Thank you Mr. Chairman. I am pleased we are having a hearing in committee this year. We didn’t do that at the beginning of the 106th Congress in 1999, and I thought that was a mistake. In fact, the process we followed in the last Congress, and in the Congress before that, led to a bill that the President wouldn’t sign and that a majority of the Democratic caucus wouldn’t support. I am afraid we are headed down that same road this year. Of course, we have a new President, and most observers expect he would sign the bill that the Chairman and Senators Grassley and Sessions have introduced if it gets to his desk.

But that doesn’t make the bill any better, or more fair, or more balanced, or more worthy of this Committee or this Congress than the one we passed last year was. Amending the bankruptcy code used to be a nonpartisan exercise, where the Congress listened to experts – practitioners and law professors and judges and trustees, and made careful considered judgments about how the law should work. Now we ignore the experts and instead do what the credit industry wants us to do. And we use parliamentary tactics to avoid reasoned consideration that harm the bill, and discredit the Senate.

We all know how the procedures of the Senate were abused to pass the bankruptcy bill last year. This year, the bill has been sent right to the calendar for floor action. We have a new Judiciary Committee this year, with four new members and a 50-50 split in party affiliation. Mr. Chairman, I strongly believe this committee should have the opportunity to consider and amend the bill.

I just want to say for the record that our Leaders’ agreement to have evenly divided committees is pretty much meaningless if major legislation like bankruptcy reform doesn’t go through committee. And so is their agreement to have equal budgets for staff, if major legislation is marked up in this committee before that agreement is implemented. This is a new Senate, with an unprecedented power sharing arrangement, and I think this Committee should start operating on that basis. Not someday, but now.

Mr. Chairman, I have a longer statement for the record that spells out my concerns about S. 220. I’d like to note here that this Committee should be cognizant of the extent to which bankruptcy reform has come to be seen as a gift to certain special interests. In that regard, let me ask unanimous consent that recent studies by Common Cause and the Center for Responsive Politics concerning the campaign contributions made by supporters of bankruptcy reform legislation be included in the record of this hearing.

In light of the appearance that these free spending industries have created, we bear a heavy burden to make sure that we are serving the public interest with this kind of far reaching legislation. We cannot meet that burden unless we slow down and open our minds to the kinds of criticisms expressed by witnesses at this hearing and by nonpartisan experts in this field. For two straight Congresses, we have ignored the experts. We need to step back and take another look. Thank you.

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I believe that as introduced, S. 220 will do terrible damage to the bankruptcy system in this country, and even more importantly, to so many hard working American families who will bear the brunt of the unfair so-called "reforms" that are included in this bill. This is a harsh and unfair measure pushed by the most powerful and wealthy lobbying forces in this country, and it will harm the most vulnerable of our citizens.

First, let me talk about what is not in this bill, which is directly related to the fact that powerful special interests have shaped it. As I have said a number of times, this bill is not a balanced piece of legislation. The interests that are the strongest supporters of this bill, the credit card companies and the big banks, succeeded in limiting the provisions that will have any effect on the way they do business. These interests gave us and our political parties millions of dollars of campaign contributions and they like the results they achieved in this bill.

Billions of credit card solicitations go out each year to consumers. Not millions, billions. Most experts agree that part of the rise in bankruptcy filings over the past decade, although the number is actually now on the way down, is due to credit card companies and the banks irresponsibly in extending credit to people who have already shown that they cannot handle additional debt.

Just to give a more tangible example of the blizzard of solicitations that credit card issuers are now sending out, one member of my staff received 85 mail solicitations in the year and a half from May 1999 to November 2000. Now I’m sure my staffer is a very creditworthy individual. But 85 offers for a new credit card? And these direct mail offers don’t include the constant invitations for credit cards that people see every day on the Internet and on TV.

This is an industry whose sales techniques are out of control. The credit card companies are making bad decisions every day, and now they are here before the Congress asking for our help. And boy did we give it to them. This bill is a bailout for the credit card industry. It’s going to make it easier for credit card companies to collect more on the bad decisions they have made, the credit they have extended to people who already have maxed out on two, five, even ten credit cards. And make no mistake, giving the credit card companies more power will work to the detriment of women and children trying to collect alimony and child support.

If we’re going to pass a credit card industry bailout bill, the least we should do is to help save the industry from itself by taking some steps to make sure that consumers are made more aware of the consequences of taking on ever increasing amounts of debt. We have the chance in this bill to require credit card companies be more open with consumers about the consequences of running a balance on a card. But so far we haven’t done it. We need more prevalent and more detailed disclosures on credit card statements and solicitations. There are limited disclosure requirements in this bill, but they don’t go nearly far enough in my opinion. And I think it’s clear that the main reason that they don’t is the power of the credit card companies.

