Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005 -- (Senate - March 01, 2005)

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Mr. GRASSLEY. Mr. President, I am glad we are now finally considering S. 256, the Bankruptcy Reform Act of 2005. Although a few amendments were accepted during the Judiciary Committee markup a couple weeks ago, and we did that to accommodate Democratic Members, this bill is practically identical to the conference report that both the House and Senate conferees signed in the 107th Congress, minus the poison pill abortion amendment.

Many of my colleagues know I have been working on this bill for quite some time now and that there has always been strong bipartisan support for passing bankruptcy reform. I started working on bankruptcy issues in the mid-1990s, and I did that with my colleague, then-former Senator Heflin of Alabama. We served together as either chairman or ranking member of the Administrative Oversight Subcommittee for a period of, I believe, 12 years.

During this period of time, we created what became known as the National Bankruptcy Review Commission. We held numerous hearings in the subcommittee on various topics dealing with the subject of bankruptcy reform.

In the 105th Congress, Senator Durbin and I passed out of the Senate a bankruptcy bill by a vote of 98 to 1, but it never got to conference.

In the 106th Congress, Senator Torricelli and I worked closely and negotiated many compromises. We were able to vote out of the Senate a Grassley-Torricelli bill by a vote of 83 to 14. The Senate then approved the bankruptcy conference report by a vote of 70 to 28. Mr. President, 53 Republican Senators and 17 Democratic Senators voted for that conference report, but President Clinton pocket-vetoed the bill, and although we had the votes to override it, we were, unfortunately, not to have that opportunity. That is what a pocket veto is all about.

In the 107th Congress, I introduced, with Senator Biden, the same language of the conference report agreed to by both the House and Senate in the previous 106th Congress.

We passed the bankruptcy bill by a strong bipartisan vote of 85 to 13, with further changes made to address concerns of Democratic Party members. We went to conference with the House and reached an agreement on a conference report. During that conference committee, numerous amendments were negotiated with Democrats who opposed the bill. We negotiated in good faith, but the inclusion of what has become known as the Schumer abortion language ultimately proved to be unacceptable to the House and we were not able to get to the finish line.

The Senate tried to address the bankruptcy bill in the 108th Congress. The House passed the conference report language without the abortion provisions, but the Senate never took it up. In addition, the House amended a Senate bill with a bankruptcy bill and requested a conference, but Senate Democrats denied us the ability to have a conference on that bill.

So after three Congresses, we are here again in the 109th Congress trying to pass bankruptcy reform. My Democratic colleagues, Senator Carper and BEN NELSON, have joined me, as well as Senators HATCH, SESSIONS, and others, on this bill, S. 256, the Bankruptcy Reform Act of 2005. The bill continues in the tried and true spirit and tradition of this bill being bipartisan, so we do have that bipartisan support on its introduction, and from the votes we have had on amendments today, it looks like that bipartisanship is still going to hold. So I hope my colleagues will not be fooled when longstanding opponents to this bill, even though they may never number more than 15, vociferously claim that the bankruptcy bill is really controversial and really unnecessary because those statements, made by the very small number of people in this body who do not think we need to do anything on bankruptcy reform, everything they are saying is far from the truth.

I note that throughout the years, we really bent over backward in trying to accommodate Democratic Senators' concerns with the bill's process, even in this Congress. I do not think that it is any surprise to anyone that my position is that the bankruptcy bill is still very much simply unfinished business after all of these compromises throughout now the fourth Congress. This bill has passed both the House and the Senate a total of 11 times between these two Houses of Congress. It is about time that we get the job done now. Hence, simply unfinished business, even though some of my colleagues will try to make this be a totally brand-new debate, just like we were starting over with the purest bill that I would prefer, but because purest bills never get through the Senate, it takes bipartisanship.

We are where we are because of compromise and unfinished business, and hopefully we will move this bill to the House and to the President, somewhat I hope a repeat of what we did 3 weeks ago with the class action tort reform bill. That is why at the beginning of this Congress I reintroduced the bipartisan conference report that was arrived at in the 107th Congress with only one change, and that change is to leave the poison pill of the Schumer abortion language out of it.

Remember that this compromise that I introduced in this year, the 107th Congress, minus the Schumer amendment, otherwise is exactly the same language negotiated when the Democrats had a majority. It was two Congresses ago when Senator Jeffords changed from being a Republican to an Independent, sitting with the Democrats. They took over the Congress, and it is that Democratic Senate that negotiated this agreement for the Senate. That is the bill we are working on now as the underlying provision.

