing. We have had a surge of bankruptcies. We have had a surge of abuses in bankruptcies where people, for example, lawyers, run ads in newspapers saying: Are you about to be evicted from your apartment? File bankruptcy. Call us. And they have their phone number there.

People are filing bankruptcies to stay an eviction for not a house they own but an apartment. That is not legitimate. So when the case is heard in the bankruptcy court, the apartment owner, who oftentimes is a small businessperson or retiree, has to go down to bankruptcy court, hire a lawyer, and then they win because the debtor does not have any property interest in the apartment. The lease has expired. They owe money on it. They are due to be evicted. Then it comes back to the State court for eviction proceedings, and they have to pick that up again. And they extend, for months, their stay in people's houses or apartments through the manipulation of the bankruptcy system. That is one of the things we tightened.

We raised the priority for women and children with regard to alimony and child support. Those payments are going to be far more high on the priority of payments when there is a limited amount of money by the debtor. So now, instead of money going strictly to lawyers or to other debts, it is going to go straight to children for child support and also for alimony. We had testimony in the Judiciary Committee, of which I am a member, from professionals in child support who say this will be a magnificent advance for women and children. We are excited about that potential.

There is so much more in the bill. I believe it is a sound bill. It has been on this floor, as I said, four times. It has been in the Judiciary Committee four times. We have had 15 hearings on the bill. I believe every possible objection has been considered, and I believe we are on the verge of making some positive change in our bankruptcy system. It is certainly overdue.

I yield the floor.

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Mr. SESSIONS. Will the Senator yield for a question?

Mr. ALEXANDER. Of course.

Mr. SESSIONS. Senator Alexander, I appreciate your remarks, having been a U.S. attorney involved in urging certain consent decrees and having been an attorney general and seeing it from the side of the State.

My question is this: What your legislation would do is provide a mechanism to guarantee a periodic review of a consent decree so it would not continue indefinitely. There are many in this country that are well over 20 years in which judges are intimately involved in details of governing and the local people have to seek approval for any of the most minute changes. This would not eliminate consent decrees. It would not eliminate their enforcement, but it creates a mechanism by which they are periodically reviewed so as to determine whether they should be extended.

Mr. ALEXANDER. The Senator is absolutely right. Perhaps Congressman Cooper had the best phrase. He said the purpose of this legislation is to keep democracy fresh.

The people are entitled to two things. One is to have their constitutional and Federal rights enforced in the Federal courts. This will continue under this legislation. But they are also entitled to have democratically elected leaders that can make the policy decisions and do the governing, which is what we say to the rest of the world.

We are fighting in Iraq and Afghanistan, sacrificing lives and hundreds of billions of dollars to promote the idea that people have a right to elect their own officials, yet we have drifted into the situation somewhere, as in the Tennessee case, where we have four prior consent decrees that will leave in the Federal courts these decisions and the Governor cannot change them. Even though a previous Governor entered into them, the standards are such he cannot change them.

He has a right to go in there and say, Judge, I hope you will review it. The plaintiff, not the Governor, has to persuade the judge that it needs to be continued. And if it does, the court may continue the consent decree if he considers it to be useful.

Mr. SESSIONS. I say to the Senator, I think that is a very thoughtful and important change he is proposing. We need to give it the most serious consideration. It would strike me that it does go to the heart of what democracy is. We created a legislative and executive branch elected by the people and empowered to deal with certain of these issues. It should be only for extraordinary things that a court would maintain extended jurisdiction over the elected representatives.

Mr. ALEXANDER. I thank the Senator from Alabama.

When the word ``judges'' is mentioned in this Chamber, we automatically divide, especially during this season. That is why I am so glad Senator Pryor of Arkansas, Senator Nelson of Nebraska, and Congressman Cooper have joined in this. Former Senator Bill Bradley has praised the ideas found in ``Democracy by Decree.''

This is not a Democratic or Republican idea. Democracy is everyone's idea in this country. One reason it has such broad support is that it is not just the court's fault that this is happening; sometimes Governors and mayors do not want to deal with the prison problem. They do not want to deal with the Medicaid problem, so they unload it on the courts. That hurts the people who should be helped. It deprives the voters of their right to choose elected officials.

The bill has broad bipartisan support. I hope it continues to have. I am grateful to the Senator from Connecticut for giving me an opportunity to make my remarks today before he made his remarks.

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Mr. SESSIONS. Mr. President, I want to express my congratulations to Papa DODD on his new daughter, born this week to join her sister Grace. We wish Jackie and the family well. I know how excited he has been over young Grace. I know how excited he is over this one. He said he lost a lot of sleep this week, he is a little tired, but he looked pretty vigorous to me in debate. I wish my sincerest best to you, and my wife Mary sends her regards, too.

