[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF BANKRUPTCY LAW AND
LEGISLATIVE PROPOSALS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON ANTITRUST, COMMERCIAL
AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
TUESDAY, JUNE 25, 2019
__________
Serial No. 116-30
__________
Printed for the use of the Committee on the Judiciary
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available via: http://judiciary.house.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
45-063 WASHINGTON : 2022
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COMMITTEE ON THE JUDICIARY
JERROLD NADLER, New York, Chair
MARY GAY SCANLON, Pennsylvania, Vice-Chair
ZOE LOFGREN, California DOUG COLLINS, Georgia, Ranking
SHEILA JACKSON LEE, Texas Member
STEVE COHEN, Tennessee F. JAMES SENSENBRENNER, Jr.,
HENRY C. ``HANK'' JOHNSON, Jr., Wisconsin
Georgia STEVE CHABOT, Ohio
THEODORE E. DEUTCH, Florida LOUIE GOHMERT, Texas
KAREN BASS, California JIM JORDAN, Ohio
CEDRIC L. RICHMOND, Louisiana KEN BUCK, Colorado
HAKEEM S. JEFFRIES, New York JOHN RATCLIFFE, Texas
DAVID N. CICILLINE, Rhode Island MARTHA ROBY, Alabama
ERIC SWALWELL, California MATT GAETZ, Florida
TED LIEU, California MIKE JOHNSON, Louisiana
JAMIE RASKIN, Maryland ANDY BIGGS, Arizona
PRAMILA JAYAPAL, Washington TOM McCLINTOCK, California
VAL BUTLER DEMINGS, Florida DEBBIE LESKO, Arizona
J. LUIS CORREA, California GUY RESCHENTHALER, Pennsylvania
SYLVIA R. GARCIA, Texas BEN CLINE, Virginia
JOE NEGUSE, Colorado KELLY ARMSTRONG, North Dakota
LUCY McBATH, Georgia W. GREGORY STEUBE, Florida
GREG STANTON, Arizona
MADELEINE DEAN, Pennsylvania
DEBBIE MUCARSEL-POWELL, Florida
VERONICA ESCOBAR, Texas
PERRY APELBAUM, Majority Staff Director & Chief Counsel
BRENDAN BELAIR, Minority Staff Director
------
SUBCOMMITTEE ON ANTITRUST, COMMERCIAL AND ADMINISTRATIVE LAW
DAVID N. CICILLINE, Rhode Island, Chair
JOE NEGUSE, Colorado, Vice-Chair
HENRY C. ``HANK'' JOHNSON, Jr., F. JAMES SENSENBRENNER, Jr.,
Georgia, Wisconsin, Ranking Member
JAMIE RASKIN, Maryland KEN BUCK, Colorado
PRAMILA JAYAPAL, Washington MATT GAETZ, Florida
VAL BUTLER DEMINGS, Florida KELLY ARMSTRONG, North Dakota
MARY GAY SCANLON, Pennsylvania W. GREGORY STEUBE, Florida
LUCY McBATH, Georgia
SLADE BOND, Chief Counsel
DANIEL FLORES, Minority Counsel
C O N T E N T S
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Tuesday, June 25, 2019
Page
OPENING STATEMENTS
The Honorable David Cicilline, Chair of the Subcommittee on
Antitrust, Commercial and Administrative Law from the State of
Rhode Island................................................... 1
The Honorable James Sensenbrenner, Ranking Member of the
Subcommittee on Antitrust, Commercial and Administrative Law
from the State of Wisconsin.................................... 2
The Honorable Jerrold Nadler, Chair of the Committee on the
Judiciary from the State of New York........................... 3
The Honorable Doug Collins, Ranking Member of the Committee on
the Judiciary from the State of Georgia........................ 5
WITNESSES
Panel 1
The Honorable Richard Durbin, Member of Congress
Oral Testimony................................................. 7
Prepared Testimony............................................. 9
The Honorable Nydia Velazquez, Member of Congress
Oral Testimony................................................. 12
Prepared Testimony............................................. 14
The Honorable Ben Cline, Member of Congress
Oral Testimony................................................. 19
Prepared Testimony............................................. 20
The Honorable Antonio Delgado, Member of Congress
Oral Testimony................................................. 23
Prepared Testimony............................................. 25
Panel 2
Hollister Petraeus, Former Assistant Director, Consumer Financial
Protection Bureau's Office of Servicemember Affairs
Oral Testimony................................................. 29
Prepared Testimony............................................. 32
Robert Keach, American Bankruptcy Institute
Oral Testimony................................................. 36
Prepared Testimony............................................. 49
Ed Boltz, National Association of Consumer Bankruptcy Attorneys
Oral Testimony................................................. 58
Prepared Testimony............................................. 60
John Rao, National Consumer Law Center
Oral Testimony................................................. 69
Prepared Testimony............................................. 71
Dalie Jimenez, Professor of Law, University of California Irvine
School of Law
Oral Testimony................................................. 94
Prepared Testimony............................................. 96
The Honorable Thomas Small, National Bankruptcy Conference
Oral Testimony................................................. 114
Prepared Testimony............................................. 116
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Items submitted by Robert Keach, American Bankruptcy Institute
for the record
A statement from the American College of Bankruptcy, dated June
14, 2019, endorsing the Family Farmer Relief Act and the
Small Business Reorganization Act............................ 38
A letter from the The American College of Bankruptcy, dated
June 14, 2019, endorsing the Family Farmer Relief Act and the
Small Business Reorganization Act............................ 42
A letter from the The National Conference of Bankruptcy Judges
(NCBJ), dated June 21, 2019.................................. 44
A statement from the American College of Bankruptcy, dated June
11, 2019, supporting the HAVEN Act........................... 48
Attachment entitled ``Subchapter V--Reorganization of a Small
Business Enterprise Debtor,'' submitted by the Honorable Thomas
Small, National Bankruptcy Conference for the record........... 123
Items submitted by the Honorable David N. Cicilline, Chair of the
Subcommittee on Antitrust, Commercial and Administrative Law
from the State of Rhode Island for the record
A statement from the American College of Bankruptcy, dated June
14, 2019, endorsing the Family Farmer Relief Act and the
Small Business Reorganization Act............................ 152
A statement from the American College of Bankruptcy, dated June
11, 2019, supporting the HAVEN Act........................... 154
A statement from the Association of Young Americans endorsing
the Student Borrower Bankruptcy Relief Act................... 155
APPENDIX
Items submitted by the Honorable David Cicilline, Chair of the
Subcommittee on Antitrust, Commercial and Administrative Law
from the State of Rhode Island for the record
A report entitled ``Effectuating the Fresh Star,'' American
Bankruptcy Institute......................................... 160
An article entitled ``The Bankruptcy Code's Disservice to Those
Who Served,'' American Bank Institute Journal................ 175
An article entitled ``Defending Our Veterans,'' American Bank
Institute Journal............................................ 179
A letter from the Consumer Bankers Association (CBA) supporting
reforming student loans...................................... 182
A letter from the The National Conference of Bankruptcy Judges
(NCBJ), dated May 31, 2019, submitted by Robert Keach,
American Bankruptcy Institute for the record................. 185
OVERSIGHT OF BANKRUPTCY LAW AND LEGISLATIVE PROPOSALS
----------
Tuesday, June 25, 2019
House of Representatives
Subcommittee on Antitrust, Commercial
and Administrative Law
Committee on the Judiciary
Washington, DC
The Subcommittee met, pursuant to call, at 10:01 a.m., in
Room 2141, Rayburn Office Building, Hon. David Cicilline [Chair
of the Subcommittee] presiding.
Present: Representatives Cicilline, Nadler, Neguse, Johnson
of Georgia, Jayapal, Scanlon, McBath, Sensenbrenner, Collins,
Buck, Armstrong, and Steube.
Staff present: David Greengrass, Senior Counsel; John Doty,
Senior Advisor; Lisette Morton, Director of Policy, Planning,
and Member Services; Madeline Strasser, Chief Clerk; Moh
Sharma, Member Services and Outreach Advisor; Susan Jensen,
Parliamentarian/Senior Counsel; Julian Gerson, Staff Assistant;
Joseph Van Wye, Professional Staff Member, ACAL Subcommittee;
Slade Bond, Chief Counsel, ACAL Subcommittee; Daniel Flores,
Minority Chief Counsel; and Andrea Woodard, Minority
Professional Staff Member.
Mr. Cicilline. The Subcommittee will come to order. Without
objection, the Chair is authorized to declare recess of the
Committee at any time.
We welcome everyone to our hearing on Oversight of
Bankruptcy Law and Legislative Proposals. I now recognize
myself for an opening statement.
The overriding principle of the bankruptcy system is to
give people who are overwhelmed with unimaginable debt a fresh
start through meaningful relief from their debt. The system is
supposed to work for everyone, from consumer debtors and small
business owners to family farmers, serviceMembers, and
veterans, and give them a new pathway to economic prosperity.
But as the witnesses at today's hearing will document, the
bankruptcy system is not working.
For example, as my colleague and friend, Senator Durbin,
will attest, far too many student loan borrowers have been
unable to succeed financially due to overwhelming student loan
debt. The amount of outstanding student loan debt has
skyrocketed to $1.5 billion. According to the Federal Reserve,
this amount has tripled since 2006 and is expected to grow to
$2 billion by 2022.
In addition to undermining the quality of life and the
earning of borrowers, the crisis has also severely affected the
economy overall. The American Bankruptcy Institute reports that
student loan debt has undermined homeownership, automobile
ownership, and has also resulted in a decline in students
choosing public service careers over the private sector. As
this report notes, and I quote, ``student loan debt thus
affects not only those who owe the loans, but also has
consequences that ripple through our communities and our
nation.''
Worse still, 20 states have passed laws to suspend or
revoke occupational and driver's licenses for people in default
for student loan debt. According to a 2017 report by the New
York Times there have been at least 8,700 cases of at-risk or
revoked professional licenses for student loan default. In one
example, the 10nessee Board of Nursing, a State with nursing
shortages, suspended the license of a nurse who defaulted on
her student loan because she was unable to work for a period
due to severe epileptic seizures. To reinstate her license, the
state required her to pay more than $1,500, which she could not
afford without a job, effectively ending her career as a nurse.
This grotesque outcome is due to amendments to the bankruptcy
code that have made educational debt virtually non-
dischargeable.
Under current law, student borrowers cannot discharge this
debt unless they demonstrate that they would face an undue
hardship if the debt were not discharged. While Congress
intended that provision to provide relief for hard-hit
borrowers, in practice it is an extremely high bar to relief
for those with crushing debt. As an original co-sponsor of H.R.
2648, the Student Borrow Bankruptcy Relief Act of 2019,
legislation introduced by Chair Nadler and Senator Durbin to
repeal the undue hardship requirement, I look forward to
hearing testimony from our witnesses on ending this crisis.
Today's hearing is also an opportunity to examine other
potential improvements to the bankruptcy system. These include
several commonsense bills that would ease burdens, streamline
the bankruptcy process, or expand eligibility for service
Members, veterans, small businesses, and family farmers.
Additionally, this hearing is an opportunity to consider
heightened disclosure requirements for bankruptcy professionals
retained by the board established by Congress to oversee the
budget and fiscal plans of Puerto Rico's instrumentalities.
I welcome each of our esteemed colleagues to offer
testimony in support of these thoughtful measures. At this
time, I now recognize the gentleman from Wisconsin, the Ranking
Member of this subcommittee, Mr. Sensenbrenner, for his opening
statement.
Mr. Sensenbrenner. I thank the Chair. The bankruptcy system
is an essential element of the U.S. economy. Rooted in the
bankruptcy clause of the Constitution, it has, since the
founding of our republic, provided the United States with the
most stable lending environment in the world. I am pleased that
with today's hearing, we can begin our examination of ways that
we can make our bankruptcy system even better.
The Subcommittee is considering a wide range of legislative
proposals today. I am an original co-sponsor of one of them,
the Family Farmer Relief Act of 2019. This bill would raise the
level of debt that may be taken into a family farm bankruptcy
under Chapter 12. It is important that we consider this bill as
it modernizes Chapter 12 to account for the higher levels of
investment needed to farm in today's family farming setting.
We will also examine the Small Business Reorganization Act.
This bill offers a way to make Chapter 11 bankruptcy more
accessible to small businesses. That will make it easier for
small businesses to reorganize their debts rather than
liquidate when they fall on hard times. Modeled on the Chapter
12 small farm bankruptcy provisions that have proven
successful, the Small Business Reorganization Act is a genuine
promise to help the bankruptcy code better serve American
business in the 21st century. Two other bills we will consider
offer more flexibility in bankruptcy for serviceMembers and
their families, and the third would require more transparency
from firms helping to resolve Puerto Rico's insolvency under
the 2016 PROMESA legislation. I am glad we are considering
these bills as well.