The Schumer abortion language that tanked the bill in the House, in the 107th Congress, is left out. Other than that, the bill was basically the exact same language that Senate Members, both Republican and Democrats, have supported.

The reason I did this is because we had reached many carefully crafted compromises and had a good bipartisan product. I did not think that we had to go through committee this time because this bill had been done so many times before, but Majority Leader Frist insisted that it go through regular order. The Judiciary Committee held a hearing and markup on this bill.

So my colleagues are clear, the committee accepted five amendments to further accommodate Democratic members. The committee also defeated a number of other amendments that were clearly offered to open issues and weaken the bill.

I would like to make my position crystal clear. We have all cooperated and compromised at great length in order to enact this legislation that fixes an unfair bankruptcy regime, provides new consumer protections, helps children in need of child support, and makes other necessary reforms to a system that is often open to abuse. I do not believe there is any need to reopen this bill and to disrupt those many compromises we have already reached with our Democratic colleagues, and more importantly with the House of Representatives.

I hope this clarification on the history and procedural process of the bill will show that, one, the bill is a bipartisan effort; two, that we have been working on bankruptcy reform for too long and have gone over all the fine points of the bill in great detail; and, three, that we have bent over backward to allow a fair process to move forward with this bill.

I discussed the merits of this bankruptcy reform bill. There is broad public support for reforming our bankruptcy system. The vast majority of people believe that individuals who file for bankruptcy protection should be required to pay back some of their debt if they have the ability to do so, and that is precisely what this bankruptcy bill attempts to do.

Most people think it should be more difficult for individuals to file for bankruptcy. Most Americans are tired of paying for high rollers who game the current bankruptcy system and its loopholes to get out of paying their fair share. Most people recognize that too many people are filing for bankruptcy. Too many people are gaming the system, and the numbers are up in historically high proportions in recent years that prove that. Bankruptcy filings were at an alltime high even during the boom years of our economy. Opponents to the bill act as if there is nothing to worry about, but the fact is we have a bankruptcy crisis on our hands.

I want to visit with my colleagues about how this bill will change the way bankruptcy is being treated. Simply put, bankruptcy is a court proceeding where people get their debts wiped away. Every time a debt is wiped away through bankruptcy, somebody loses money. Of course, that is common sense, and when somebody who extends credit has their obligations wiped away in bankruptcy, they are forced to make a decision. Should this loss simply be swallowed as the cost of doing business or are prices raised for other customers to make up for another's losses?

Presently, when individuals file for bankruptcy under chapter 7, a court proceeding takes place and their debts are simply erased. But every time a debt is wiped away through bankruptcy, someone loses money. When someone loses money in this way, he or she has to decide to either assume that loss as a cost of business or raise the price for other customers to make up for that loss.

When bankruptcy losses are infrequent, lenders maybe are able to swallow that loss. But when they are frequent, lenders need to raise prices for other consumers to offset their losses. These higher prices translate into higher interest rates for future borrowers. The result of the bankruptcy crisis is that hard-working, law-abiding Americans have to pay higher prices for goods and services because somebody else did not make good on their obligations to pay. This bill would make it harder for individuals who can repay their debt to file for bankruptcy under chapter 7. This would lessen, then, the upward pressure on interest rates and prices. It is only fair to require people who can repay their debts to pull their own weight. But under current bankruptcy law, an individual can get full debt cancellation in chapter 7 with no questions asked.

The Bankruptcy Reform Act of 2005 asks the very fundamental question of whether repayment is possible by an individual. It is this simple: If repayment is possible, then he or she will be channeled into chapter 13 of the Bankruptcy Code which requires people to repay a portion of their debt as a precondition for limited debt cancellation. In other words, people who have the ability to pay will not get off scot-free anymore.

This bill does this by providing for a means-tested way of steering people who are filers, who can repay a portion of their debts, away from chapter 7 bankruptcy. This test employs a legal presumption that chapter 7 proceedings should be dismissed or converted into chapter 13 whenever the filers earn more than the State median income and can repay at least $6,000 of his or her unsecured debt over a 5-year period of time.

In calculating a debtor's income, living expenses are deducted as permitted under IRS standards for the State and locality where the debtor lives. Legitimate expenses such as food, clothing, medical, transportation, attorney's fees, and charitable contributions are taken into account in this analysis, as provided under Internal Revenue Service guidelines.