I am disappointed Senator Dodd is not supportive, as I understand it, of this bill. It is essentially the same bill we passed during the 107th Congress, 83 to 15. It came out of committee with a strong bipartisan vote again this year. This is the fourth time it has come up. It passed one time 97 to 1 in the Senate. This is the fourth time it is up. I believe it will become law this year.

I want to say there are some things here that my good friend has stated that are just not correct. I hope really he will think about and reevaluate some of his conclusions on the legislation. I have to say, there is a small group of leftists who are determined to block this bill. They seem to believe there is something wrong if a corporation, even a credit card company, gives money to an American citizen for them to want to be paid back, and if they don't pay it back, it is the credit card company's fault. They lose their money and they are an evil force here. This is really an odd argument, I suggest.

I also argue, flatly state, that I disagree with the statement that the only purpose of this bill is to help the credit card companies make money. That is absolutely not correct. It is really offensive to suggest that to the 83 Members of this Senate who have been working on this bill for quite a number of years.

Let me say a couple of things that I believe are indisputable. Philip Strauss, attorney for San Francisco Child Support Services, for 28 years enforcing child support obligations, testified before our Judiciary Committee, of which I am a member. I want to deal with some allegations that have been floated by--I think primarily it is the Elizabeth Warren view of this bankruptcy bill. In an effort to smear the bill and defeat the bill, they have conjured up this idea, somehow, that children and spouses are going to be harmed by this bankruptcy bill. It is absolutely incorrect. It is abysmally wrong. Let me tell you what this expert said.

It is my opinion and the opinion of every professional support collector with whom I have discussed the issue that the support amendments contained as part of the bill, contained in section 211-219 of S. 256, the bankruptcy bill, will revolutionize enforcement of support organizations against debtors in bankruptcy.

Child support obligations will be revolutionized.

This legislation has been endorsed by the National Child Support Enforcement Association. Maybe some of those who have been saying this hurts children ought to interview the professionals--the National Association of Attorneys General, the National District Attorneys Association, both of which have important roles to play in collecting enforcement obligations for children--child support.

Mr. Philip Strauss, the attorney who spent 28 years in bankruptcy court collecting these debts for women and children against spouses and deadbeat dads who bankrupt against their debts, had this to say. The provisions in the bill are ``a wish list for child support attorneys.'' That is what he has been looking for.

Under the current law, if we don't change it by passing this bill, the law that will remain in effect has alimony and child support payments No. 7 on the list of priorities for paying nonsecurity debt--No. 7 in the list. We moved it up to the top. Everybody who knows anything about this bill knows that women and children and their alimony and child support is going to be secured in a way it never has been before. It is offensive what Professor Warren is saying about this bill. This college professor keeps writing things that are not so. I don't know how--I guess she has tenure.

She also is the one who has gone around this country and promoted the idea, and had a press conference a few weeks ago, to announce that medical bills are the cause of everything. She says that all the people filing, half the people plus, 54 percent of the people who file bankruptcy are in bankruptcy court because of medical bills.

What do we know about that as a fact? She had a survey that indicated that. Do you know what we discovered, when you read the fine print of her survey? It includes gambling debts. It includes alcoholism and drug problems.

This is what the United States Trustee Program found in a much more extensive survey. Hers I believe had 1,700 people. This one has 5,203 cases. U.S. trustees are involved in bankruptcy courts in 48 States. They deal with these cases. They were asked to survey the filings in their districts to find out what you list on your filing as your debts, who you owe. You actually list who it is. So, if it is a doctor bill, it is on there. If you don't put it on there you don't wipe out that debt and you remain obligated to pay it, so everybody puts every debt they have on the list so it can be wiped out when they file bankruptcy. What they found was, this professional study of 5,000 cases, not interviewing debtors but looking at what they put on their form, they found that only slightly more than 5 percent of the total unsecured debt reported in those cases was medically related. Only 5 percent was medically related. This is not 50 percent of the cases in bankruptcy being caused by medical--only 5 percent of them, of the total debt, was medical.

It also revealed that 54 percent of the debtors, when they list all their debts, and they have a long list of them, listed no medical debts whatsoever. And of the people who listed some medical debts, 90 percent of those who listed a medical debt listed a medical debt of less than $5,000.

For some people there is no doubt that medical debts are a cause for bankruptcy. I do not doubt that. But this idea that we ought not reform bankruptcy, that we ought to assume that there is no fraud and abuse in bankruptcy and the idea that everybody is in bankruptcy because of medical debts is just not so.