Last December, the Wisconsin State Journal summarized well my concern about the extent to which this bill gives the credit card industry what it wants.

The Journal wrote:

"When the credit card industry came to Congress to ask for help in collecting debts from deadbeats, Congress should have said: It’s not government’s job to bail you out. Why don’t you tighten up your own lending practices? Instead, Congress let the industry turn a bankruptcy reform bill into a debt collection assistance plan."

The editorial continues:

"The House and Senate had before them 172 recommendations from the National Bankruptcy Reform Commission, which was led by Madison attorney Brady Williamson. The commission had stressed that bankruptcy law must remain balanced: It must work for creditors and debtors.

But the congressmen also had before them lobbyists for the credit card industry and similar lenders. Quickly, bankruptcy reform legislation became a campaign fund-raising bonanza for the politicians, with the lending industry ''investing'' $ 20 million in contributions. Just as quickly, bankruptcy reform turned into the credit card industry's bill."

My colleagues on this Committee and in the Senate are well aware of my concern about the influence of campaign money on politics and policy. As I have said a number of times, the bankruptcy bill is a poster child for the need for campaign finance reform. You only have to look at what the credit card industry gets in this bill, and just as importantly, the disclosure that consumers don’t get, to understand that.

Now there’s another thing missing in this bill. Remember, this bill is supposedly designed to end abuses of the bankruptcy system by people who really can afford to pay off more of their debts. But the biggest abuses, and all the experts agree on this, come when wealthy people in certain states file for bankruptcy by taking advantage of very large or even unlimited homestead exemptions that are available in their states. Some people with large debts even move to a state like Florida or Texas where there is an unlimited homestead exemption specifically for the purpose of filing for bankruptcy.

The National Bankruptcy Review Commission and virtually all leading academics believe that homestead exemptions are being abused and a national standard is needed. And by a vote of 76-22, the Senate adopted in the last Congress an amendment from my colleague the senior Senator from Wisconsin to close the loophole. That amendment would have put a $100,000 cap on the amount of money that a debtor can shield from creditors through the homestead exemption.

But that amendment was stripped out of the bill during last year’s secret conference and replaced by a weak substitute. The bill limits the homestead exemption to $100,000, but only for property purchased within two years of filing for bankruptcy. That means that wealthy debtors can plan for bankruptcy by moving to an unlimited homestead exemption state, buying a palatial estate, and then just put off their creditors for two years before filing bankruptcy. If they do that, they can continue to shield millions of dollars in assets and throw off their debts with a bankruptcy discharge. The bill will have no effect on this abuse of the bankruptcy system. This bill does not close the homestead exemption loophole that people like Burt Reynolds and Bowie Kuhn have famously used in the past.

So once again, supporters of this bill chose to ignore reforms that would give this bill some balance. Somehow the interests of wealthy debtors who use the homestead exemption to abuse the bankruptcy system are more important than the interests of hardworking Americans who through no fault of their own – whether from a medical catastrophe, or the loss of a job, or a divorce, are forced to seek the financial fresh start that bankruptcy has made possible since the beginning of our republic.

It’s interesting, and very revealing, to contrast the treatment by this bill of wealthy homeowners who abuse the bankruptcy system with how it treats poor tenants who need the protection of the bankruptcy system to keep from being thrown out on the street while they try to get their affairs in order. As I mentioned, the provision dealing with the homestead exemption is virtually meaningless. At the same time, the bill includes a draconian provision that denies the bankruptcy stay to tenants trying to hold off eviction proceedings, even if they are able to pay their rent while the bankruptcy is pending. This provision is purely punitive. It will have no impact at all on getting debtors to pay past due rent. It will result in people being evicted who are not abusing the bankruptcy system, but who are trying to use it for exactly the purpose for which it was intended – to get a fresh start and become once again productive members of our society.

When the bankruptcy bill was before the Senate in the last Congress, I tried very hard to pass an amendment that would have made the bill less harsh on tenants while at the same time denying the protection of the automatic stay to repeat filers who are abusing the system. I modified the amendment to take account of some reasonable hypothetical situations that the Senator from Alabama came up with. But the realtors strongly opposed my amendment. And the Senate rejected it by a nearly party line vote. That was unfortunate. It confirmed my view that this bill is not balanced. It is not rational. It’s about punishing people, not just stopping the abuses that we all agree should be stopped.