Moreover, a debtor may rebut the presumption by demonstrating special circumstances. So the means test takes into account a debtor's income, a debtor's expenses, and allows a debtor to, even beyond that, show special circumstances which would justify adjustments to the means test.

In this way, the bankruptcy reform bill preserves the principle of a fresh start for people who have been overwhelmed by medical debts or sudden, unforeseen emergencies. As stated by the Government Accounting Office, the bill allows for the 100-percent deductibility of medical expenses before examining repayment ability. The bill preserves fair access, then, to bankruptcy for those people who are truly in need.

So that I am crystal clear, people who do not have the ability to repay their debt can still use the bankruptcy system as they would have before. This bill clearly provides that people of limited income can still file under chapter 7 and get that fresh start. There is a specific safe harbor built in for these individuals, so their debts can be wiped away, as is done right now.

I point this out because so often during this debate it is going to be pointed out to you, inaccurately, that somehow poor people are not getting that opportunity for a fresh start. So I want to repeat: There is a safe harbor for poor people. But the free ride is over for people who have higher incomes, and who can repay their debt.

Personal responsibility has been one of the main themes of the bankruptcy reform bill, going back to my first introduction. But even before that, since 1993, the number of Americans who declared bankruptcy has increased, would you believe it, over 100 percent. While no one knows all the reasons underlying the bankruptcy crisis, the data shows that bankruptcies increased dramatically during the same timeframe when unemployment was low and real wages were at an all-time high.

I believe the bankruptcy crisis is, in fact, a moral crisis. People have to stop looking at bankruptcy as a conventional financial planning tool, where honest Americans have to foot the bill for those who do not pay their honest debt. It is clear to me that our lax bankruptcy system must bear some of the blame for the bankruptcy crisis. A system where people are not even asked whether they can pay off their debts obviously contributes to the fraying of the moral fiber of America. Why should people pay their bills when the system allows them to walk away with no questions asked? Why should people honor their obligations when they can take the easy way out through bankruptcy?

I think the system needs to be reformed because it is fundamentally unfair. This bill will promote personal responsibility among borrowers and create a deterrence for those hoping to cheat the system. This bill does more than provide for a flexible means test that gives judges discretion to consider the individual circumstances of each debtor in order to determine whether they truly belong in chapter 7. It also contains tough new consumer protections. But the opponents of this bill do not seem to realize that. So I want them to pay attention as I describe new procedures to prevent companies from using threats to coerce debtors into paying debts which could be wiped away once they are in bankruptcy.

The bill requires the Justice Department to concentrate law enforcement resources on enforcing consumer protection laws against abusive debt collection practices. It contains significant new disclosures for consumers, mandating that credit card companies provide key information about how much they owe and how long it will take to pay off their credit card debts by only making the minimum payment. That is a very important consumer education for every one of us.

Consumers will also be given a toll-free number to call where they can get information about how long it will take to pay off their own credit card balances if they only pay the minimum payment. This will educate consumers and improve consumers' understanding of what their financial situation is.

Credit card companies that offer credit cards over the Internet will be required for the first time ever to fully comply with the Truth In Lending Act, so claims that this bill is unbalanced are off base.

Moreover, the bill makes changes which will help particularly vulnerable segments of our society. Child support claimants are given a higher priority status when the assets of a bankruptcy estate are distributed to creditors.

Here again, I make crystal clear that the bankruptcy bill makes significant improvements for child support claimants. This bankruptcy bill does not hurt them, as opponents of the bill are trying to claim. In fact, the organization, the very organization that specializes in tracking down deadbeat dads, feels this bill will be a tremendous help in collecting child support.

The people on the front lines say the bankruptcy bill is good for collecting child support. An example: The bill provides that parents and State child support enforcement collection agencies are given notice when a debtor who owes child support or alimony files for bankruptcy. Bankruptcy trustees are required to notify child support creditors of their right to use child support enforcement agencies to collect outstanding amounts due.

In addition, the bill requires creditors to provide the last known address of debtors owing support obligations upon the request of the custodial parent.

The bill goes further--requiring that the identity of minor children be protected in bankruptcy proceedings.

Concerns expressed by opponents to the bill about this being a flawed part of it just don't hold water.