Finally, we will look at Chair Nadler's proposed
legislation to make all student loans dischargeable in
bankruptcy. The amount of student debt has reached crisis-level
proportions for large numbers of young Americans who are the
future our country. I am willing to consider that bankruptcy
reform should allow them an easier chance to deal with
substantial debt, but I must emphasize that since the great
majority of new student loans are Federal loans, we must do
everything we can to make sure that innocent taxpayers are not
forced to pick up the tab for unpaid student loans. Further,
Congress would be remiss in steering college students to
bankruptcy court as the only help that we are willing to give.
Regardless of this bill, we must address the skyrocketing costs
of higher education.
It is my hope my colleagues are willing to work across the
aisle to achieve this goal, and I yield back the balance of my
time.
Mr. Cicilline. Thank you, Ranking Member Sensenbrenner. The
Chair now recognizes Chair of the Full Committee, the gentleman
from New York, Mr. Nadler, for his opening statement.
Mr. Nadler. Thank you, Mr. Chair. I thank the Chair for
holding today's hearing, the first hearing in the 116th
Congress on the very important subject of bankruptcy reform.
The Bankruptcy Code either directly or indirectly affects
millions of Americans and all types of businesses, from the
largest to the smallest. When it works properly, it offers a
second chance to individuals and businesses in financial
distress. Various reforms are necessary to ensure that it
reaches its full potential.
We are fortunate today to be joined by four Members who
have introduced legislation to address certain deficiencies and
unfairness in the Code. I am pleased that this undertaking is
largely bipartisan, which I hope will help facilitate enactment
of these needed reforms. I am especially appreciative that
Senator Durbin is here today to share his thoughts on
legislation that both he and I introduced earlier this year,
the Student Borrower Bankruptcy Relief Act.
Our legislation would address head on the manifest
unfairness that student loans, unlike every other unsecured
debt, such as credit cards or auto loans, are effectively non-
dischargeable in bankruptcy. This Subcommittee last considered
such relief more than 10 years ago, and unfortunately the
problem of crushing student loans has only worsened. Currently
45 million Americans owe student loan debt estimated at a total
of $1\1/2\ trillion, an amount that exceeds outstanding credit
card and auto loan debt combined.
Some of this debt is attributable to for-profit education
mills that promise much but deliver little. Some of this debt
is also the result of predatory lending practices that target
young Americans desperate to improve their lives and contribute
to society, but who do not fully understand the terms of the
loans they take on. Some of this debt is disparately borne by
minorities who, on average, own more than their White
counterparts, and who are more often the targets of such
predatory lending practices.
There is no reason that this one category of debt should be
singled out for special treatment that makes relief under the
Bankruptcy Code virtually impossible. I thank Senator Durbin
for joining me in attempting to put an end to this injustice.
The problem of student loan debt is just one of the many issues
we must address. As today's witnesses will explain, we also
need to address two important provisions affecting those who
serve our country in the military. According to a 2018
Lifestyle Survey of Service Members and Veterans, financial
issues were the top lifestyle stressor, and unfortunately
bankruptcy is sometimes the best answer for those in financial
distress.
Under current law, National Guard Members and reservists
who serve on active duty are, like other active service
Members, exempt from the Bankruptcy Code means test, which
determines whether a debtor's income is too high to have all
his or her debts erased in bankruptcy. This critical protection
for National Guard Members and reservists must be extended
before it expires at the end of the year.
In addition, although Social Security benefits are not
treated as income for purposes of the means test, veterans'
disability benefits do constitute income under this test.
Fortunately, bipartisan legislation addressing this inequity
has been introduced in both the House and the Senate. We must
also ensure that family farmers in financial distress are
eligible for Chapter 12 of the Bankruptcy Code, the specialized
form of bankruptcy relief specifically intended for family
farmers. I am pleased that the gentleman from New York, Mr.
Delgado, is here today to discuss his bipartisan legislation
that will accomplish this vital goal.
In addition to these concerns, further reforms are
necessary to better effectuate the financial reorganization of
small businesses debtors. Experiences since the enactment of
the 2005 amendments to the Bankruptcy Code show that provisions
intended to streamline the bankruptcy process for these debtors
fail to address certain fundamental concerns, such as the
ability to cram down dissenting creditors who object to a
debtor's reorganization plan. I thank the gentleman from
Virginia, Mr. Cline, for his leadership on this issue.
Finally, Congress should consider the need to promote
greater transparency and integrity with respect to the ongoing
financial reorganization of Puerto Rico. In response to dire
fiscal issues facing Puerto Rico at the time, Congress passed
the Puerto Rico Oversight Management and Economic Stability
Act, or PROMESA, in 2016. That legislation established the
Financial Oversight and Management Board with control over
Puerto Rico's budget, laws, financial plans, and regulations,
and the authority to retain professionals to assist the Board
in executing its responsibilities.
Although largely patterned on Chapter 11 of the Bankruptcy
Code, PROMESA did not incorporate all facets of Chapter 11 into
other relevant provisions of the Code, including, for example,
the Code's mandatory disclosure requirements regarding actual
or potential conflicts of interest that professional persons
seeking to be retained in a bankruptcy case must make to the
court prior to their retention. Fortunately, our colleague from
New York, Ms. Velazquez, is with us today to discuss her
legislation that addresses this shortcoming in PROMESA.
In addition to our colleagues who will be testifying, we
have a distinguished panel of other witnesses who will share
their perspectives on the important issues under consideration
today. Accordingly, I look forward to hearing from all of
today's witnesses, and I yield back the balance of my time.
Mr. Cicilline. I thank the gentleman. I am now pleased to
recognize the Ranking Member of the full committee, the
gentleman from Georgia, Mr. Collins, for his opening statement.
Mr. Collins. Thank you, Chair Cicilline and Ranking Member
Sensenbrenner. I am glad that we are having this hearing today,
and it is good to be on something that we can all discuss and
hopefully move forward on. It is good to see the senator and
the rest of our Members here as well.
The bankruptcy system is a critical component of the
economy. It provides for an important safety net for
entrepreneurs and households when they need a fresh start. It
also stabilizes and encourages lending because it is a tried-
and-true way for creditors to recover as much as feasible when
things go wrong for borrowers. I particularly applaud this
Subcommittee for considering today the Small Business
Reorganization Act. This important bill, recently introduced by
Representative Cline and Subcommittee Chair Cicilline, offers
long-term and long-needed reform to Chapter 11 of the
Bankruptcy Code to help small businesses.
Chapter 11 has for many years been the key to survival for
firms that need to reorganize their debt so they can continue
in business. Reorganization preserves jobs, investments, and
valuable contributions to our economy. For just as many years,
Chapter 11's terms have been poorly suited to allow small
businesses and their creditors to take full advantage of the
relief it promises. To solve this problem, this bill takes up
as a model for small business the provisions of Chapter 12 that
help small family farmers to reorganize their farming
enterprises when needed. Chapter 12 has long worked well for
family farmers. Weaving models based on it into Chapter 11 for
general use in small business cases is a terrific idea.
I was proud to have introduced the Small Business
Reorganization Act last term with the Subcommittee Chair
Cicilline, and I am proud to be an original co-sponsor this
term. This bill promises to finally make Chapter 11 work for
the entrepreneurs whose small businesses form the backbone of
job creation in communities across our Nation.
We also consider today several other bills. Respectively,
they offer more flexibility in bankruptcy for service Members
and their families, an increase in the amount of debt that can
be reorganized in Chapter 12 bankruptcies, and increased
transparency concerning firms helping to resolve Puerto Rico's
insolvency under the 114th Congress' PROMESA legislation. I am
glad that we have the chance to examine these bills today.
We are also, though, here to consider Chair Nadler's
proposed legislation to expand the amount of student loan debts
that can be discharged in bankruptcy, and I also recognize the
senator's work on that as well. However, like many Members, I
am deeply touched by the skyrocketing cost of higher education
and the massive amounts of debt students are taking on to
shoulder these costs. To be the best help, Congress must find
ways to stop the explosion of costs. Congress' answer to
students should not be, sorry, we are unwilling to drive down
costs, but we want to make it easier for you to end up in
bankruptcy court. The answer needs to be about the costs
themselves and the institutions with a firm look at the total
picture. As someone who just came from, you know, a few years
ago on the state level, this is one of the biggest issues we
have, and I am glad we are discussing it. We need to find an
answer to this, but I think we cannot also discharge the cost
aspect of university and college systems as we go forward.
Also, since the vast majority of students loans are now
Federal loans, our answer to taxpayers shouldn't be that in
response to unbearable student loan levels, all Congress can do
is to increase the ways in which taxpayers get left holding the
bag. That is exactly what happens when Federal student loans
are discharged in bankruptcy cases. I really want to help Chair
with his proposal and the senator as well and would ask all my
colleagues to join in a real search for real solutions that we
can find a total picture of this problem we have.
It is something that needs to be fixed, but simply in life,
sometimes the best answer is not free. It is how do we get in
and dig and find our important answer. With that, I yield back.
Mr. Cicilline. I thank the gentleman. We have two panels of
witnesses today. It is now my pleasure to introduce today's
first panel.
Our first witness is Senator Dick Durbin. Senator Durbin is
the 47th United States senator from the State of Illinois and
is the state senior senator. He serves as the Senate Democratic
Whip. Currently he sits on the Senate Judiciary,
Appropriations, Agriculture, and Rules Committees. Senator
Durbin is the author of S. 1414, the Student Borrower
Bankruptcy Relief Act of 2019, which is identical to H.R. 2648,
a bill introduced by Chair Nadler earlier this year.
Our second witness, Congresswoman Nydia Velazquez, is the
representative for New York's 7th Congressional District in the
116th Congress. She is the Chair of the House Small Business
Committee, a senior member of the Financial Services Committee,
and a member of the House Committee on Natural Resources. She
is currently serving her 14th term as a member of Congress. She
is also the author of H.R. 683, which would impose disclosure
requirements for professional persons employed by the Financial
Oversight and Management Board for Puerto Rico.
Our third witness on the panel is Representative Ben Cline
of Virginia's 6th Congressional District. He is a member of
both the House Judiciary Committee and the Education and Labor
Committee. He previously served as a member of the Virginia
House of Delegates from 2002 to 2018. Representative Cline is
the author of H.R. 3311, the Small Business Reorganization Act
of 2019.
Our fourth witness on the first panel is Congressman
Antonio Delgado, the first-term representative from New York's
19th District. He is a member of the Agriculture, Small
Business, and Transportation and Infrastructure Committees.
Additionally, he is the author of H.R. 2336, the Family Farmer
Relief Act of 2019.
We welcome all our distinguished witnesses on our first
panel and thank them for participating in today's hearing.
Please note that each of your written statements will be
entered into the record in its entirety. Accordingly, I ask
that you summarize your testimony in 5 minutes. As you know, to
help you stay within this time, there is a timing light on your
table. When the light switches from green to yellow, you have 1
minute to conclude your testimony. When the light turns red, it
signals your 5 minutes have expired. We will, of course, try to
afford you every courtesy we can.
We will begin, of course, with Senator Durbin. You may
begin.
STATEMENT OF THE HON. RICHARD DURBIN
Senator Durbin. Chair Cicilline, thank you for the
introduction. Chair Nadler, good to see you again. My friend,
Congressman Sensenbrenner, it is great to be here with you, and
Congressman Collins who left earlier, we have worked together.
I am going to submit my statement for the record. I would like
to just make three or four points if I can.
Number one, I recently had a conversation with a member of
the Federal Reserve--I won't name the person--and I asked about
the issue of student loans. This person said to me, this noted
economist said to me, I don't get it. Why is it that no matter
what you borrow money for, whether it is essential or
frivolous, under our bankruptcy system, you can be discharged
from that decision to borrow that money under certain economic
circumstances, but not student loans. Student loans trail you
to the grave. This is a decision you are making that is going
to be with you to the bitter end because you cannot discharge
it in bankruptcy.
Now, think of the people most affected by it. They are the
people in America least experienced when it comes to debt: 19-
20-year-old college students? What does $30,000 mean to that
student? What does $50,000 mean to that student? Probably
nothing because they don't have a life experience to measure it
against as to what they are likely to earn and what they are
likely to be able to pay back. That is the largest class of
people who are affected by this decision which says we will not
allow you to discharge your decision, even if it's a bad one,
in bankruptcy except in the most extreme circumstances.
I also would like to make a point that the Wall Street
Journal a look at how many people qualify to be discharged in
bankruptcy for student debt because of undue hardship. The Wall
Street Journal found in the year 2017, despite the fact, as
Chair Nadler said, we have tens of millions of people in debt
with student loans, four--exactly four--in the entire United
States of America could prove undue hardship.