Shortly before the election last year, the Senator from Alabama was on the floor once again arguing that this bill is necessary to crack down on tenants abusing the bankruptcy system to live rent free. My amendment would have cracked down on those abusers too, but without harming good faith debtors who need the automatic stay of an eviction to avoid homelessness and be able to pay some of their debts. The failure of the majority to recognize the harshness of the bill on this point and accept a reasonable amendment that deals with the abuse just as effectively was a great disappointment. It reinforced my judgment that this bill is not balanced, it is not fair.

Now let me turn to what proponents view as the central feature of this bill, the means test. After much work, I believe this feature of the bill is still flawed and unfair. The means test is the mechanism that the bill’s proponents believe will force people who can really some portion of their debts into Chapter 13 repayment plans instead of Chapter 7 discharges. The means test requires every debtor to file detailed information on their expenses and income which is then analyzed according to a formula. Those who pass the means test can file a Chapter 7 case; those who fail would have to file under Chapter 13.

The bill includes an important "safe harbor" for debtors who are below the median income. The means test does not apply to them. That’s a good thing, since studies show that only 2 or 3 percent of debtors would be required to move from Chapter 7 to Chapter 13 under the means test. But even with that "safe harbor," the bill has significant problems. First, the bill specifies that for purposes of determining the safe harbor, the median income for each individual state should be used, rather than the higher of the state or national median income. This will unfairly disadvantage people who live in high cost areas of low median income states. In the Senate bill in the last Congress, we included a safe harbor from creditor motions that applied to people with income less than either the national or the median income. The people who drafted the final bill that President Clinton vetoed and that has been reintroduced ignored that standard. I doubt they really believe it will mean that more abusers of the system will be caught by the means test. But they did it anyway, giving further evidence of the arbitrary nature of this bill.

In addition, the means test still employs standards of reasonable living expenses developed by the Internal Revenue code for a wholly different purpose. These standards are too inflexible to be fair in determining what families can live on as they go through a bankruptcy. They are arbitrary. And they are also ambiguous with respect to things like car payments because they weren’t designed to be used in this context. We have pointed this out repeatedly over the past few years, but the sponsors of the legislation have insisted on using these inflexible IRS standards.

The safe harbor from the means test also inexplicably counts a separated spouse’s income as income available to a mother with children who has filed for bankruptcy, even if the spouse is not paying any child support. This can’t be fair. Mothers filing for bankruptcy because their spouses have left them are treated for purposes of the safe harbor as if the spouse’s income is still available to them. That is what this bill does. It makes no sense. It’s arbitrary and punitive.

But perhaps the thing that is most curious about the means test is that while we now have a safe harbor for lower income people, they still have to fill out all the same paperwork, doing all of means test calculations using the IRS expense standards. Why is that? If the intent is to exempt lower income debtors from the means test, why have them go through the means test anyway? The burden of the means test for these people is not the result — a tiny percentage would ever be sent to Chapter 13 because of it. No, it’s the burdensome paperwork that is the problem. This bill makes it more difficult to file for bankruptcy. By leaving the paperwork requirements in place, the means test remains a barrier for low income debtors, even with the safe harbor.

Just one example. This bill would deny the protection of bankruptcy to a single mother with income well below the state median income if she doesn’t present copies of income tax returns for the last three years, even if those returns are in the possession of her ex-husband. I can see no justification for this result whatsoever.

So for those supporters of the bill who trumpet the safe harbor, I ask you: Why doesn’t the bill apply the same safe harbor to creditor motions as the Senate bill did, and why doesn’t it exempt people who fall within the safe harbor from the paperwork requirements? I have yet to hear reasonable answers to those questions, which leads me to believe that there are no reasonable answers. This bill is arbitrary, and it is punitive.

This bill also includes a number of "presumptions of nondischargeability" provisions, which basically say, "these debts can’t be discharged in bankruptcy because we think they look like people are running up bills in contemplation of bankruptcy." In other words, they are abusing the system. They are accumulating debt with no intention of paying it off.

