S. 945 INTRODUCTORY STATEMENT

STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS (Senate - May 3, 1999)
As Reported Online at http://www.thomas.gov
Posted by the Amerian Bankruptcy Institute
CONSUMER BANKRUPTCY REFORM ACT OF 1999

CONSUMER BANKRUPTCY REFORM ACT OF 1999

Mr. DURBIN.

Mr. President, today, joined by colleagues, Senator
Leahy, Senator Kennedy, Senator

Feingold and Senator Sarbanes, I am
introducing the bankruptcy reform bill that passed the Senate last year
by a vote of 97-1.

A constant theme that has guided me throughout the consideration of
bankruptcy legislation is balanced reform. You cannot have meaningful
bankruptcy reform without addressing both sides of the
problem--irresponsible debtors and irresponsible creditors.

Unfortunately, the bill we worked so hard to develop, was decimated
in conference and the result was a one-sided bill designed to reward the
credit industry and penalize American consumers. I could not support it.
I hope this year will be different.

The bankruptcy code is delicate balance. When you push one thing,
almost invariably something else will give. For that reason, it is
crucial for bankruptcy reform to be thoughtful and for the changes to be
targeted and not create more problems than they attempt to solve.

This year, Senator Grassley has introduced S.625,
the bankruptcy reform bill of 1999. This bill has more similarities to
last year's conference report than the bipartisan measure that passed
the Senate last year by an overwhelming margin.

The Durbin-Leahy bill is fairer. S.625 uses a means test adopted from
IRS collection allowances. The test would require every debtor,
regardless of income, who files for Chapter 7 bankruptcy to be
scrutinized by the U.S. trustee to determine whether the filling is
abusive. The bill creates a presumption that a case is abusive if a
debtor can pay the lesser of 25% of unsecured nonpriority claims or
$15,000 over 5 years. The IRS means test was designed for use on a case
by case basis, not as an automatic template.

In my home state, the average annual income for bankruptcy filers in
the Central District of Illinois for 1998 was $20,448, yet the average
amount of unsecured debt was $22,900. This figure shows that many filers
were hopelessly insolvent. They owed more money on debt that had no
collateral than their total income for the entire year. These debtors
don't even come close to meeting the standards that would require them
to convert their case to a

chapter 13 case, but they will be forced to go through additional
scrutiny at extra costs to everyone involved.

In contrast, the Durbin-Leahy bill gives courts discretion to dismiss
or convert a Chapter 7 bankruptcy case if the debtor can fund a Chapter
13 repayment plan. One of the factors for the court to consider in
making the decision is whether the debtor is capable of paying 30% of
unsecured claims under a 3 year plan. This reform can address abuses
without the complexity of certifying ability to pay in every case as
required by S.625.

The Durbin-Leahy bill is cheaper because every case does not go
through means testing. By requiring the trustee to submit reports on all
filers the cost to trustees is dramatically increased with little
reward.

The means test in S. 625 looks a lot like the means test in the House
bill. We now know that the means test in the House bill would only apply
to far less than 10% of Chapter 7 filings. A study released by the
American Bankruptcy Institute found that by using the test from the
House bill, 97% of sample Chapter 7 debtors had too little income to
repay even 20% of their unsecured debts over five years. As a result,
only 3% of the sample Chapter 7 filers had sufficient repayment capacity
to be barred from Chapter 7 under the rigid means test. This means 100%
of the filers would have to go through a process that would only apply
to 3% of the cases.

Beyond the administrative costs, there is the unneeded stress on poor
families. According to the National Conference on Bankruptcy Judges, a
review of surveys of Chapter 7 cases from 46 judicial districts in 33
states reveals that the median gross annual income for the 3151 cases in
1998 was $21,540, some $15,000 lower than the 1997 national median
income for all families in the United States. Yet, the median amount of
unsecured nonpriority debt for these same debtors was $23,411. These
people are insolvent, and forcing them to go through unnecessary hoops
for little reward is unfair and ineffective.
The Durbin-Leahy bill is more balanced. The Durbin-Leahy bill includes
credit disclosures designed to help families understand their debt and
prevent them from incurring debt which makes them financially
vulnerable. Many families file for bankruptcy after a health crisis or
some other catastrophic event that prevents them from paying their
debts. For example, the survey conducted by the bankruptcy judges shows
that on average over 25% of bankruptcy cases involve debtors with
medical debts over $1000. By requiring more complete information for
debtors, they can make better credit decisions and avoid bankruptcy
altogether.

The Durbin-Leahy bill addresses abusive creditor practices. The
Durbin-Leahy bill protects the elderly from predatory lending practices.
Much of our discussion concerning reform of the nation's bankruptcy laws
has focused upon perceived abuses of the bankruptcy system by consumer
debtors. Far less discussion has occurred with regard to abuses by
creditors that help usher the nation's consumers into bankruptcy. I
believe that abuses exist on both sides of the debtor-creditor
relationship and that bankruptcy reform is incomplete if it fails to
address documented abuses among creditors.

Last year, I worked to protect elderly Americans by prohibiting a
high-cost mortgage lender who extended credit in violation of the
provisions of the Truth-In-Lending Act from collecting its claim in
bankruptcy. If the lender has failed to comply with the requirements of
the Truth-in-Lending Act for high-cost second mortgages, the lender will
have absolutely no claim against the bankruptcy estate. This provision
is not aimed at all lenders or at all second mortgages. Indeed, it is
aimed only at the worst, most predatory, of these by and large worthy
lenders. It is aimed only at practices that are already illegal and it
does not deal with technical or immaterial violations of the Truth in
Lending Act.

Disallowing the claims of predatory lenders in bankruptcy cases will
not end these predatory practices altogether. Yet it is one step we can
take to curb creditor abuse in a situation where the lender bears
primary responsibility for the deterioration of a consumer's financial
situation.

I encourage my Senate colleagues to join Senator
Leahy and me in this effort. Bankruptcy reform must be
balanced and must not create a nation of financial outlaws.

Mr. President, I ask unanimous consent that a copy of the bill be
printed in the Record.

There being no objection, the bill was ordered to be printed in the
Record, as follows:

See http://www.abiworld.org/legis/bills/99mays945.html

END