The Department of Education enforces the collection of most
of these student loans. I have asked them to consider the
possibility that if you are a quadriplegic disabled veteran
saying it is an undue hardship to pay back your student loan,
you just might be credible. Well, I haven't been able to
convince them of that, but it shows you the extreme
circumstances we have here. The only debt you cannot discharge
in bankruptcy is incurred by people with little life experience
and virtually no way to escape it by the current law requiring
undue hardship to be proven.
The other point I want to make to you is a point well
taken. We need to address not only student debt, but the
increasing cost of education. It has gone through the roof, and
it is out of control. First stop, let me suggest to you, I will
give you two numbers, and these two numbers are going to be on
the final, so you might want to write them down: 9 and 35. Nine
percent of high school graduates in America go to for-profit
colleges and universities, 9 percent. Thirty-five percent of
all student loan defaults are students from for-profit colleges
and universities. What does that tell us? They are over-
charging and under-educating. They are not preparing the people
with this debt to move forward in a life that can pay of that
debt. So, 35 percent of all the student loan defaults can be
addressed by addressing the outrages involved in the for-profit
college and university industry.
Secondly, I happen to believe that when it gets right down
to it that there is going to be a restructuring within higher
education. Jack Reed, well known to Chair, has a provision
which says to a school you are going to have skin in the game.
If you drag this student into a debt that is unimaginable,
unpayable, your institution is going to be on the line, too.
Why is that such an outrageous idea? They are borrowing money
through the Federal government and, in some cases, in the for-
profit cases, running all the way to the bank. Why shouldn't
they have some skin in the game when it comes to defaults on
student loans? They might think twice about the loan. They
might think twice about the cost of tuition in higher
education.
We have got to get them in sync with the reality that
unless we do something, they have got a perfect world. They can
use Federal taxpayers' dollars, make the profit off them, and
leave the responsibility to those kids, their families, and
future generations. Let's start with this. Let's do this change
in bankruptcy. It wasn't that long ago that people could
discharge loans in bankruptcy. Let's return to that. It will
give not only these young people a second chance, but it will
be a dramatic boost to the economy.
Thank you, Mr. Chair.
[The statement of Senator Durbin follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Cicilline. Thank you, Senator Durbin. The Chair now
recognizes Representative Velazquez for 5 minutes.
STATEMENT OF THE HON. NYDIA VELAZQUEZ
Ms. Velazquez. Chair Cicilline, Chair Nadler, Ranking
Member Sensenbrenner, and Members of this subcommittee, thank
you for the opportunity to testify today on my legislation, the
Puerto Rico Recovery Accuracy in Disclosures Act. This
important bill will close a loophole in the Island's debt
restructuring process, improve transparency, and restore
confidence and integrity in the process.
Before Hurricane Maria devastated Puerto Rico in late 2017,
the Island was already in a deep recession brought on in part
by trying to pay down over $120 billion in government debt. In
response, Congress passed the Puerto Rico Oversight Management
and Economic Stability Act, known as PROMESA, in 2016 to set up
an orderly bankruptcy process to restructure this debt,
stimulate economic development, and put the Island on a path to
financial recovery. While we can have a difference of opinion
on how well the Oversight Board is carrying out its mission,
one thing should be clear: the Island and her people are
entitled to the same rights and protections as any debtor on
the mainland.
As the Committee is aware, the trust the American people
have placed in our bankruptcy system is based on a fair,
efficient, and transparent process. Transparency, as required
by section 327 of the Code and Rule 2014, applies to every
corporate bankruptcy, and ensures any conflicts of interest or
even the perception of a conflict between those working on the
bankruptcy and the debtor are disclosed. However, PROMESA does
not have a similar requirement.
My bill will address this oversight and apply a robust
disclosure requirement to all PROMESA title III proceedings,
eliminating the double standard the people of Puerto Rico are
facing. Puerto Ricans should be confident that the Board's
bankruptcy advisors do not have their thumb on the scale to
favor certain debts where they have a self-interest and ensure
integrity in the PROMESA process.
The need for PRRADA was recently articulated when the
Board-appointed law firm investigated potential conflicts in
Puerto Rico's bankruptcy. One of the main recommendations in
the law firm's report was that vendors should disclose
affiliate relationships and found that trading in Puerto Rico's
public debt is particularly problematic as it gives rise to the
appearance of conflict. This is exactly what the PRRADA bill
requires vendors to do and why the bill should become law.
PRRADA will guarantee to the people of Puerto Rico the same
transparency and disclosure practices required by law in U.S.
mainland bankruptcies.
In the interest of fairness for Puerto Rico's people and
for the impartiality in restructuring and thereby securing
Puerto Rico's future, we must pass H.R. 683 and close this
loophole. I am proud to say this is bipartisan legislation with
co-sponsors from both sides of the aisle, including Members of
this Committee and Members of the Natural Resources Committee,
which, as you may know, has been deeply involved in Puerto Rico
policy.
I kindly ask that the Judiciary Committee look favorably on
this bill, and I thank you again for the opportunity to be here
today and to bring fairness to the people of Puerto Rico. Thank
you.
[The statement of Ms. Velazquez follows:]
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Mr. Cicilline. Thank you, Chairwoman Velazquez. The Chair
now recognizes Representative Cline for his opening statement.
STATEMENT OF THE HON. BEN CLINE
Mr. Cline. Thank you, Mr. Chair, Ranking Member
Sensenbrenner, and Chair Nadler for holding this hearing today
and for the opportunity to appear before you to discuss the
Small Business Reorganization Act, which I am proud to
introduce alongside Chair and Ranking Member Collins.
In 2010, the National Bankruptcy Conference Small Business
Working Group identified a problem regarding small businesses
in the current bankruptcy law and presented to Congress a
report which recommended amendments to the Bankruptcy Code to
add a new Chapter for small business reorganizations. Chapter
11 of the Bankruptcy Code was primarily designed to allow a
business to restructure its debt obligations while maintaining
operations with the underlying principle being that a business
in its entirety is more valuable than assets valued
independently.
The point of Chapter 11 is that preservation of the
business benefits both the creditor, who should receive a
higher recovery because of the debtor's restructuring than they
would otherwise obtain through a liquidator, and the debtor,
who can remain in business. Unfortunately, the current
Bankruptcy Code makes it difficult for small businesses to
reorganize and forces them to use alternatives that often lead
to liquidation. When the choice is between a process that is
time consuming and needlessly expensive or the simpler route of
negotiating with creditors for liquidation under State law,
many small businesses overwhelmed by their situation choose the
latter.
Our legislation intends to fix this problem by allowing
small businesses with less than $2.5 million in debt to file
bankruptcy in a timely, cost-effective manner, and hopefully
allows them to remain in business. This not only benefits the
owners, but employees, suppliers, customers, and others who
rely on that business. Under our legislation, small business
owners could retain a stake in the company if the
reorganization doesn't discriminate unfairly and is fair and
equitable with respect to each class of claims or interests.
Bankruptcy courts couldn't approve the plan unless all of the
small business' disposal income, excluding amounts necessary
for the payment of ordinary operating expenses, is applied to
the plan over a 3-5-year period.
Mr. Chair, as you well know, our districts depend on their
small businesses. They are convenience stores, restaurants, and
pharmacies. Those who endeavor to open and run a small business
are proud of their work and their standing in our communities.
Unfortunately, they also take on sometimes insurmountable
financial burden. When they are forced to close, it has a great
impact on the community. I am proud to join you, Mr. Chair, in
introducing the Small Business Reorganization Act to provide an
important avenue of relief to the people in our communities who
employ countless individuals and who drive our local economies.
With that, thank you, Mr. Chair.
[The statement of Mr. Cline follows:]
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Mr. Cicilline. Thank you, Representative Cline.
Representative Delgado is now recognized for 5 minutes.
STATEMENT OF THE HON. ANTONIO DELGADO
Mr. Delgado. Thank you, Chair Cicilline. I also want to
thank Ranking Member Sensenbrenner as well as Chair Nadler,
Ranking Member Collins, and the entire Subcommittee for the
invitation. I appreciate you holding this hearing to make sure
our nation's bankruptcy laws reflect today's economy and
represent the experiences of our nation's farmers.
I am proud to represent New York 19th Congressional
District, which stretches nearly 8,000 square miles. It is made
up of 11 counties and includes the beautiful Hudson Valley and
Catskill Mountains. My district is the 8th most rural in the
country and the 3rd most rural represented by a Democrat. It is
home to more than 500 farms, 8,000 farm operators, and 5,000
farmers. Today I am here to speak on behalf of family farmers
across my district, who, along with farmers across the country,
are facing alarming rates of foreclosure during this down-farm
economy.
I would like to take this opportunity to articulate for the
Committee exactly what a down-farm economy looks like. Farmers
are currently facing a 5th year of declining net farm income.
Prices are low, inputs are high, and current trade policies
make the future unknown. The year 2018 marked the 4th
consecutive year of rising bankruptcy rates as a proportion of
the farm population. In addition, at the 2018 Agriculture
Economic Outlook Foreign Trade Forum, the USDA chief economist
said net farm income is expected to remain flat over the next
10 years, and, when accounting for inflation, to fall in real
terms.
This is a down-farm economy, and this story is not unique
to New York 19 or upstate New York. This is an urgent national
issue for our farmers. According to the National Farm Bureau,
last year just 498 farms filed for Chapter 12 bankruptcy
compared to nearly 766,000 consumer filings through Chapter 7
and 13. Over the last 10 years, Chapter 7 and Chapter 13 have
seen 10 million total filings compared to just 5,039 Chapter 12
filings. It is clear the current debt cap has rendered Chapter
12 inaccessible for today's farm families.
This farm economy is exacerbated by an outdated filing cap
that leaves farmers without options to restructure or repay
their debt. This is why I introduced the Family Farm Relief
Act, along with the Ranking Member, Mr. Sensenbrenner, and our
colleagues on both sides of the aisle. H.R. 2336 is a
bipartisan step to give these family farmers long-overdue
relief through Chapter 12. Chapter 12 debt relief was, in fact,
originally written for family farmers experiencing a down-farm
economy. The rules as written allow for a seasonal repayment as
farmers' incomes shift with the seasons.
Our legislation modifies Chapter 12 bankruptcy rules to
increase the debt cap for eligibility from $3,237,000 to $10
million. These changes reflect the increase in land values as
well as the growth over time and the average size of U.S.
farming operations. These changes will provide farmers
additional options to manage the current farm economy. Lifting
the cap will allow farmers to retain assets and continue farm
operation.
The Family Farm Relief Act, which also has a bipartisan
Senate counterpart, has the support of important voices in the
farming community, including the American Farm Bureau
Federation and the National Farmers Union. Upon introduction,
the American Farm Bureau said this legislation will help to
align bankruptcy law with the scale and credit needs of U.S.
agriculture. The National Farmers Union also joined in
endorsing the Family Farm Relief Act saying that it will help
more family farmers avoid liquidation or foreclosure, allowing
them to stay in operation. This legislation aims to do just
that: Keep farmers operational.
Allowing farmers increased flexibility is critical to the
health and wellness of our family farmers in the upstate
economy at large. I encourage the Committee to mark up this
legislation and bring it to the House floor so we can give our
farmers and growers the flexibility they need to continue
operations.
Thank you all again for the opportunity to testify today to
address how we can aid our farmers in this difficult farm
economy. I look forward to working with you all to advance the
Family Farm Relief Act. Thank you.
[The statement of Mr. Delgado follows:]
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Mr. Cicilline. Thank you, Representative Delgado. In
keeping with our committee's practice, the witnesses are at
this point excused. We thank you very much for coming here
today to share your thoughts about these various pieces of
legislation and thank you for your leadership on this very
important issue. This was very informative to the Committee and
will certainly guide us as we consider these legislative
proposals. Thank you again.
The witnesses for the second panel will please take your
seats after our staff have made the administrative
arrangements, which is code for placing your name cards on the
table.
Thank you and welcome to our witnesses.
Our first witness on our second panel is Hollister
Petraeus. Ms. Petraeus retired from the Consumer Financial
Protection Bureau in 2017 after spending 6 years as the
director of the Office of Servicemember Affairs where she
worked to strengthen consumer protection measures for the
military, veterans, and their families. Prior to joining the
CFPB, Ms. Petraeus served as the director of BBB Military Line,
a program with the Council of Better Bureaus that fosters
outreach between local better business bureaus and military
communities. She currently sits on the board of directors of
the Children of Fallen Patriots Foundation and the Board of
Governors of the National Military Family Association. Ms.
Petraeus received her bachelor's degree from Dickinson College
and is the recipient of the Department of Defense Medal for
Distinguished Public Service. Welcome.
