[Extensions of Remarks]
[Pages E87-E89]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

INTRODUCTION OF H.R. 3150, THE BANKRUPTCY REFORM ACT OF 1998

______

HON. GEORGE W. GEKAS

of pennsylvania

in the house of representatives

Wednesday, February 4, 1998

Mr. GEKAS. Mr. Speaker, yesterday, I had the honor, along with my
colleagues Congressmen Jim Moran of Virginia, Rick Boucher of Virginia,
and Bill McCollum of Florida, to submit to the Congress legislation to
reform the Bankruptcy Code. This measure, the Bankruptcy Reform Act of
1998--H.R. 3150--will be referred to the House Committee on the
Judiciary, and then to the Judiciary Subcommittee on Commercial and
Administrative Law. As the Chairman of the Subcommittee on Commercial
and Administrative Law I can assure the Congress that this measure will
be given an expeditious review and brought to the full House of
Representatives as soon as possible. Why? Because bankruptcy reform is
needed, and needed now.
Mr. Speaker, I would like to submit to the body two items for
printing in the Congressional Record which detail my position on
bankruptcy reform and the major provisions of H.R. 3150. There will be
much, much more information offered on this topic, this bill and the
arguments for, and against, what is here being proposed. I look forward
to a spirited debate and enactment of the best bankruptcy reform bill
possible.

The Bankruptcy Reform Act of 1998

MAJOR PROVISIONS

The Bankruptcy Reform Act of 1998 was introduced on
February 3rd by Rep. George Gekas (R-Pa.), Rep. James Moran
(D-Va.), Rep. Bill McCollum (R-Fla.), and Rep. Rick Boucher
(D-Va.). The bill is designed to restore personal
responsibility to the bankruptcy system and to ensure that it
is fair for debtors, creditors and consumers. Topics covered
by the bill include:

Consumer Bankruptcy

In 1997, Americans filed an all-time record of 1.33 million
consumer bankruptcy petitions, which erased an estimated $40
billion in consumer debt. Those losses are passed on to all
consumers, resulting in a hidden tax of $400 for every
American household. In other words, consumers who pay their
bills are forced to pick up the tab for those who do not. The
consumer bankruptcy provisions of the Bankruptcy Reform Act
of 1998 are designed to address a flaw in bankruptcy law that
allows individuals to file for bankruptcy and walk away from
their debts, regardless of whether they are able to repay a
portion of what they owe.
Needs-based bankruptcy--The Bankruptcy Reform Act of 1998
creates a system that would determine the amount of financial
relief a debtor needs and require people to repay what they
can. The amount of relief would be calculated based on a
formula that uses a debtor's income and obligations to
determine his or her ability to repay.
If the debtor cannot repay all of his or her secured and
priority debts, and at least 20 percent of unsecured debts
over five years, the debtor has the option of filing for
complete relief under Chapter 7 of the bankruptcy code.
(Examples of secured debts are car loans and mortgages.
Priority debts are such obligations as alimony, child support
and back taxes. Unsecured debts include installment loans and
credit card debts.)
If the debtor could repay all of his or her secured and
priority debts and at least 20 percent of unsecured debts
over five years, the debtor may not file under Chapter 7; if
the debtor still chooses bankruptcy, he or she would file
under Chapter 13 and begin a repayment plan. (Under Chapter
7, a debtor receives nearly complete relief from debts.
Under Chapter 13, the court establishes a timely repayment
plan that can run up to five years.)
Those debtors with an annual income of less than 75 percent
of the national median family income can choose automatically
whether to file for bankruptcy under Chapter 7 or Chapter 13;
the needs-based test does not apply to these individuals.
Debtor's Bill of Rights--This provision would protect
consumers from ``bankruptcy mills''--law firms and other
entities that steer consumers into filing bankruptcy
petitions without adequately informing consumers of their
rights and the potential harm bankruptcy can cause. Under the
legislation, an attorney is required to refund the full cost
of representing the consumer if he or she does not provide
full and fair representation. The bill would also crack down
on misleading advertisements and other tactics by requiring
full disclosure about an organization's services, and sets
out a series of rules under which for-profit ``debt relief
counseling organizations'' must operate so that consumers are
assured that they will get proper and adequate advice.
Consumer Education--The bill contains two education-related
provisions. First, each consumer must receive information
prior to filing for bankruptcy about his or her options, both
within the bankruptcy system and alternatives to bankruptcy.
Second, the bill creates a pilot program of financial
management training for debtors and allows the Court to
require a debtor to complete such a program as a condition of
having his or her debts discharged.
Exemptions--The bill increases from 180 to 365 days the
time in which a debtor must live in a particular state in
order to take advantage of that state's asset exemption
rules. This provision is designed to limit a debtor's ability
to move into a state with broader exemptions immediately
prior to filing for bankruptcy.