It is just not; it is a fiction. We need to get it out of our heads.

There is another suggestion that poor people are going to have to pay back some of their debt. This is ``pressure on poor people,'' they say; ``this is class warfare.'' Poor people now are going to have to pay back their debt, and they are going to be harmed. We discussed the problem in bankruptcy.

The most offensive, clearly wrong thing about the current bankruptcy problem in America is that people making $200,000 a year, if they run up a couple hundred thousand dollars in debt, those people do not have to pay a dime. They can wipe out the entire debt. Shouldn't they pay some of it back? The average American citizen works hard to pay his or her debts back. They save; they do not take vacations; they do not buy a new car, they buy an older car so they can pay their debt. Some doctors, lawyers--we have examples of them--know how the bankruptcy works. They do not want to pay their debt. They wipe them out when they could easily have paid them back.

We reached a bipartisan consensus to have a means test which received 83 votes on the floor of the Senate the last time. If you make below median income your State, then you don't have to pay anything back. Eighty percent of the people make below median income. Some people who make above median income have special expenses, and we allowed them to take an exception. It really looks as though maybe only 10 to 13 percent of the people who file bankruptcy would be impacted by the means test.

The wealthy, why shouldn't they pay? I ask you, why should somebody not pay the local hospital when they have plenty of money with which to pay their debts?

What happens if you make median income and you don't have special circumstances? What should happen? I think you ought to pay some of it back. That is what the American people think, and that is what this Congress thinks.

What would happen is this: They would move into chapter 13, the bankruptcy chapter, which allows for repayment of a portion of the debt. The judge would look at the person's income, how much he believes they can pay back over a period of no more than 5 years, and order them to pay back some portion of those debts. What is wrong with that?

I hear my colleagues complain about the bill saying: I don't mind rich people paying back. That is what the bill does. It creates a safe harbor, an absolute wall for lower income people, people making below median income in America. Eighty percent of the filers of bankruptcy don't have to go into chapter 13. They don't have to pay a dime back.

Let's just say this: Chapter 13 is not so bad. It has a lot of sanctions. You can keep your car and ``cram down'' the value of that car, hold on to your house better, and other things that sometimes are an advantage. A lot of States use chapter 13 a lot. In Alabama, almost half of the filers are chapter 13 filers.

Just because somebody is going into chapter 13 and pays some back does not mean they are being oppressed.

``Oh, you know.'' Well, we are going to complain about credit cards today. A couple of days ago, it was about health insurance, we need to reform health insurance. If we reform health insurance, they argue, we wouldn't have bankruptcy.

If we don't fix credit cards and interest rates and truth in lending and banking issues--they are not part of the Judiciary Committee but part of the Banking Committee's financial lending portfolio of issues--we have to deal with them. We can't deal with bankruptcy. This is a bankruptcy bill.

This bill would create a workable process for filing bankruptcy in Federal court, so fairness occurs based on the debt that people have incurred. If you want to deal with the debts being incurred and giving more money, or have a welfare increase, whatever you want to do, let us propose that somewhere else to give people more money. But once they choose to file bankruptcy, let us create a system that is fair.

Let us say that people who have higher incomes and can pay back some of it, why don't they pay it back?

That is what I think we ought to do.

It has been suggested. We have a lot of complaints. Members of this body like to talk about some minor child getting a credit card.

Let me say that any minor in America who gets a credit card and goes down and runs up $5,000 worth of bills on that credit card does not have to pay a dime. The company that wrongly sent them that credit card eats the $5,000 loss because you can't sue a minor on such a debt. They can't be made to pay it. Who is the loser, if they sent a credit card to some young person and they used it, but the credit card company itself? That is not the issue before us.

Let us fix this bankruptcy bill that allows too much abuse, too much legal cost for people who go to court. Let us keep the legal fees down. Let us make the system fairer. Let us make sure the great protections of a fresh start for Americans is still alive and well. And for those median income and below, there is no change fundamentally in this bill whatsoever except they have to have some financial counseling, some credit counseling, and they can start all over again and wipe out all of their debt. But if they make above that and can pay some of it back, let us have them pay some back.

I don't think that is unfair or unusual or upsetting to most people who considered the bill, and that is why we have had such good support for it.

There was some suggestion that we have seen some reduction in filings. I hear 50,000--50,000 off a number of 1.6 million. About a little over 20 years ago, in 1980, there were 287,000 bankruptcy filings a year. Now they hit 1.6 million, and there is the suggestion that because it has dropped to 1.5, that somehow we ought not to fix this system that we know from experience--and we have been watching it for some time as a problem. Let us fix this problem. Whether it is 1.2 million in bankruptcy, 2 million in bankruptcy, we have a problem with the system. Let us fix it.