The second witness on our panel is Robert Keach, who
appears on behalf of the American Bankruptcy Institute. He is a
shareholder at Bernstein, Shur, Sawyer, & Nelson, and focuses
on bankruptcy reorganization and out-of-court workouts. He has
appeared before bankruptcy courts in seven districts across New
England, New York, and California. He has been a panelist for
national bankruptcy, lender liability, and creditors' rights
programs. Mr. Keach served as the President of the ABI from
2009 to 2010 and is currently an adjunct professor teaching
cross-border insolvency and business bankruptcy at Boston
College Law School. He received his B.A. from the University of
Vermont and his J.D. from the University of Maine School of
Law.
Our next witness is Edward Boltz, representing the National
Association for Consumer Bankruptcy Attorneys. Mr. Boltz
currently serves as an attorney and managing partner at the Law
Offices of John Orcutt. There he represents consumers across a
broad spectrum of financial matters, including Chapter 7 and 13
bankruptcies, mortgage issues, and student loan legislation.
Mr. Boltz is also the vice President of NICBA, a position he
has held since 2007. At various points he has served as the
NICBA's director, president, and co-chair of the Legislative
Committee as well. Mr. Boltz received his B.A. from Washington
University in St. Louis and his J.D. from George Washington
University Law School.
Our third witness is John Rao, who appears on behalf of the
National Consumer Law Center. Mr. Rao has been a staff attorney
at NCLC since 1996 focusing on consumer credit, mortgage
servicing, and bankruptcy issues. He provides testimony to
Congress and Federal regulatory agencies on issues affecting
low-income consumers and has filed amicus briefs in cases
before the Supreme Court and various courts of appeal. Before
joining NCLC, he was a managing attorney at the Providence
office of Rhode Island Legal Services, heading the program's
consumer unit. He received his B.A. from Boston University and
his J.D. from the University of California Hastings Collee of
Law. A special welcome to you, Mr. Rao.
Our fifth witness is Professor Jimenez, a professor at the
University of California Irvine School of Law. Professor
Jimenez's research focus is on bankruptcy, consumer financial
distress, and financial product regulation and their
intersection with consumer protection and access to justice.
She was a founding staffer with the Consumer Financial
Protection Bureau where she worked on debt relief, credit
reporting, and student loan issues. She received her M.S. from
the Massachusetts Institute of Technology and her J.D. from
Harvard Law School where she won the Outstanding Bankruptcy
Student Award from the American Bankruptcy Institute. Welcome.
Our last witness today is Judge Thomas Small, who is
representing the National Bankruptcy Conference. Judge Small
served as a bankruptcy judge for the Eastern District of North
Carolina from 1982 to 2007, and as chief judge from 1992 to
1999, and again from 2006 to 2007. From 2000 to 2001, he served
as President of the National Conference of Bankruptcy Judges
and chaired the U.S. Judicial Conference Advisory Committee on
Bankruptcy Rules from 2000-2004. Additionally, since 2007,
Judge Small has sat on the Board of Editors of the Collier on
Bankruptcy Treatise. He received his B.A. from Duke University
and his J.D. from the Wake Forest University School of Law.
We welcome all our very distinguished witnesses on the
second panel and thank you for participating in today's
hearing. Now if you would please rise, I will begin by swearing
you in. Please raise your right hand.
Do you swear or affirm under penalty of perjury that the
testimony you are about to give is true and correct to the best
of your knowledge, information, and belief, so help you God?
[A chorus of ayes.]
Mr. Cicilline. Let the record show the witnesses answered
in the affirmative. You may be seated. Thank you.
Please note that each of your written statements will be
entered into the record in its entirety. Accordingly, I ask
that you summarize your testimony in 5 minutes. To help you
stay within that time, there is a timing light on your table.
When the light switches from green to yellow, you have 1 minute
to conclude your testimony. When the light turns red, it
signals that your 5 minutes have expired.
Ms. Petraeus, we will begin with you. You are recognized
for 5 minutes.
TESTIMONY OF HOLLISTER K. PETRAEUS
Ms. Petraeus. Chair Cicilline, Ranking Member
Sensenbrenner, Chair Nadler, and distinguished Members of the
subcommittee, thank you for the opportunity to speak to you
today, most notably on the HAVEN Act, which was recently
introduced by Representatives McBath and Steube.
Let me say up front that I'm not a bankruptcy expert nor a
lawyer, but I do have a long history of advocacy for the
military on consumer financial matters. I'm the daughter, wife,
and mother of Army officers. As I've lived a life of constant
moves and, more recently, combat deployments, I saw the impact
those events had on the finances of military personnel and
their families.
During the first year of the Iraq War, my husband's
division went to war. I saw the families' financial challenges
firsthand during that year, not just those of the active-duty
troops, but also families of the Guard and Reserve who came to
our family assistance center for help. I did what I could to
help raise awareness with our Federal and State legislators who
visited. I also worked with local business leaders to include
the Better Business Bureau, which led to the job that I held
there for 6 years.
Running the BBB Military Line was an education for me on
the fact that many scammers specifically target the military
for their steady paycheck, which is often coupled with youth
and financial inexperience. While I was at the BBB, we
developed a number of free financial readiness workshops to
provide in-person financial education for serviceMembers and
their families. But while education is important, the sad truth
is that in many cases, serviceMembers' finances are impacted by
events that they cannot control: Deployments, shoddy loan
servicing, inaccurate credit reporting, and the flouting of
important consumer financial laws.
So, when I was offered the opportunity to head up the
Office of Servicemember Affairs at the newly-formed Consumer
Financial Protection Bureau, I jumped at the chance. I knew
that the Bureau had the power to enforce consumer financial
laws, and that to me was a vital part of protecting military
families' hard-earned money. I ran that office for 6 years, and
in that time, we saw over $120 million returned to
serviceMembers.
Last year, I was asked to join an American Bankruptcy
Institute Task Force on Veterans and Service Members. One of
its most immediate missions was to correct a glaring error in
the Bankruptcy Code of 2005, language that effectively denied
disabled veterans the protections it provided to all other
disabled Americans. Under the 2005 law, judges could no longer
decide the debtor's disposable income but had to include
virtually all income that the debtor received, except for three
things: Benefits received under the Social Security Act,
payments to victims of war crimes, and payments to victims of
terrorism.
That first item is the problem. Civilians receive
disability benefits from the Social Security Administration,
but disabled Service Members and Veterans do not. They get
their disability benefits from the VA and from the Department
of Defense. So, by using specific language referencing the
Social Security Act, Congress effectively denied those who had
become disabled in the service of their country the rights
given to others who had not served, and that is obviously not
right.
I cannot imagine that Congress intended this, but with
their disability pensions counted, veterans may fail the means
test and not qualify for Chapter 7 bankruptcy which allows for
a quick, fresh start. Instead, they must file for Chapter 13
with a 3- to 5-year payment plan that they must fund from their
current monthly income, including their military disability
pension. Surely Congress never intended that a military
disability benefit should go into the pockets of creditors. The
HAVEN Act will fix that problem.
Let me also mention one other item you are considering for
National Guard and Reserve Members. Combat deployment, while a
source of extra pay, could have a catastrophic impact on their
civilian small business. If they opted for bankruptcy, the
means test counted their military special pay and allowances,
even though they were no longer receiving them. That could make
their income too high for bankruptcy. The National Guard and
Reservists Debt Relief Act of 2008 fixed that issue, and today
you are looking to extend it for another 4 years, an action I
support. Our citizen soldiers who put on the uniform of our
country should not be financially penalized for doing so.
Ideally, no one should need to declare bankruptcy, but it
happens and at a higher rate for veterans. Many of them have
disabilities that make it hard to earn a living wage, and that
may limit their caregiver spouse, too. No veteran should face
the added stress of pledging their disability benefits to
creditors. You can eliminate the roadblocks and make it harder
for them to discharge their debts, and I commend you--excuse
me--for your efforts today. Thank you.
[The statement of Ms. Petraeus follows:]
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Mr. Cicilline. Thank you, Ms. Petraeus. Mr. Keach is now
recognized for 5 minutes.
TESTIMONY OF ROBERT KEACH
Mr. Keach. Mr. Chair--
Mr. Cicilline. Would you please turn on your microphone?
Mr. Keach. Thank you.
Mr. Cicilline. Thank you.
Mr. Keach. Chair Cicilline, Ranking Member Sensenbrenner,
and Chair Nadler, distinguished Members of the subcommittee,
thank you for inviting me to present the views of the American
Bankruptcy Institute in support of the several bipartisan
bankruptcy measures now pending before the subcommittee. ABI is
the world's largest association of professionals practicing in
appropriately structuring in personal bankruptcy with nearly
11,000 Members worldwide.
I was honored to serve as the co-chair of the ABI's
Commission to Study the Reform of Chapter 11. The 400-page
report of the Chapter 11 Commission was the product of more
than 3 years of study on how best to improve and modernize the
Bankruptcy Code with input from all sectors and viewpoints. The
report has been an influential resource for stakeholders and
cited by numerous Federal courts, including the Supreme Court,
and inspires reform efforts like the bipartisan, bicameral
items on today's agenda.
Others will speak on some of these bills, but let me focus
on two: The Family Farmer Relief and the Small Business
Reorganization Act.
The ABI endorses and urges passage of the Family Farmer
Relief Act. This bipartisan and bicameral legislation would
increase the debt limits for the filing of Chapter 12 cases
from the existing limits, now about $4.1 million, to $10
million. Since its enactment in the midst of the severe farm
crisis in 1986, Chapter 12 has been a useful and durable
support for the cyclical and economic challenges faced in
American agriculture. The original debt limit for Chapter 12
eligibility was $1.5 million. That was set in 1986. However,
today's farming operations are larger. Farming has become much
more expensive due to the need to access technology.
Accordingly, debt loads are much larger given the capital
requirements for farmland, equipment, and inputs.
As a result, the liability cap under Chapter 12, which has
been increased for cost of living and other factors over the
years, does not align with the modern credit and risk
environment associated with family farming. This bill would
increase that cap to $10 million, which we think is long
overdue. A crisis in this sector is already unfolding.
Uncertainties in both the trade and commodities markets as well
as the impact of natural disasters makes this an ideal time to
reset Chapter 12 before a larger crisis arrives.
I would also, Mr. Chair, move to admit a letter from the
American College of Bankruptcy in support of the Chapter 12
reform.
Mr. Cicilline. Without objection, so ordered.
[The information follows:]
MR. KEACH FOR THE RECORD
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Mr. Keach. Thank you. Let me speak also briefly about the
Small Business Reorganization Act. Chapter 11 of the Bankruptcy
Code has long been of great value in preserving going concern
value jobs and maximizing creditor recoveries from any
businesses. Small businesses are the entities that drive job
creation in a dynamic economy, but they are also most likely to
experience financial distress. As Congress looks to find ways
to help small businesses enter the marketplace and create jobs,
it should also focus on helping existing businesses succeed and
save jobs that otherwise would be lost if those businesses
closed their doors.
The Small Business Reorganization Act of 2019 is a good
start, and we thank Representative Cline and Chair Cicilline
for sponsoring it in the House. This is the jobs bill that has
already been paid for. It costs us nothing to make the
bankruptcy system work better for small business. With some
tweaking, it can be an even more effective remedy.
The testimony before the ABI Commission strongly
established that the Chapter 11 process simply does not work
for small- and medium-sized businesses. Witnesses testified
consistently that small businesses were running away from
Chapter 11, and those that filed were filing, frankly, merely
to facilitate a quick liquidation. Only 27 percent of small
businesses that file Chapter 11 confirm plans.
Why is Chapter 11 in its existing form not working? It's
simply too complex and too costly for these businesses. More
importantly, current doctrines that apply in Chapter 11 means
that it is a virtual certainty that the existing owners of the
business will not get to retain their ownership interest in
reorganizing under Chapter 11. The Small Business
Reorganization Act fixes those problems. However, like the
Chapter 12 bill, we think its debt limit is somewhat too low at
$2.6 million. ABI would encourage that the same change be made
to this bill in increasing the debt limit to $10 million for
small businesses. The data studied by the ABI Commission seem
to establish that as the right level to encompass the
businesses that need help.
Here, too, I would like to introduce letters from the
American College of Bankruptcy and the National Conference of
Bankruptcy Judges in support of this legislation.
Mr. Cicilline. Without objection, so ordered.
[The information follows:]
MR. KEACH FOR THE RECORD
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Mr. Keach. My time is about up, but I would just take my
last statement to also note that the ABI supports the HAVEN
Act, and like to submit a letter from the American College of
Bankruptcy in support of the HAVEN Act as well.