Small Business Bankruptcy

More than 50,000 American businesses file for bankruptcy
each year, including many small ones. The Bankruptcy Reform
Act of 1998 implements reforms recommended by the National
Bankruptcy Review Commission to streamline the treatment of
small business Chapter 11 cases. The legislation defines a
small business as one with less than $5 million in debts. The
Commission found that the Chapter 11 process, which is
designed to give business owners time to reorganize and get
the business back on its feet, often had inadequate oversight
and was ineffective for small businesses. Major reforms in
this area include:
Requiring all small businesses to confirm Chapter 11 plans
within 150 days of filing, or prove that they are deserving
of an extension.
Enlarging the grounds for conversion to Chapter 7, under
which a Bankruptcy Trustee is required to liquidate the
business.
Charging U.S. Trustees and Bankruptcy Administrators with
overseeing small business debtors and ``blowing the whistle''
early on cases that cannot succeed in Chapter 11. (The
current oversight system, which involves court-appointed
creditors' committees, has proven ineffective).

Single-Asset Realty Cases

These provisions also implement recommendations of the
National Bankruptcy Review Commission in a specific area of
Chapter 11. Single-asset realty cases typically involve in
office or apartment building where the rents are inadequate
to cover payments due on the mortgage. Owners often file
Chapter 11 to postpone foreclosure. Usually there are few or
no creditors other than the mortgage holder. The Commission
found that owners in this situation often propose ``new
value'' plans, whereby the mortgage holder's claim is reduced
to the current value of the building, the excess claim is
canceled, and the owner contributes a new amount of money
toward the new value. The Bankruptcy Reform Act of 1998 takes
steps to streamline this process and to ensure that the ``new
value'' must be in cash equal to 25% of the full value of the
property.

Enhanced Data Collection

A common complaint about the current bankruptcy system is
that data is limited, making it difficult for Congress to
recommend changes. The Bankruptcy Reform Act of 1998 would
require: Uniform, national reporting forms for Chapters 7, 11
and 13; monthly filing forms for Chapter 11, so that the
progress of a business reorganization can be easily
monitored; a ``sense of the Congress'' declaration that all
non-confidential data should be stored electronically and be
made available to the public via the Internet; and a ``Sense
of the Congress'' declaration that a national data system
should be established for tracking bankruptcy trends.

Bankruptcy Tax Issues

The Bankruptcy Reform Act of 1998 makes a number of changes
to existing law to close loopholes that limit the
government's ability to collect taxes. The bill also improves
the system for notifying government representatives of a
bankruptcy filing in which taxes may be involved.
The Bankruptcy Reform Act of 1998 also incorporates the
major elements of S. 1149, the Investment in Education Act,
which was unanimously reported by the Senate Judiciary
Committee last October. This language ensures that local
school districts and governments are given a priority in
bankruptcy proceedings to recover back property taxes. School
districts around the country are losing money because they
tend to be last in line to collect back taxes owed by
property owners who have filed for bankruptcy. These
provisions ensure that more money is put back into schools.

Direct Appeals

Under current law, there are two levels of appeals in
bankruptcy cases. The first is an appeal to a district court
or a bankruptcy appellate panel and the second is to the U.S.
Court of Appeals. This proposal would

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streamline and expedite the appeals process by eliminating
the first step and allowing appeals to be taken directly to
the U.S. Court of Appeals.

Making Chapter 12 Permanent

The bill would also make permanent Chapter 12 of the
Bankruptcy Code, which is scheduled to expire in 1998.
Chapter 12 is designed to preserve family farms by limiting
the power of a bank to exercise a veto over a farmer's
reorganization plan. This provision was adopted unanimously
by the Senate in October.
____

Statement of Chairman George W. Gekas, Chairman, Judiciary Subcommittee
on Commercial and Administrative Law--Bankruptcy Reform Act of 1998