The problem is that these presumptions are unfair. So instead of being a deterrent to abuse of the system, they are simply a gift to the credit industry, and a harsh punishment to hard working people trying to do the best they can to meet their obligations to their families. One such provision creates a presumption of nondischargeability if a debtor takes $750 of cash advances within 70 days of bankruptcy. $750 in a little more than two months. That’s not much Mr. President. I think all of us can imagine a single mother with children who loses her job or has unexpected medical bills for her kids and has to use cash advances to buy food and for her family or pay her rent. But if that woman files for bankruptcy, the debt to the credit card company is presumed to be fraudulent. That means that the debt from those cash advances will not be discharged by bankruptcy. It will still hang over her head as she tries to get back on her feet and support her family after the bankruptcy proceeding is over. That is not balanced. Once again, this bill gives special treatment to credit card companies at the expense of the most vulnerable members of our society. It is arbitrary and punitive.

This example shows how empty the proponent’s arguments are when they claim that the bill gives first priority to alimony and child support. Over 100 law professors wrote the Senate last year to contest that claim. Let me quote from their letter:

Granting "first priority" to alimony and support claims is not the magic solution the consumer credit industry claims because "priority" is relevant only for distributions made to creditors in the bankruptcy case itself. Such distributions are made in only a negligible percentage of cases. More than 95% of bankruptcy cases make NO distributions to any creditors because there are no assets to distribute. Granting women and children a first priority for bankruptcy distributions permits them to stand first in line to collect nothing.

The law professors continue:

Women’s hard -fought battle is over reaching the ex-husband’s income after bankruptcy. Under current law, child support and alimony share a protected post-bankruptcy position with only two other recurrent collectors of debt – taxes and student loans. The credit industry asks that credit card debt and other consumer credit share that position, thereby elbowing aside the women trying to collect on their own behalf. .... As a matter of public policy, this country should not elevate credit card debt to the preferred position of taxes and child support.

What the law professors point out so convincingly is that the key issue is not how the limited assets of a debtor are distributed in bankruptcy but what debts survive bankruptcy and will compete for the debtors income when the bankruptcy is over. In a variety of ways, this bill will encourage reaffirmation agreements, and increase nondischargeability claims, which will lead to more debtors having more debt that continues after bankruptcy.

That’s what hurts women and children, not the priority of child support claims in the bankruptcy itself. The priority of claims in the bankruptcy itself is almost meaningless since in the vast majority of bankruptcy cases there are no assets to distribute. People are broke and they don’t have anything to sell to satisfy their creditors. That is why they file for bankruptcy. You can’t squeeze blood from a stone.

One of the interesting things about this bill is the almost Orwellian names of some its provisions. There are a number of them. For example, there is a title of this bill with the name: "Enhanced Consumer Protection." But many of the provisions in this title actually offer little if any protection at all. The weak credit card disclosure are provisions are one example. Yes, those may be "enhanced" consumer protections, enhanced from nothing, but they aren’t considered sufficient by any organization whose primary concern is consumer protection.

There’s another section within the so-called "Enhanced Consumer Protection title called "Protection of Retirement Savings in Bankruptcy." Sounds pretty good. But what the provision does is put a cap on the amount of retirement savings that are put out of reach of creditors in a bankruptcy proceeding. You see, before this bill, there was no limit at all on the amount of retirement savings that can be protected. So this bill is not an enhanced consumer protection at all. It’s a step backward for consumers and hardworking Americans who have tried to put aside some money for their golden years.

Incidentally, this provision was nowhere to be found in either the bankruptcy bill that passed the Senate last year or the bill that passed the House in 1999. This is one of those provisions that appeared out of nowhere. In fact, before a firestorm of criticism forced him to reconsider, the Senator who proposed this provision wanted to let consumers waive the existing protection of retirement savings in boilerplate consumer credit agreements. So the $1 million cap is an improvement over what the sponsors of this bill tried to do, but it is hardly a "protection."

Now here’s another Orwellian title. Section 306 is called "Giving Secured Creditors Fair Treatment Under Chapter 13." It ought to be called "Giving Certain Secured Creditors Preferred Treatment Under Chapter 13," because it favors those who make car loans over other secured creditors and over unsecured creditors.

Here’s how it works: There is a concept in bankruptcy law currently called "cramdown" or "stripdown." It recognizes the fact that the collateral for some kinds of loans can lose value over time, so that it may be worth significantly less than the debt owed. Remember that in a bankruptcy proceeding, secured creditors get paid first. But the cramdown concept says to those creditors, you only get paid first up to the amount of the value of the collateral for the loan. After that, if you are still owed money, you get in line with other unsecured creditors.

To give a more tangible example, if someone owes $10,000 on a car loan, but the car which is collateral for that loan is worth only $7,000, then only $7,000 of that loan is considered secured in a bankruptcy. That makes perfect sense, since the maker of that loan has the right to repossess the car, but if it does that it can only get $7,000 when it sells the car.