[The information follows:]
MR. KEACH FOR THE RECORD
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Mr. Cicilline. Thank you, Mr. Keach. The Chair now
recognizes Mr. Boltz for 5 minutes.
TESTIMONY OF ED BOLTZ
Mr. Boltz. On behalf of NACBA, I want to thank Chair
Nadler, Ranking Member Collins of the Judiciary Committee, and
Chair Cicilline and Ranking Member Sensenbrenner of this
Subcommittee for the opportunity to offer our views on the
State of consumer bankruptcy and pending legislative proposals.
While there are many issues related to consumer bankruptcy in
play in both the courts and throughout the economy as a whole,
I will limit my remarks to some currently-pending legislation
directly related to bankruptcy as well as several other topics
to which proposed legislation may serve as effective vehicles
for essential change.
First, we would talk about restoring the bankruptcy
discharge for student loans. NACBA through its Members and,
more importantly, its clients are often the first to see
economic troubles affecting Americans. In 2007, NACBA, with the
Center for Responsible Lending and the Consumer Federation of
America, released a survey finding that there was a sharp rise
in subprime mortgage-related problems. Shortly thereafter, we
hit the great recession caused by the housing crash. In 2012,
again NACBA first forecast the coming student debt bomb. Since
then, student debt has skyrocketed to over $1.5 trillion, and
the amount of student loan debt now surpasses all other
consumer debt except for mortgage debt.
In response to this unabated growth of the student loan
crisis and greater questions about higher education, there have
been numerous proposals, both large and small. While the
Department of Justice, after consultation with NACBA, among
others, has given guidelines about allowing Chapter 13 debtors
to participate in various income-driven repayment plans during
their bankruptcies, such plans have often faced resistance from
bankruptcy courts as purportedly constituting unfair
discrimination.
Additionally, in February 2018, the Department of Education
issued a request for information regarding its application of
the undue hardship standard currently under the Bankruptcy
Code. Despite more than 400 responses highlighting the harsh
effects of this standard submitted more than a year ago, there
have been no results, let alone any changes, in the practices
by the Department of Education in this regard. Additional
congressional oversight of the Department of Education would be
welcome.
These minimum efforts, however, show the inadequacy of
piecemeal, non-comprehensive changes that stop short of
restoring the general dischargeability of student loans in
bankruptcy. Furthermore, while government loan programs
generally lend to borrowers without regard to creditworthiness,
private student loans are largely underwritten on the same
basis as other consumer debts with lending risk reflected in
the interest rates charged as well as requiring co-signers,
often parents or elderly grandparents, and other demands for
security. Research indicates that the non-dischargeability of
private student loans made in 2005 by BAPCPA did not result in
the lowering of interest rates by student borrowers, in large
part because there is no showing of strategic default by
borrowers prior to BAPCPA or since.
Restoration of the discharge of bankruptcy for student
loans and private student loans would help restore the most
debt-burdened and make them economically functional again. For
these reasons, we support Senator Durbin and the House bill,
H.R. 2648, that would restore the complete discharge. We also
would support as a smaller step H.R. 885, which would restore
the dischargeability of private student loans.
Regarding the HAVEN Act, the Bankruptcy Code uses a means
test to determine the projected disposable income a debtor has
to pay to unsecured creditors. These tests are based currently
on monthly income, which excludes the debtor's Social Security
Act, while Social Security and disability retirement benefits
are excluded based on the protections outside of bankruptcy
from collection by any creditors, with the sole exception
largely being student loans.
Debtors receiving veterans' disability benefits as well as
veterans retirement benefits have these same protections
outside of bankruptcy as do other forms of public retirement
benefits, such as railroad workers and certain public school
workers. As written in an article published earlier today, many
of these people are worse off in bankruptcy than they would be
outside of bankruptcy.
For these reasons, NACBA supports the HAVEN Act, but would
encourage this Subcommittee to look at expanding such to cover
not just disability benefits, but also veterans' retirement
benefits. We do recognize that should be capped, however, at
the maximum amount of Social Security so as to not provide a
windfall for retirees with substantial benefits otherwise.
I thank you for your time.
[The statement of Mr. Boltz follows:]
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Mr. Cicilline. Thank you. Thank you, Mr. Boltz. The Chair
now recognizes Mr. Rao for 5 minutes.
TESTIMONY OF JOHN RAO
Mr. Rao. Chair Cicilline, Ranking Member Sensenbrenner--
Mr. Cicilline. Please put on your microphone. Thanks.
Mr. Rao. Chair Cicilline, Ranking Member Sensenbrenner, and
Chair Nadler, Members of the subcommittee, thank you for
inviting me to testify today. While there are a number of bills
and proposals before this Committee that are worthy of
consideration, including those in the report of the ABI's
Commission on Consumer Bankruptcy, I wish to voice my strong
support for Chair Nadler's Student Borrower Bankruptcy Relief
Act, and will focus on that bill.
When the bankruptcy discharge for student loans was
eliminated in the Higher Education Reauthorization Act in 1998,
the conference report stated that some protections still remain
for borrowers in the form of undue hardship. While this was a
questionable premise even then, we now know with certainty that
undue hardship is effectively a non-existent right. It is
virtually never used. One study has found that only one-tenth
of 1 percent of bankruptcy filers with student loans seek an
undue hardship discharge. The barriers to getting an undue
hardship discharge are enormous and deny access to those most
needing relief.
Some will suggest more borrowers would try for undue
hardship if Congress defined it in a way that would allow
courts to apply a more lenient standard. No matter how defined,
the undue hardship method of discharge will be random and
arbitrary. In the two circuits where a less stringent test is
currently used, student borrowers fare no better in the
outcomes of their cases, and no more cases are brought in those
circuits. Even with a less strict standard, the burden is on
the student borrower to bring a court action and prove that
their loan should be discharged. Any system that requires the
poorest and most in need to come up with thousands, even tens
of thousands, of dollars to fund contested litigation will not
work. This economic reality alone explains why no cases are
brought now and why none will be brought under a redefined
standard.
Another reason given in 1998 for changing the law was that
borrowers in financial distress could rely upon the Department
of Education's income-driven repayment plans. We now know after
many years of experience that these programs are fraught with
problems and their reach is limited. Many eligible borrowers
are not enrolled in these plans despite clear potential
benefits. Instead, borrowers are steered by servicers into
forbearances and deferments, which causes their balances to
grow as interest continues to accrue and is capitalized.
Services do this because it is more profitable for them as it
is much easier to put someone on forbearance than to enroll
them in an income-driven repayment plan.
Making bankruptcy dischargeable or making bankruptcy
discharge available to borrowers would incentivize servicers to
Act more responsibly. Even if servicer problems were fixed, it
makes no sense to keep borrowers who might otherwise seek
bankruptcy relief on an IDR for 20 years, especially those who
don't have repayment ability to be paying nothing or some
minimal amount. The administrative costs of annual
recertifications and collection costs if the debtor re-defaults
are a waste of taxpayer funds and further drains the student
loan program.
As each of the bankruptcy discharges for student loans was
eliminated over the period 1977 to 2005, there was no evidence
of abuse by consumer borrowers. The debate was moved by
perception rather than reality. Still, any concern about the
potential abuse is even less compelling now because of the
substantial changes that were made in the Bankruptcy Code in
2005, including a means test, document requirements, and
exemption limitations.
The question remains, why student loans are treated
differently? The government financially supports a number of
loan programs with laudable goals similar to student loans,
such as loan programs for veterans, farmers, small business
owners, and homebuyers. While many of these programs also have
less strict underwriting, somehow, we treat them differently
and make them non-dischargeable. Some argue that this is
because student loans help borrowers obtain a college degree,
which is an asset that will guarantee future income. This
ignores the many student borrowers who are struggling with
large amount of debt never completed their schooling or
obtained a degree. Even those borrowers who obtain a degree run
into unexpected life traumas or other circumstances that
prevent them from having sufficient incomes to repay their
loans.
In conclusion, it is time to directly confront the myths
about student loans dischargeability and rebut the rationales
for treating student loans differently in bankruptcy. Congress
should reverse this policy and Act immediately to ensure that
student loans are not exempted from discharge. Thank you,
Chair.
[The statement of Mr. Rao follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Cicilline. Thank you, Mr. Rao. The Chair now recognizes
Professor Jimenez for 5 minutes.
TESTIMONY OF DALIE JIMENEZ
Ms. Jimenez. Chair Cicilline, Ranking Member Sensenbrenner,
and Members of the subcommittee, thank you for the opportunity
to express my views to you today. In the few minutes before
you, I want to urge the Subcommittee to approve bills that
would make the bankruptcy discharge available to all student
loan borrowers.
The $1.5 trillion in outstanding student loans and the
rising defaults are symptoms of structural problems that
bankruptcy cannot solve. Bankruptcy, however, is well suited to
bring relief to individuals who are today suffering greatly
under the weight of this crushing system. I want to make the
case for dischargeability of private student loans first and
then focus on rebutting objections to the dischargeability of
Federal loans.
In 2005, owners of private student loan debt received a
tremendous gift. With the stroke of a pen, the $56 billion of
outstanding private loans that were originated at a time when
those loans were immediately dischargeable in bankruptcy
suddenly became practically nondischargeable. There was no
economic justification for doing this. None.
What did the American people get from this? A few studies
examined the effect of the 2005 amendments on the private
student loan market, including two studies that I coauthored.
To summarize them, basically, making private student loans
presumptively nondischargeable harmed students. It increased
the cost of the loans. It did not translate into savings for
subprime borrowers, and it was done despite any evidence of
opportunistic behavior by private student loan borrowers.
Since 2005, private lenders have increased their
requirements for co-borrowers by 1.5 times. In 2005, it was 60
percent of under budget loans had a co-borrower. Now it is over
90 percent.
What does the market look like today? Well, interest rates
range from 0 to 20 percent, and defaults are quite low, similar
to credit cards, around 2 percent. This is very different from
Federal student loans that have about 11 percent default.
Less than 2 percent is the only data we have from 2005 to
2011, less than 2 percent of private student loans are included
in a bankruptcy filing. The special treatment of private
student loans in bankruptcy is utterly indefensible, and I urge
you to end it.
I now want to address some of the arguments against
discharging Federal loans--Federal student loans in bankruptcy.
A typical one is the student benefited from the education at
the expense of the creditor, and thus, they ought to be
obligated to repay. That is an argument against bankruptcy
discharge generally, and it ignores in this context the public
benefits of a well-educated citizenry.
Another common objection is that students will get loans,
graduate, and file bankruptcy as quickly as possible. But there
has never been any empirical evidence of any widespread abuse.
In fact, the individual anecdotes that people point to are of
cases in which the bankruptcy judge denied a discharge.
That objection also ignores the moral hazard consequences
of the current system on creditors and servicers. These players
yield tremendous power by virtue of their treatment in
bankruptcy and lack, therefore, market incentives to improve
their treatment of students.
Theorized objections to changing the system ignore the
real-life consequences of bankruptcy. Filing bankruptcy is
expensive. It affects the cost and availability of important
products, like obtaining credit, insurance, living
arrangements, and job prospects for years to come. These
arguments also ignore the many tools the bankruptcy system
already have to control abuse--means testing, good faith
requirements, limit on how often someone can obtain a
bankruptcy discharge, among others.
Another argument for the status quo is that making these
loans dischargeable would compromise the viability of the
student loan program. That argument assumes that making a
discharge available for Federal borrowers would precipitate
massive numbers of the 45 million student loan borrowers to
file bankruptcy. This would require astronomical growth in
bankruptcy filings, which at their height saw about 2 million
people filing. The numbers just don't add up.
Second, this argument assumes that the availability of
Federal student loans depends on repayment. The funding of the
Federal student loan program is a political question. It does
not depend on the fiscal solvency of the program itself. The
real question is where do American people think their
government should invest?
I would argue that higher education is one such place,
although we do not necessarily need to do it through loans.
Changing the bankruptcy treatment of these students' loans
would allow us to focus on the people who are suffering the
most. I urge you to report these bills positively out of the
Subcommittee and to amend the Bankruptcy Code immediately to
make all student loans dischargeable.
Thank you.
[The statement of Ms. Jimenez follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Cicilline. Thank you very much, Professor Jimenez.
I now recognize Judge Small for 5 minutes.
TESTIMONY OF HON. THOMAS SMALL
Judge Small. Thank you, Mr. Chair, Mr. Sensenbrenner,
Committee Members.
The National Bankruptcy Conference is grateful for the
opportunity to participate at this hearing this morning to
present its views with respect to small business
reorganizations.
As a bankruptcy judge, I saw this problem firsthand and
have known for over 30 years that Chapter 11 doesn't work well
for small businesses. Chapter 11 is too expensive. Confirmation
requirements are too onerous. Creditors have too much control
of the process.