The greatest, and perhaps most dangerous, irony I have come
across in the past decade is that despite economic growth,
low inflation, low unemployment, and increasing personal
income, our nation has seen as alarming increase in the
number of bankruptcy filings--1.3 million in 1997 to be
exact. Think about that for a second. That's more than one
family per every hundred in the United States and over $40
billion in debt that has been erased--in a year of strong
economic growth. It only further illustrates the problem when
you consider that the number of filings in the '90s is eight
times as many, per household, as there were during the
Depression.
It wasn't always this way. The so-called ``bankruptcy of
convenience'' is a new phenomenon, borne out of the loss of
stigma the word ``bankruptcy'' once, but no longer, carried.
It used to be a sense of responsibility, or perhaps more
appropriately, a sense of disgrace and embarrassment that
discouraged Americans from declaring bankruptcy. Deals were
cut to make sure that creditors would at least eventually see
their money and that debtors paid off, rather than legally
erased, their debt.
Harry S. Truman, the 33rd President of the United States,
spent the better part of the 1920s in debt due to the
collapse of his clothing business in 1922. Truman was both a
man and a President of the highest moral character with a
tremendous sense of responsibility, which was reflected in
the motto that sat on his desk in the Oval office-- ``The
buck stops here.'' Truman eventually paid off all of his
creditors by working out deals and payment schedules, thereby
keeping himself out of bankruptcy court and ensuring that he
lived up to bills he amassed.
As an attorney in practice, I can remember negotiating such
a repayment arrangement for a client in the late '60s. With
just a few phone calls I was able to appease my client's
creditors and arrange for payments to be made on a regular
basis until my client's debt could be discharged. While my
client's creditors were demanding their pound of flesh, they
know all too well that a deal was in their best interests.
The creditors would get paid, albeit not immediately. The
other option was for my client to declare bankruptcy, which
would have erased his debt and left his creditors high and
dry. Both parties agreed that an arrangement based on
responsibility and good faith was the better alternative.
Today's situation is tremendously difficult to comprehend,
because times are good. The only reasonable explanation is
that the stigma of bankruptcy is all but dead. How do we
know? Other than the last two decades, we only see ``spikes''
in the number of bankruptcy filings during times of
recession--which makes sense. During difficult economic
times it is always tougher to make ends meet. But the past
six years have been a period of unparalleled economic
growth--as any Wall Street broker would be happy to tell
us. So obviously the growth in the personal bankruptcy
market is not a response to the economy.
Nor can we justifiably point an accusing finger at the
credit card industry. The popular myth is that the credit
card industry is flooding consumers with credit they can't
afford thereby causing a surge in filings. However, those
accusations are misdirected. Credit card debt accounts for
only 16% of all bankruptcy debt. With some quick calculations
you can see that leaves $33.6 billion of some $40 billion in
debt still unaccounted for--so it is not likely nor is it
fair to blame the credit card industry for the rapid increase
in bankruptcy filings.
The lack of stigma has become a weed infesting the
bankruptcy landscape. And the seed that sprouted this
condition was Congress, or more correctly our predecessors in
Congress. The Bankruptcy Reform Act of 1978 changed the code
dramatically, making the system decidedly pro-debtor. The
1978 reforms were appropriate for the times. But the times
have changed. In the twenty years since, filings have gone
from 200,000 to 1.3 million.
In his 1997 Economic Report, President Clinton also
acknowledged that the Bankruptcy Reform Act of 1978 is the
primary culprit for the increased filings of the past two
decades. The report states that ``recent rises in nonbusiness
bankruptcies is probably the result of changes in the
bankruptcy law and a number of broader social changes . . .
researchers generally attribute much to the increase in
bankruptcies since the late 1970s to effects of the
Bankruptcy Reform Act of 1978.''
The weed has spread as bankruptcy became viewed more as a
financial planning tool, government debt forgiveness program,
and a first choice, rather than a last resort. Bankruptcy has
even become fashionable--the Hollywood trend setters do it.
People Magazine recently ran a cover story to illustrate the
problem. Willie Nelson, Burt Reynolds, Kim Basinger, M.C.
Hammer, former Baseball Commissioner Bowie Kuhn, Arizona
Governor Fife Symington, former Philadelphia Eagles owner and
Pennsylvania trucking magnate Leonard Tose are just a few of
the high profile filers lending their help, albeit
unconsciously, to make bankruptcy en vogue. Just last week,
Grammy Award winning singer Toni Braxton, who has sold more
than 15 million records in the past 5 years, declared
bankruptcy.
It is simply too easy to file. I sent my bankruptcy
counsel, Dina Ellis, to Bankruptcy court a few weeks back and
what she reported to me was mind boggling. Lawyers who have
never met their clients looking like limousine drivers at the
airport as they try to identify their clients and get them in
front of the judge. Scores of cases decided over the course
of a few hours, spending an average of 1 to 5 minutes to