The bill also makes great strides in cracking down on very wealthy individuals who abuse the bankruptcy system. If you listen to our critics, you might get the impression that the homestead exemption is a giant loophole that this bill does not deal with, and that we are busy protecting the rich.

The GAO looked at the question of how frequently the homestead exemption is abused by wealthy people in bankruptcy. The GAO found that less than 1 percent of bankruptcies filed in States where there are unlimited homestead exemptions involve homesteads over $100,000. That means 99 percent of bankruptcy filings were not abusive.

This is not a loophole at all. In fact, the provision in this bill with respect to homestead is a significant improvement from current law. There is a Federal cap on homestead exemptions in current law.

Under the current bankruptcy law, the debtors living in certain States can shield from their creditors virtually all of the equity in their home. Consequently, some debtors relocate to these States to take advantage of the mansion loophole provisions that are, in most cases, in their constitution. This bill would take a strong stand against this abuse by requiring that a person be a resident in a State for 2 years before he can claim the State's homestead exemption. Current requirements can be as little as 91 days.

The bill further reduces the intent for abuse by requiring a debtor to own the homestead for at least 40 months before he can use State exemption law. Current law doesn't have any such requirement.

Furthermore, the bill would prevent individuals who have violated security laws or individuals who have engaged in criminal conduct from shielding their homestead assets from those whom they have defrauded or injured. Specifically, if a debtor was convicted of a felony, violated a security law, or committed a criminal act intentionally, or engaged in reckless misconduct that caused serious physical injury or debt, the bill overrides State homestead exemption laws and caps the debtor's homestead at $125,000 as the amount that would be protected.

To the extent that the debtor's homestead exemption was obtained through the fraudulent conversion of nonexempt assets during the 10-year period preceding the filings of the bankruptcy case, this bill requires such exemption to be reduced by the amount attributable to the fraud.

These homestead provisions were delicately compromised between those who believe that the homestead should be capped through Federal law--I am one of those--or others who are uncomfortable with a uniform Federal cap which may violate their own State constitution.

So, please, tomorrow when this debate is conducted on changing this provision that has been so carefully worked out over a period of at least two Congresses, don't believe it when people say we have a gaping loophole. The homestead provisions in the bankruptcy bill will substantially cut down on the abuses that might be referred to.

I would like to talk about another thing this bankruptcy bill does which is so important for those of us who represent agricultural States. This bill makes chapter 12 of the Bankruptcy Code, which gives essential protections to family farmers, a permanent chapter in the Bankruptcy Code. The bill enhances these protections. It makes more farmers eligible for chapter 12. The bill lets farmers in bankruptcy avoid capital gains tax. This is very important because it will free up resources to be invested in farming operations that otherwise would go down the black hole of the Internal Revenue Service. Farmers need this chapter 12 safety net.

In addition, the bankruptcy bill will for the first time create badly needed protections for patients in bankruptcy hospitals and nursing homes. Let me provide an example of what could happen right now without the patient protections contained in this bill.

At a hearing I held on nursing home bankruptcies, I learned about a situation in California where a bankruptcy trustee just showed up at a nursing home on a Friday evening and evicted the residents of that nursing home. The bankruptcy trustee didn't provide any notice whatsoever that this was going to happen. There was absolutely no chance for the nursing home residents to be relocated. The bankruptcy trustee literally put these elderly people out on the street and changed the locks on the doors so that they couldn't get back into the nursing home. The bankruptcy bill will prevent this from ever happening again. These are protections that we will be giving these deserving senior citizens for the first time.

The truth is that bankruptcies hurt real people. It isn't fair to permit people who can repay to skip out on their debts. Yes, we must preserve fair access to bankruptcy for those who truly need a fresh start. This bill does not in any way compromise that century-old principle of our Bankruptcy Code.

This bankruptcy reform act does that--it guarantees a fresh start. It lets those people who can pay their debts live up to their responsibilities as well.

Let us restore the balance. Let us pass this bill. This bill is a product of much negotiation and compromise over three Congresses. It is fair, it is balanced, but, more importantly, it is a bill that once got to President Clinton and he pocket-vetoed it. This bill that passed by overwhelming majorities of both Houses of Congress is long overdue legislation.

I urge my colleagues to support this legislation but, more importantly, help us defeat amendments that are opening all of the carefully crafted compromises that we worked on over the last 3 to 4 years.

I yield the floor. I suggest the absence of a quorum.

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