House bill 3311, which incorporates the essential aspects
of the National Bankruptcy Conference's proposal, would remedy
all these problems and provide incentives and procedures for
debtors and creditors to arrive at consensual plans. There
would be a new voluntary subchapter, Chapter 11, subchapter V,
that small business enterprises could use to reorganize.
The debtor would be a debtor in possession, but in every
case, there would be a standing trustee, much like in Chapter
11--or Chapter 12. Only the debtor could file a plan, and the
plan must be filed quickly, within 90 days. There would not be
a creditors Committee in most cases. There would be no
disclosure statement unless the court ordered otherwise. Even
without a disclosure statement, the debtor would have to
provide a lot of information, including all of the information
and periodic reports that small business debtors now provide
under Chapter 11.
A confirmed plan under subchapter V may be either
consensual or nonconsensual. If the plan meets most of the
current Chapter 11 requirements, including the high voting
requirements, the plan would be confirmed, and the case would
proceed as if it were a regular Chapter 11 case. The trustee
would disappear, and the debtor would receive a discharge upon
substantial consummation.
If the debtor cannot meet the requirements for a consensual
plan, the plan can still be confirmed if it meets subchapter
V's ``crammed down'' requirements, the most important of which
is that the plan must provide that all the debtor's projected
disposable income be received in a 3- to 5-year period, as
determined by the court, and be applied to make payments under
the plan.
If the court confirms a nonconsensual plan, the trustee
remains in place and monitors compliance with the plan, and the
debtor's discharge would be delayed until all plan payments are
made.
Now the National Bankruptcy Conference tried really hard to
make this a balanced proposal that would benefit both debtors
and creditors. Obviously, reorganization will be more feasible
for small businesses, but there are benefits for creditors as
well.
For one thing, every subchapter V case has an impartial,
independent standing trustee who provides oversight of the
debtor's operations. Every case will move fast. Debtors will
not be allowed to languish in Chapter 11, and the plan may
provide for specific remedies, including liquidation, that can
be executed by the trustee if the debtor fails to meet its
obligations under the plan. Most importantly, reorganizations
would avoid liquidations, and asset values would be preserved.
Now in 1985, I had the privilege of testifying before--with
my late colleague, bankruptcy judge Thomas Moore before two
Senate Judiciary Committee subcommittees looking into
bankruptcy and the farm crisis. Our message in 1985 was that
Chapter 11 did not work well for family farmers, and what was
needed was a new Chapter to deal with their specific problems.
Today, my message with respect to small businesses is
similar. Chapter 11 does not work well for small businesses,
and legislation is needed. Chapter 12 saved thousands of family
farms for the benefit of family farmers and their creditors,
and I strongly believe that today, House bill 3311 would save
thousands of small businesses for the benefit of their owners,
their creditors, their suppliers, their customers, their
employees, and the economy as a whole.
I would be glad to answer any questions you may have.
[The statement of Judge Small follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Mr. Cicilline. Thank you, Judge Small.
Thank you to all the witnesses for your opening statements.
We will now proceed under the 5-minute rule with questions,
and I will begin by recognizing the gentleman from Georgia, Mr.
Johnson, for 5 minutes.
Mr. Johnson of Georgia. I thank Chair for holding this
important hearing.
Bankruptcy reform for vulnerable groups has gone overlooked
for too long and gathering the experts we have before us today
is an important step towards passing meaningful legislation and
fixing the problems that they have testified about.
Make no mistake. We are here because the rich are getting
richer, and the poor are getting poorer. After decades of
adding pro Wall Street laws to the books, we have settled into
a system with loopholes that stack the deck against fairness
for people in bankruptcy proceedings.
The so-called Bankruptcy Abuse Protection--or excuse me,
Bankruptcy Abuse Prevention and Consumer Protection Act, passed
in 2005, made student loan debt nondischargeable in bankruptcy.
This legislation should have been called the Bankruptcy
Protection for Private Lenders for For-Profit Colleges and
Universities Act because the private lenders were the ones who
benefited the most from making student loans nondischargeable
in bankruptcy.
Ms. Jimenez, you say that it was $56 billion on the books
at the time the 2005 legislation passed. That was a gift, a
panacea for the private loan industry. These so-called schools
that they left money for student loans too often had humongous
advertising budgets. They swept in a bunch of unqualified
students. They accepted everybody, regardless of whether you
could read, and when you finished matriculating, the diploma
that you received was not worth the paper that it was written
on. Graduates had degrees but couldn't find a job.
As a result of this change in Federal law, people are stuck
paying back these student loans for the rest of their lives.
Even gambling debt is dischargeable, but student loan debt is
not dischargeable. Even timeshare debt is dischargeable in
bankruptcy, but student loan debt is not.
I am proud to be a cosponsor of Chair Nadler's bill. It is
H.R. 2648, the Student Borrower Protection--excuse me, Student
Borrower Bankruptcy Relief Act of 2019. I am proud to be
cosponsor of that bill, and I hope that it will pass. It is
time to take steps to ensure that groups such as these students
are protected, and I am looking forward to hearing about the
solutions that we are testifying about today.
Ms. Jimenez--well, actually, Mr. Boltz, in your testimony,
you discussed the development of bankruptcy law in the realm of
student loans, commenting about Congress having made it
increasingly difficult to discharge student loans. Why do you
think that was the case? Why did Congress do that, Mr. Boltz?
If you are--
Mr. Cicilline. Could you put on your microphone?
Mr. Boltz. Mr. Johnson, as best I know, most of the changes
that made student loans dischargeable were made in bills that
were not even through the Judiciary Committee. They were often
in a higher education act. Some of the changes were made in
crime bills.
Mr. Johnson of Georgia. Why was this change made, though?
Mr. Boltz. It was often made as part of a deal to increase
the amount of lending that was available on the idea that the
poorest people who were unable to pay, if we kept them on the
books, that somehow that would increase the liquidity of the
student loan programs. As Ms. Jimenez has testified, that is
really not the case.
Mr. Johnson of Georgia. Well, what do you say about it, Ms.
Jimenez? Why did they do it?
Ms. Jimenez. I think it is partly as we opened, talking
about Federal loans first or Government-guaranteed loans, is we
opened up more and more Federal loans available to students and
asked--didn't ask about their ability to repay, then it was
basically the bogeyman story that people were going to come in
and start filing bankruptcy--start going to school, graduate,
file bankruptcy--
Mr. Johnson of Georgia. Do you think it was--let me ask
you? Do you think it was to protect the lenders more than to
protect borrowers and shore up the system? What do you think
the real motivation was for passing the legislation?
Looks to me like it was to protect those who were giving
the campaign contributions to those who were passing the laws,
but I will move on.
Mr. Rao, according to a recent study, Black men and women
who take out loans to finance their education are forced to
take out more money than their White peers. What is the reason
for this disparate impact on minority populations, and how can
we in Congress work to stop it?
Mr. Cicilline. The gentleman's time has expired, but the
witness may answer the question.
Mr. Rao. Yes, Mr. Johnson. I would say that, actually,
Professor Jimenez has done a lot of research on this, and there
has been a lot of evidence that minority families lack the same
amount of resources that some White families have and will
often be required to incur additional debt. They are also going
often to private schools, which charge more. There are actually
a number of reasons that Professor Jimenez has outlined in her
research.
So, thank you.
Mr. Johnson of Georgia. Thank you. I yield back. I thank
Chair.
Mr. Cicilline. Thank you.
The Chair now recognizes the Ranking Member of the
subcommittee, Mr. Sensenbrenner, for 5 minutes.
Mr. Sensenbrenner. Thank you very much.
I have been on this Committee since I was first elected to
Congress in 1978. Before I was elected to Congress, there was a
major redo of the Bankruptcy Code that was passed in '78, and
that made student loans nondischargeable. I believe in '82 or
'83, this committee, which was still heavily run by Democrats,
made the loans nondischargeable. Now at that time, there was
very little Federal lending, and most of the lending were
guaranteed student loans through the private banking sector.
I remember the debate when that happened that said that
there were a lot of graduates, particularly those with advanced
degrees, that were filing for bankruptcy to discharge their
student loans even before the ink was dry on the diplomas they
got for getting an advanced degree.
I think most of us agree that a college education is a way
to have increased income, and an advanced degree is a way to
have even better advanced incomes. I think with the exception
of you, Ms. Petraeus, everybody here has a law degree on that.
That might have been the motivation a while ago when you
decided to go to law school.
Now my question is, yes, there is a problem with student
loans, defaulted student loans. If we make them
nondischargeable, how do we prevent people who have a diploma
that will get them having six-figure incomes in their practices
from gaming the system and getting a major part of their debt
discharged, when that debt ended up giving them the opportunity
for significantly increased income if they did not have those
degrees?
So, who would likely to be first?
[Laughter.]
Mr. Sensenbrenner. Because we cannot repeat that mistake.
If we repeat that mistake the American taxpayers will rise up,
saying the Federal Government lent them money, and they had no
intention of paying it back because the bankruptcy court was
across the street.
Mr. Rao. Ranking Member Sensenbrenner, that problem that
you address, even though I don't acknowledge that it did exist,
was fixed in 2005 by the amendments that Mr. Johnson referred
to. While many of them have made bankruptcy filing much more
difficult, they absolutely address the issue you are talking
about, someone coming right out of college with--the doctor
with the six-income figures, that person would never be able to
get a discharge under our current bankruptcy law. The means
test would preclude that person. Forgetting whether it is
student loan or any other debt, they would never be able to get
a discharge.
The reports of abuse--and Ranking Member Sensenbrenner, you
refer to 1978. This Judiciary Committee asked for a GAO study
to be done to look at how much student loan was being
discharged in bankruptcy when it was dischargeable, and that
study showed that there was virtually no abuse and that the
same amount of--
Mr. Sensenbrenner. Then why did the Judiciary Committee
turn around and make it nondischargeable?
Mr. Rao. Actually, it didn't. This Committee did not vote
in favor of it. Eventually, it was included as a compromise
with the GAO study, and then all the other changes were not
done by this committee. They were done by the higher education
committees. This--
Mr. Sensenbrenner. This doesn't answer my question. If we
make student loans dischargeable again, how do we prevent a
gaming of the system?
Now, if you look at a means test on this, you walk out of
med school or you walk out of law school, you don't have bags
of money unless you have got a trust fund sitting around. So,
most people will be able to qualify under a means test because
their income is not very much, and their assets are probably
negative.
So, how do we do that? Because the key to getting this
passed is to figure out how to prevent people from gaming the
system. If we just say, well, nobody ever did that in the past,
sir, you are in denial, and you are having this proposal, which
I think has got some merit to it if it is properly done,
leading it down to defeat.
Now, somebody else in my remaining 24 seconds? Yes, Ms.
Jimenez?
Ms. Jimenez. Could I answer? So, I want to talk about both
the idea that this is something that will happen, and even if
it did, that we cannot stop it. The means test didn't just
create barriers based on income, as you were just referring to,
Ranking Member Sensenbrenner. It also added bad faith and
dismissal for cause provisions to the code under both Chapter
7, 13, and 11 that allow a bankruptcy judge to take into
account exactly the circumstances that you are afraid of, the
person who graduates and then doesn't currently have a job, so
has no income, but has very good prospects.
In that situation, and there are a few other things in the
Bankruptcy Code, the judge can dismiss those cases or deny a
discharge in general or a discharge of that particular debt.
Mr. Sensenbrenner. Yes, my time is up, but I am a skeptic.
You have got to convince me.
Thank you.
Mr. Cicilline. Thank you, Mr. Sensenbrenner.
The Chair now recognizes the Chair of the Full Committee,
Chair Nadler, for 5 minutes.
Mr. Nadler. Thank you, Mr. Chair.
Before I ask my question, I want to note for the record
that Professor Jimenez interrupted her stay with her family in
Germany to fly back yesterday so she could participate in
today's hearing, which was rescheduled from last week. I think
all of us very much appreciate your significant efforts, and we
are glad you are with us today.
Now my question. Among the staggering statistics you cite
in your prepared testimony are the following. One in five
adults have student loans, and approximately 20 percent of the
outstanding amount of these loans are in default. What impact
do these factors have on our nation's economy?
Ms. Jimenez. Thank you for the question, Representative
Nadler.
There is abundant evidence that the number of defaults and
the amount of student debt that people are holding are delaying
marriage, purchasing of homes, not--people are choosing not to
go into public service careers. They are choosing to delay all
sorts of purchases, including cars.
We live in a consumption economy, and we need consumers to
actually participate, and this is stopping that participation.
Mr. Nadler. Thank you.
As a result of your research, you have observed the
disparate impact of student loan debt with respect to gender
and race. Could you explain what those disparate impacts are
and the principal factors causing them?