decide each case. Can you imagine? Spend a couple of hours
filling out forms and a couple of minutes before a judge and
you can kiss your debts goodbye. You want to put that in
perspective? By the time this press conference is finished 20
people will have had their debts discharged.
Of course, any remnants of the bankruptcy stigma are easily
erased by our daily dose of media. Bankruptcy lawyers have
taken to advertising on TV, radio and in the papers to tout
the benefits of stiffing your creditors or how to restore
your credit immediately after declaring bankruptcy. The way
they make it sound, you would think that you are crazy to
responsibly pay your bills or mortgage. It pays to go into
debt.
The crux of the problem is that too many consumers are
choosing convenience rather than responsibility for the debts
that they have accrued and can afford to pay. This is why you
and I should care about stemming the tidal wave of
bankruptcies.
When irresponsible spenders who can afford to pay all or
some of their debt declare bankruptcy, you and I get stuck
with the bill. It's a $40 billion bill that we share this
year, or $400 per household. I don't know about you but $400
dollars is 5 weeks' worth of groceries or 20+ fill-ups at the
gas pump to me. It has also been estimated that it takes 15
responsible borrowers to cover the cost of one bankruptcy of
convenience.
When consumers file for bankruptcy, retailers pass on the
costs in the form of higher prices, layoffs and/or buying
less from suppliers. Lenders redistribute bankruptcy debt by
charging you and me higher interest rates and insurance
premiums.
Now my colleagues and I have a decision to make: plow new
ground or let the weeds grow. Mr. Moran, Mr. McCollum, Mr.
Boucher and I have decided to plow. The bill we are
introducing here today is a conglomeration of ideas,
strategies and solutions that, when enacted, will put an end
to the abuse, protect the downtrodden and keep you and I from
footing the bill for someone else's irresponsibility.
The genesis of this reform was the Bankruptcy Reform Act of
1994 and its major tenet, the formation of the National
Bankruptcy Review Commission. The Commission was charged with
the duty of studying the bankruptcy code and submitting a
report in two years suggesting proposed reforms. Last
October, the Commission released its report and
recommendations to Congress. To put it lightly, the report
was disappointing (even by several Commissioner's own
admissions), for it failed to identify the problem of
increased consumer bankruptcies or offer adequate solutions.
However, in its defense, it did provide a starting point for
our debate.
Our bill is comprehensive--tackling both consumer and
business bankruptcy. Let me highlight some of the fine points
of our bill:
Our bill emphasizes responsibility and cuts down on abuse
by implementing a needs-based system. Our plan mirrors
previous legislation introduced by Congressmen McCollum and
Boucher.
A unique portion of our legislation is what I call the
``Debtor's Bill of Rights,'' which outlines protection for
those who legitimately require bankruptcy's safety net and in
particular would save them from becoming victims of the
``bankruptcy mills.''
There is also language included in the bill that provides a
pilot program for consumer education to help debtors better
manage their finances.
We have addressed the exemption issue, making it more
difficult for those who are dodging their debts to hide their
wealth in exempted assets.
Our bill also permanently extends Chapter 12 bankruptcy to
protect family farmers under the Code.
What you see before you is a tremendous accomplishment--
reestablishing the link between bankruptcy and the ability to
pay one's debts. Yet it still preserves the foundation of
bankruptcy--providing the safety net that supports those who
suffer a major life crisis.
My home state of Pennsylvania passed one of the first
bankruptcy laws in our nation's history. The Pennsylvania
Bankruptcy Act of 1785, called for consumers convicted of
bankruptcy to be nailed to the pillory by the ear and then
publicly flogged. After the flogging the ear would be cut
off. By no means do we wish to return to those days.
To paraphrase my former colleague and former Treasury
Secretary Lloyd Bentsen: while there is nothing wrong in
legitimately

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admitting financial defeat by filing bankruptcy when it
becomes impossible to repay one's debts, we must make an
effort to restore the justifiable sense of embarrassment
Americans once felt asking their neighbors to shoulder their
burden.
Another concern is that the current system--which breeds
financial irresponsiblity--is not the cure-all imagined by
those who live beyond their means. By allowing people to
escape from their financial obligations, we are doing those
individuals a disservice by not encouraging them to manage
their finances and control their debt. The end result is a
citizenry caught in a never-ending cycle of debt. With
bankruptcy filings expected to reach historic levels this
year, I have grave concerns for the stability--economic and
emotional--of the American family.
The time is now, while our economy is robust, to reform.
Waiting until the dawn of the next recession or economic
downturn will only allow this outbreak of bankruptcy to run
into an uncontrollable epidemic. Historically, bankruptcy was
intended as a last resort pursued only under the most dire of
situations. We are committed to ensuring that the code will
help those in dire circumstances get back onto their feet
while protecting responsible consumers who are unfairly
bearing the cost.

____________________