Let us treat people fairly. If you can pay some of it back, you shouldn't get off scot-free. If you make below median income, you get to wipe out all of your debts and not pay a dime to the people you owe unless you intentionally and deliberately inflict harm on that.

It is the same law we have always had. Those debts are not dischargeable in bankruptcy.

Mr. President, I ask unanimous consent to have printed in the RECORD a letter from the Department of Justice on the data they have obtained from the U.S. Trustees on the issue of medical debts, and I commend to my colleagues the February 10, 2005, testimony of Philip Strauss before the Senate Judiciary Committee on the benefits of the bill to women and children which he states is indisputable and represents a wish list of items of those who collect child support for women and children.

There being no objection, the material was ordered to be printed in the RECORD, as follows:

U.S. DEPARTMENT OF JUSTICE,

OFFICE OF LEGISLATIVE AFFAIRS,

Washington, DC.

Hon. CHARLES E. GRASSLEY,

U.S. Senate,

Washington, DC.

DEAR SENATOR GRASSLEY: This responds to your letter, dated February 5, 2005, requesting information from the Executive Office for United States Trustees (EOUST) concerning medical debts of those who file for bankruptcy protection and the recently published study in the Health Affairs journal (``Market Watch: Illness and Injury As Contributors to Bankruptcy'').

It is the practice of the U.S. Trustee Program (USTP) not to comment on data collected and analyses performed by outside researchers for reasons that include difficulties in verifying their data and research methodologies. It is noted in the cited study of 1,771 filers that very broad definitions of ``medical bankruptcies'' are used. The authors considered a ``Major Medical Bankruptcy'' to include cases in which debtor reported any of the following: illness or injury as a reason for filing bankruptcy, uncovered medical bills exceeding $1,000 in the past two years, loss of two weeks of work-related income due to illness or injury, or mortgage of home to pay medical bills. The authors considered ``Any Medical Bankruptcy'' to include cases containing any of the factors above or birth or death in the debtor's family or birth or death in the debtor's family or addiction or uncontrolled gambling.

Enclosed in a description of related USTP data and a summary of findings from analysis of a similar but larger sample of bankruptcy cases (5,203) utilizing data from official records during approximately the same time period as the study cited above. It should be noted that reported credit card debt also may reflect medical-related debts, but are not shown in these findings.

In general, the data describing medical-related expenses contained in official documents filed by chapter 7 debtors reveal that slightly more than 5 percent of their general unsecured debt is medical-related. The conclusion that almost 50 percent of consumer bankruptcies are ``medical related'' requires a broad definition and generally is not substantiated by the official documents filed by debtors.

We hope this information is responsive to your inquiry. If we can be of further assistance, please do not hesitate to contact this office.

Sincerely,

William E. Moschella,

Assistant Attorney General.

Enclosure.
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Summary of USTP Data and Findings on Medical Debt

USTP DATA

The USTP database contains 5,203 no asset chapter 7 cases that were closed between 2000 and 2002. The database includes cases filed in 48 States, Washington, DC and Puerto Rico proportionate to chapter 7 filings in each location. The database contains no cases from North Carolina and Alabama, because those States are served by Bankruptcy Administrators. Nearly all of these cases had been filed about 4 months prior to closing.

On each petition we reviewed Schedule F of the petition to see if any medical debts were listed. This would include where the creditor was a doctor, hospital or other treatment facility, medical collection agency, or if the debt was in any way identifiable as being medical in origin.

This accounting would not have identified medical debts charged on credit cards, placed with certain collection agencies, or paid prior to the bankruptcy filings.

FINDINGS

All Debtors (N = 5,203):

54 percent listed no medical debt.

Medical debt accounted for 5.5 percent of the total general unsecured debt.

90.1 percent reported medical debts less than $5,000.

1 percent of cases accounted for 36.5 percent of medical debt.

Less than 10 percent of all cases represent 80 percent of all reported medical debt.

Cases Reporting Medical Debts (N = 2,391):

Among the debtors reporting medical debt, the average medical debt was $4,978 per case.

78.4 percent reported medical debts below $5,000 (average of $1,212 for this group).

21.6 percent reported 80.9 percent of the total medical debt.

Medical debts accounted for 13.0 percent of the total general unsecured debt for those reporting medical debt.

Mr. SESSIONS. Mr. President, I thank the Chair. I yield the floor.

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