Ms. Jimenez. Absolutely. So, basically, this is just
reproducing the racial gaps and the racial differences that we
have in our society. The racial wealth gap, in general, is
widening and is wide, and that means that, say, Black borrowers
are forced to borrow student loans at higher rates than White
borrowers because they don't have family wealth to support
them, and they also tend to attend for-profit schools, which
are schools that are actually marketing themselves more towards
blacks, Latinos, women, and working people. They have much
worse outcomes in terms of graduation rates, employment rates,
repayment rates, basically everything--everything that would
matter.
So, the higher education is sold as some kind of panacea
out of poverty or lower middle class, and that works for some
people, but it doesn't work for everyone. It is basically a bet
that the student is taking, and sometimes that bet fails. It
happens to fail more often for Black and Latinos.
Mr. Nadler. Thank you.
Mr. Rao, what are some of the so-called reforms enacted by
the 2005 amendments to the Bankruptcy Code that make it more
difficult for all consumers, let alone those with overwhelming
student debt, to file for and obtain bankruptcy relief?
Mr. Rao. Yes, Chair Nadler. The major change, of course,
was the means test. There were also--and so that means test
requires all filers to calculate their current monthly income.
There are additional filing and document requirements. If you
are above the median income in your state, you are subjected to
the full means test, which does remove those who have an
ability to repay. It creates a presumption of abuse and would
ultimately deny those folks a discharge.
There were also changes for exemptions so that particularly
higher-income consumers couldn't move to States with unlimited
homesteads and high assets in that way. There were also
counseling requirements that were imposed that haven't actually
proven to have done much in terms of really making bankruptcy
relief having exposed those individual debtors to other
options.
Mr. Nadler. As a result of these reforms, if student loan
obligations were made fully dischargeable, would the argument
that such legislation would invite abuse be even less
compelling?
Mr. Rao. Yes, absolutely. It would address that problem,
which even though I would say that it didn't exist, it
certainly would address the problem of bankruptcy filers.
Mr. Nadler. Thank you. Finally--thank you.
Finally, Judge Small, you were a bankruptcy judge for many
years. Based on that experience, what are your thoughts about
the current law with respect to the dischargeability of student
loans?
Judge Small. It is almost impossible to discharge a student
loan in most circuits under the Brunner undue hardship test. If
you are not going to repeal 23(a)(8), you should at least do
something to make the standard of the Brunner test easier so
that a debt could be discharged for hardship, maybe not undue
hardship.
Mr. Nadler. Thank you very much. My time is 4 seconds from
expiring. I yield back.
Mr. Cicilline. Thank you, Mr. Chair.
I recognize the gentleman from North Dakota, Mr. Armstrong.
Mr. Armstrong. Thank you.
So, I am a sponsor of H.R. 236, the Family Farmer Relief
Act, and it is important because over the last 20 years, the
increase in production from our farmers all across the country
has gone up significantly. These are some of the best
scientists and producers in any industry in the world. At the
same time, the decline in farm income, combined with trade
fluctuations, has created a really difficult time for farmers.
I think one of the reasons we don't notice the farm crisis
that is actually going on right now, and partially because of
the farm crisis in the '80s, is because there are less family
farmers than there were 20 years ago. Some of that is because
of prior farm crises. Some of it is just based on economies of
scale, which is where we get to a revamp of Chapter 12.
According to the USDA, debt-service ratios are projected to
reach all-time highs very shortly, with the 5-year 50 percent
collapse in farm income, it is imperative that producers have
adequate safety nets to rely upon should they need to make the
extraordinarily difficult decisions for their farm.
In both 2017 and 2018, approximately 500 farms filed each
year under Chapter 12 bankruptcy. The Upper Midwest has
witnessed a 19 percent increase in Chapter 12 filings since
2017, and that statistic does not include the effects of
droughts, floods, and recent trade disputes.
Just like any good business, our egg producers need updated
and flexible tools to reorganize their debt. Chapter 12
bankruptcy is an important and unique provision that allows
farmers to restructure their debt while maintaining their
farming operations and uniquely recognizes some of those
challenges that are based on a farm business income.
Unfortunately, the current debt cap from Chapter 12, it is
$4.1 million, it unnecessarily excludes farmers' most desperate
need of reorganization. Just to be quite frank, it doesn't
recognize what the current family farm looks like. By
increasing the debt cap from Chapter 12 bankruptcy from $4
million to $10 million, this bill will keep more farmers in
fields and farms and in the family.
I always am on a continuing quest to educate people about
North Dakota, and one thing that is great, we do not have
corporate farming. So, every farm in North Dakota is a family
farm. I will note this bill is particularly beneficial to my
State because we only have family farms.
Yet the effect of this bill won't just be felt by farmers,
but it is felt by the rural communities who rely on them as an
economic driver. Strong farms support strong rural communities.
So, we need to give them the tools that meet their needs in the
current economy.
Family farms are more than just a business. They are a
commitment to a tradition passed down from generation to
generation. We owe it to our farmers to make this simple change
and stand with them when we need to make the most difficult
decisions.
I would just note that this bill was in desperate need of
introduction prior to what is going on in the farm community
right now, and whether it is floods that are going on all
across the country, droughts that some people are experiencing,
and obviously, the uncertain trade situation that everybody
faces.
Last, but not least is we have gone from a scenario where
the family farmer can work on a $120,000 piece of equipment to
a $1 million piece of equipment that is more computer than
mechanical at this point, and inputs continue to rise, whether
it is transportation, anhydrous, all these things. So, the
number of acres you need to do to produce and have a valid
family farm is going up every day. They provide not only my
region, my State, but every State across the country with food
and actually, quite frankly, feed the world.
So, I am proud to be a part of that bill. I will just say
one thing that on this student loan debt, and I think it is
something that we have to address. That is that college tuition
is increasing at an unsustainable rate. There has been a 213
percent in tuition from 1987 to 2017, and we have great
colleges in North Dakota. We have great colleges all across the
country. I am not sure they are getting 217 percent better
education than those people who got in 1987 did.
There really are no market forces that drive down college
tuition, but there are plenty of market forces that benefit
schools increasing, whether it is a local chamber of commerce,
State education. We continue to grow these campuses.
Oftentimes, employment is going up at not quite 213
percent, but a very high rate. The employment that is on
college campuses isn't academic. It is more administrators,
more deals with those.
So, when we deal with these student loan issues, we also
have to figure out how to put some kind of federally backed
student loan. We have an incentive to keep local college
tuition costs down, and that has to be a part of this
conversation. Otherwise, I worry that we open the flood gates
to an ever-increasing tuition cost where we get into a
situation where not only are we increasing college tuition
everywhere, but we are not necessarily preparing our students
for a 21st century workforce.
So, I yield my time without asking a single question, and I
don't think I have done that before.
Mr. Cicilline. Very thoughtful comments. Thank you.
The gentleman yields back. I now recognize the gentlelady
from Washington, Ms. Jayapal, for 5 minutes.
Ms. Jayapal. Thank you so much, Chair Cicilline, for
holding this hearing, and thank you to all of you for your
comments.
I am confused by the comments earlier about people gaming
the system because I feel like the student loan system is a
giant trap. We say to people you have to get an education. K-12
used to be enough to get a good job. It isn't anymore. We all
know that.
We say to people go get a trade or a vocational skill or do
something, get a 4-year degree. Then they do that, but they
come out with an average of $40,000 to $50,000 in debt, $1.5
trillion in student loan debt in this country.
When I think about gaming the system, I think about the
fact that, actually, the Federal Government right now is
charging so much on interest, so much more than we actually pay
for that money, that many of these borrowers--I got a whole
bunch of tweets yesterday because we introduced our ``College
for All'' bill. A whole bunch of these borrowers were telling
me they are paying $700 a month for their principal payments,
trying to pay off their student loans, and $4, $5 is actually
going to principal.
The rest of it is going to interest because we are charging
these enormous interest rates for these students. So, they are
never going to be able to get out of debt.
When I think about, again, gaming the system, I wonder how
it is that we can bail out Wall Street firms because they are
supposedly too big to fail, but these student borrowers, 44
million people with student loan debt in this country today,
are too small to fail. They can have their entire lives
destroyed, no future, and yet somehow there is this different
standard.
So, let me ask you, when big businesses fall on hard
times--you have all talked about this--they can take advantage
of the relief that bankruptcy offers. When students have the
same problem, they cannot.
That means an organization like the Trump Administration,
for example--the Trump organization, excuse me, can declare
bankruptcy with taxpayer costs. Any big organization, I am not
picking on Trump. Any of them can declare bankruptcy, and
somehow, they are not gaming the system. Tet students are. So,
why aren't we worried about the gaming of the system with those
big organizations or, to the counter, why don't we say, look,
to these students, we can give you the same benefit?
So, Mr. Boltz, in your written testimony, you described
this ever-increasing set of restrictions on how and when
ordinary people can discharge their loans. What is any logical
reason--I will take any single logical reason for why clients
with student debt should face this heavier, higher burden to
discharge their student loans than major corporations?
Your mike.
Mr. Boltz. Thank you, Ms. Jayapal.
Particularly, in regard to the private student loans, there
is absolutely no basis for this whatsoever. When it comes to
the Federal loans, there is the argument that has been made and
is not terribly solid that because the Government is on the
hook for these amounts that it affects the liquidity of making
future loans.
One of the things that is important to consider, however,
of the $1.5 trillion in student loans, 11 percent of the
borrowers, of the 44 million people, they are in default, which
is a technical term under--in student loan law, which means
they are more than 9 months without a payment. More than a
third of people are delinquent on their student loan.
So, part of what that means is that of the $1.5 trillion,
the Government is not going to ever see all of that. So, there
is a large fallacy that this is somehow going to undermine the
ability to continue to make loans for students.
Ms. Jayapal. In fact, if we are really concerned about the
State of the economy, there are reports that say that if we
were to cancel all $1.5 trillion in student loan debt, we would
bring $1 trillion over the next 10 years into our economy. Even
the Federal Reserve has said people are putting off major
decisions like buying homes or investing in a car or whatever
else they need, even getting married or having kids, because of
their student debt.
Mr. Rao, you are an attorney at the National Consumer Law
Center, and you pointed out that currently in bankruptcy law,
the business entrepreneur is given an opportunity for a fresh
start, while the student borrower is given no margin of error.
Do student borrowers present some very special risk to the
bankruptcy system that I am missing?
Mr. Rao. No, I don't believe they do. In fact, they
probably present less risk than particularly some of the
business filers or, you know? There was one point in 1978 when,
as a member of this Committee had said, that it was
inappropriate to really view the student loan programs as a
social program when we are granting the loans, but then to
treat them as business, strictly as business when you are
trying to collect the debt.
I would say it is even worse than that because, as you have
pointed out, we allow the business entrepreneur to get a
discharge, but we don't allow the student loan borrower.
Ms. Jayapal. Thank you, Mr. Rao.
Thank you, Ms. Jimenez, for making the trip back.
I had one more question, but I am out of time. I would just
say before I yield back, Mr. Chair, that yesterday, I
introduced with Senator Sanders and Representative Omar a bold
package to cancel $1.5 trillion in student loan debt and to
ensure that we can actually invest in the future of our young
people by making college tuition free and debt free. I look
forward to the day when we can make that kind of investment for
our future.
Thank you.
Mr. Cicilline. I thank the gentlelady.
I now recognize the gentlelady Pennsylvania, Ms. Scanlon,
for 5 minutes.
Ms. Scanlon. Thank you very much.
The issue of student loan debt is one that comes up at
every town hall and every constituent conversation that I have.
Pennsylvania has the highest student debt levels in the
country, 1.8 million people have some amount of student loan
debt in Pennsylvania, and the average of $36,000 per person is
about 20 percent higher than the rest of the country. So, it is
a huge issue in my community.
What has really been striking to me is the
intergenerational impact that we are seeing now. So, last
August I met a woman who had just dropped her daughter off at
college, and she was emotional. It wasn't because her daughter
was going to college. It was because her daughter was going to
her second-choice college. Mom and Dad were still paying off
their student debt, so the daughter couldn't go to her first-
choice college.
Then there is Nate and Natalie, who attend church with me.
Young parents, they have boys ages 4 and 6. They can't start
saving for their kids' education because they are still paying
their student loans.
These are responsible people. They are paying their taxes.
They are paying their loans. They are doing what they are
supposed to do.
My own kids' friends, my three have just graduated from
college, and I am hearing how people aren't buying cars, and
they are not buying houses. They are not getting married and
they are delaying having children. So, clearly, there is an
emotional drag on the system.
I just saw an article a couple days ago from Adweek about
targeting millennial customers, millennial consumers. Our
corporations are having to adjust their marketing tactics
because the metrics that held true for previous generations
aren't working because the millennials have such a debt load,
they don't have the discretionary income. So, this whole drag
on our economy is really something I am pleased that we are
having this hearing to start chipping away.