What the bill does is to eliminate the cramdown for any car that is purchased within five years of bankruptcy. That means that even though the vehicle that secures the loan has lost much of its value, the entire amount of the debt must be repaid in a Chapter 13 plan. This gives special treatment to the lender, but more importantly, it will make it much more difficult for a Chapter 13 plan to work. And that will hurt people who want to pay off their debts in an organized fashion under Chapter 13.

Most people file Chapter 13 cases because they want to keep their cars. The cramdown allows them to reduce their car payments to a reasonable amount, leaving enough money to pay off other secured creditors and make a repayment plan work. According the Chapter 13 trustees, who know what they are talking about since they deal with these cases day in and day out, this single provision of the bill will increase the number of unsuccessful Chapter 13 plans by 20 percent.

Making it more difficult for debtors to get Chapter 13 plans confirmed will lead to more repossessions of cars, and ultimately to more Chapter 7 filings. And even where a Chapter 13 plan can be confirmed and is successful, the anti-cramdown provision will reduce the amount that a debtor can pay to unsecured creditors or for child support or alimony. In essence, car payments on a car worth far less than the debt are given priority over child support. Another example of how this bill is arbitrary and punitive and how the claims of the bill proponent’s that the bill will help women and children are empty indeed.

The anti-cramdown provision undermines the efficacy of Chapter 13. All the experts tell us that. And I have to point out the irony here. The avowed purpose of proponents of this bill is to move people from Chapter 7 discharges to Chapter 13 repayment plans, yet the bill undermines Chapter 13.

There’s even another provision in this bill that undercuts Chapter 13. The small group of Senators who shaped this bill in a shadow conference accepted a provision from the House bill that says that for those debtors with income above their state’s median income, Chapter 13 plans must extend over 5 years, rather than three. That’s a 66% increase in payments required to complete the plan. In view of the fact that the majority of three year plans fail, the requirement that the debtor go two more years without an income interruption or unexpected expenses will inevitably lead to an even higher rate of Chapter 13 plan failures and discourage even more debtors from filing voluntarily under Chapter 13.

As I have said before, this bill is at war with itself. Bankruptcy experts from around the country say it will not work. This bill will destroy Chapter 13 as an option for many debtors. If we pass it, I’m convinced that we will be back here trying to fix it once it starts to take its toll on the American people. In the meantime, how many lives will we make harder, how much more heartache are we going to inflict on hard working Americans?

Mr. Chairman, I’ve spoken for quite awhile here about the problems with this bill. In fact, I have probably only scratched the surface. This is an immensely complicated bill about a very technical area of the law. There are provisions in this bill that I would venture to guess that no one in the Senate really understands. Indeed, some of the statements by proponents of the bill indicate that they don’t understand bankruptcy law or this bill.

This is the kind of bill where we need to rely on the experts to guide us. And we just haven’t done that here. Once again, we have a letter from over 100 law professors, from all across the country. They aren’t debtors lawyers, they aren’t all Democrats, they don’t have an ideological agenda, they just understand the law and care about how it operates. And they plead with us, let me quote from their letter again: "Please don’t pass a bill that will hurt vulnerable Americans, including women and children."

This is extraordinary. The experts beg us to listen to them. They don’t have a financial interest here. They don’t represent debtors. None of them is in danger of declaring bankruptcy. They just hate to see this Congress make such a big mistake in writing the laws. They don’t want us to ruin the bankruptcy system, which dates back to the earliest days of our country, by passing a bill that is so unbalanced, so arbitrary and punitive.

Mr. Chairman, I want to assure my colleagues that I am not opposed to reform of the bankruptcy laws. I know there are abuses that need to be stopped. I voted for a bill in 1998 that passed this Senate with only a handful of votes in opposition. There are things we can do to improve the bankruptcy system. There are loopholes we can close and abuses we can address. We can do it in a bipartisan way. We can write a balanced bill that the Senate and the country can be proud of. We can rely on the advice of experts as we always have in the past. We didn’t do that here. We relied on the credit card industry, which has showered Senators and the political parties with campaign contributions, and it shows.

Before we barrel forward on a fast track to pass this bill just because it’s where the process ended last year, we have one more chance to listen to the experts. One last chance to step back from the brink of passing a very bad law, a law that I believe we will come to regret. It’s a matter of simple fairness, and simple justice.

S. 220 is an unfair bill, Mr. Chairman. The Committee and the Senate can and must do better. Thank you.

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