Obviously, amending the Bankruptcy Code does not solve the
whole problem. We have to go after the predatory private
colleges and the predatory loans and revamp the system for how
people pay for it. I do think that this bankruptcy piece is so
important. The piece that really is striking to me is that
student loans were dischargeable. That there was this chipping
away at it, and now we are treating student loans differently
than credit card debt. It is kind of astounding to me.
So, I guess maybe Ms. Jimenez, am I correct that the
amendment suggested here would not create special rules for
student loan debt, like favored treatment for student loan
debt, but would lump it in with the general category of debt.
Is that right?
Ms. Jimenez. That is right. Absolutely correct. The student
loan debt special treatment is the rare event, and so the
Representative Nadler's bill and Senator Durbin's bill would
just take that special treatment away.
Ms. Scanlon. Okay. Mr. Rao, so when we are treating student
loans like other debt, that doesn't mean that someone is going
to be able to walk in and say I just don't feel like paying,
kind of like I just don't feel like paying my credit cards,
does it?
Mr. Rao. Right. Again, the Bankruptcy Code does screen for
consumers who would really have an ability to repay their debt
based on their income. So, if they do have that, they would be
presumed to be abusive and they would not get a discharge.
Ms. Scanlon. Okay. So, we still have the courts and the
rest of the Bankruptcy Code to Act as a stopgap against abuses?
Mr. Rao. Yes.
Ms. Scanlon. Okay. Ms. Jimenez, your statement talked a
little bit about the difference in student loan debt and
defaults with communities of color and that we have got some
disparity there. Can you explain that a little?
Ms. Jimenez. Absolutely. The fact that we have chosen to
support the higher education system through loans means that we
have created or re-created and exacerbated the wealth gap in
this country because we are making people who already come from
families who don't have as much wealth as others, we are making
them borrow. They already don't have--there is already
disparities in education, in job prospects based on implicit
bias and just outright racism, and we are making those people
take out loans.
Then there is actually evidence that we are suing them more
often and that they are not receiving the same benefits as
others in income during the repayments.
Ms. Scanlon. The thing that really surprised me when I
started looking into this was the statistic that women actually
hold more student loan debt. Two-thirds of all student loan
debt is women, despite the fact that they have less wealth with
which to repay. Can you comment on that?
Ms. Jimenez. Exactly. A lot of that is actually working
women, single parents, who are preyed upon by for-profit
colleges. They mostly take out private loans. The for-profit
college's business model is really around Federal loans. So
there, even if we made private student loans nondischargeable,
that wouldn't really solve that problem.
Ms. Scanlon. Okay. So, that is kind of an intersection of
the two problems?
Ms. Jimenez. That is right.
Ms. Scanlon. Okay, thank you. I yield back.
Mr. Cicilline. I thank the gentlelady.
The Chair now recognizes the gentleman from Colorado, Mr.
Neguse, for 5 minutes.
Mr. Neguse. Thank you, Mr. Chair, and thank you for holding
this important hearing. I appreciate the witnesses and their
testimony.
I want to focus in on an issue that many of my colleagues
have talked about already at great length, which is, of course,
the student loan debt that is harming so many people across our
country and really drastically impacting the lives of nearly 45
million people, and the crippling effect of student loans on
our nation's financial health is, of course, well known to this
Committee and, I believe, to the witnesses as well.
Just to give you some sense of context, I represent the
great State of Colorado. In Colorado, student loan debt, as of
January 2019, is $26 billion and impacts 700,000 Coloradans,
and more than 20,000 rural Colorado residents are severely
delinquent. So, this is an issue that we must address with the
urgency that it requires, which is why I am proud to be one of
the co-lead and lead sponsors of the Student Borrower
Bankruptcy Relief Act of 2019, with Chair Nadler and Senator
Durbin, to ensure ultimately the Bankruptcy Code is fair to
all.
I want to have a question for you, Mr. Keach. I reviewed
your written testimony. I guess I am trying to better
understand the rationale for the exception as it was enacted in
the early 1970s. Then, obviously, over time it was changed,
right?
So, in your written testimony, you offer that the Consumer
Commission, which is the commission of the ABI, weighed the
rationale--I am quoting from your written testimony--for
student loan dischargeability against the current and projected
student debt landscape. Then I will just give you a quote.
``The commission considered, but rejected the notion of making
student loans freely dischargeable,'' which is a misnomer in
terms of the word ``freely,'' but I understand that this is
from the commission, ``freely dischargeable like any other
debt, concluding that the rationale supporting
nondischargeability remained valid.''
So, could you explain what was going on in the minds of
policymakers 40 years ago as to why they came up with this
exception in the first place?
Mr. Keach. Sure, I can try. I think my colleagues to the
left, all three of which are Members of the ABI Consumer
Commission--and I thank them for their service--in that
respect, could probably speak to this.
The historical antecedents that have been talked about are
largely accurate, and that is that there were beliefs about
moral hazard. That has been addressed. The bigger concern was
probably for the solvency of the Federal student loan program
or at least for the liquidity and solvency of the program.
The ABI Consumer Commission recommendation actually is
somewhat of a midpoint between those people who are concerned
about that and complete discharge and, in fact, would discharge
private loans. It would also allow for the discharge of
federally provided, guaranteed, or insured loans that were more
than 7 years old at the time of the bankruptcy.
It would also allow for discharge of loan obligations of
people other than the students themselves. Would also
materially reform the so-called Brunner hardship test to make
that test meaningful and allow for people to actually get
discharged under that test. As Judge Small said, that doesn't
happen today.
It doesn't allow for full dischargeability of federally
funded, guaranteed, or insured student debt other than under
the hardship test.
Mr. Neguse. So, on that precise point, notwithstanding the
undue hardship test and, obviously, the recognition that that
test has not been--with the lack of any real discernible
standards makes it largely toothless. I guess I am trying to
better understand why adhere to this purported rationale that
was adopted 50 years ago if the underlying presuppositions of
that rationale have not come to pass?
Mr. Keach. Sure. I don't want to speak for the full ABI
Consumer Commission, but that I don't think there is any
support in that commission or in the commission recommendation
with a rationale about moral hazard. That has gone out the
window. I don't think anybody is making that argument anymore.
To the extent that there is balance built into the ABI
Consumer Commission report, which is probably somewhere near
where Ranking Member Sensenbrenner was and the Nadler bill, is
really about a concern for continued solvency and funding of
the Federal system. It doesn't at all try to protect the
private lending system.
Mr. Neguse. To that point, do we have--thank you for your
answer--do we have any empirical data that suggests that that
concern is substantiated? I guess that is my point. Because
with a wide variety of other common loan structures, right, I
am thinking home mortgages by way of example. We certainly--
those are dischargeable in bankruptcy, and we don't have wide
concerns about the security of that program.
I guess that is what I am trying to get at, and I--
Mr. Keach. Well, interestingly enough, actually,
residential mortgages that are within the various Federal
programs actually do have more protection under the Bankruptcy
Code than regular private loans. So, there is actually a pretty
direct parallel here.
Mr. Neguse. They are dischargeable.
Mr. Keach. Well, they are not fully modifiable or fully
dischargeable, right?
Mr. Neguse. Sure. They are in part dischargeable.
Certainly, far more dischargeable than a student loan.
Anyway, I see my time has expired, but--
Mr. Keach. Well, to the extent there is a deficiency, that
is true. You can't actually modify materially in Chapter 13,
for example, a first mortgage because of the Federal mortgage
insurance program. So, there are some parallels to that.
Mr. Neguse. Thank you, Mr. Chair.
Mr. Cicilline. The Chair now recognizes the gentlelady from
Georgia, Ms. McBath, for 5 minutes.
Ms. McBath. Thank you, Mr. Chair.
I am so glad for each of you spending a few moments with us
this morning. I am very excited to be the cosponsor of the
bipartisan HAVEN Act of 2019, along with my Republican
colleague Mr. Steube. This measure has also been endorsed not
only by Ms. Petraeus and Mr. Keach, but also endorsed by the
Veterans of Foreign Affairs, the American Legion, Disabled
American Veterans, among others.
I appreciate this opportunity to discuss ways in which we
can reform our bankruptcy system to better serve people and
small businesses that are facing financial hardship. No one
wants to turn to bankruptcy, and we should ensure that these
systems effectively help people rescue their financial lives.
I am especially pleased to have the opportunity to discuss
my bill, the HAVEN Act, which I introduced, as I said once
before, with my Republican colleague Congressman Steube. This
bill would help veterans qualify for bankruptcy relief by
excluding their VA and Department of Defense benefits from the
calculation of their income, as it is already done with Social
Security disability payments.
This small change will help veterans who are most in need,
and no one should ever be penalized for the payments they
receive for their injuries resulting from their brave service
to our country. I am proud to support this bipartisan bill and
to discuss it with you today.
Mr. Keach, I will turn to you, if you will. Can you think
of any reason why Social Security benefits should be treated
differently than VA or Department of Defense benefits for
bankruptcy income calculations?
Mr. Keach. The ABI can't think of any reason why that
should be true. We fully support the HAVEN Act. We, frankly,
are of a belief that the inclusion of these benefits for our
veterans in disposable income calculation was an error, and
that error should be corrected. This bill would do that.
Ms. McBath. Thank you very much.
Ms. Petraeus, in your written testimony today, you cite a
study indicating that 125,000 veterans filed for bankruptcy in
2017. The study also found that although veterans comprise only
10.3 percent of the population, they make up 14.7 percent of
Chapter 7 debtors and 15 percent of Chapter 13 debtors.
Why is it important for veterans to be able to access
Chapter 7 bankruptcy rather than counting their benefits as
income and potentially making only Chapter 13 bankruptcy relief
available for themselves?
Ms. Petraeus. Thank you for the question.
I must say this has been an education for me on bankruptcy.
Chapter 7 is the equivalent of a fire sale. Everything must go.
You dispose of your assets, and then you walk away, freed of
your obligations.
Chapter 13 is a whole other thing, where you end up paying
for 3 to 5 years. You have to set up a payment plan. Frankly,
for many of these veterans, they don't have a whole lot of
money to start with. If they end up having to even take their
disability pension and apply it to their payment plan, they
have got almost nothing left.
The military leads a very mobile lifestyle. I, myself,
moved 24 times in 37 years while my husband was on active duty.
The spouse unemployment is a very significant issue for the
military, which means they have not had a spouse who has had
the opportunity to build a career or to have a very significant
income. When you add in disability, that spouse may now be a
full-time caregiver as well.
So, they just don't have a lot of money, frankly, and to,
again, take away their pension and apply it to a payment plan
is just punitive. I can't imagine that that was really
intended.
Ms. McBath. Thank you. One more question.
Based on your many years of experience working with service
Members and veterans dealing with financial challenges, why do
you think so many veterans are seeking bankruptcy relief?
Ms. Petraeus. Again, some of it is just a part of the life
they have led. The military is not a place where you get rich.
It is very meaningful service. I was lucky enough to live in
that community my whole life. They do it for the best of
reasons. But, they tend to have lower income as a group.
A significant number of them do have issues after serving
that may impact their ability to get or to keep a job. I will
also say they are not exempt from the student loan crisis. Even
though they have the GI bill, a surprising number of veterans
have significant student loans, in many cases because they have
been targeted by unscrupulous for-profit colleges that have
marketed to them.
They have spent not only their GI bill, but then taken out
private student loans to fund what in many cases is a fairly
worthless education. So, they have a lot of the same issues.
They have a mobile lifestyle, and they don't have a good income
to start with. So, when they get out of the military, that may
put them in a very shaky financial situation.
Ms. McBath. Thank you so much for your service, and thank
you so much for your testimony.
Ms. Petraeus. Thank you.
Ms. McBath. I am out of time.
Mr. Cicilline. I thank the gentlelady for yielding back.
I now recognize myself for 5 minutes. Thank you again to
our witnesses that have participated in today's hearing.
Ms. Petraeus, thank you for your work and the passion with
which you bring to this important work. We all recognize the
current system that creates or provides or exempts, I should
say, Social Security benefits from the law's current definition
of current monthly income for purposes of determining
eligibility for consumer bankruptcy relief.
While at the same time disability benefits from the
Veterans Administration and the Defense Department are not,
seems to make very little sense to anyone. I am just wondering
if any of the witnesses on the panel today can think of any
good reason for this disparate treatment?
[No response.]
Mr. Cicilline. Okay. The record should reflect that no
witness saw them. I thank you again for your advocacy for this
important bill.
I want to just turn now to the student loan bankruptcy. I
misspoke in my opening statement when I indicated that student
loan debt is at $1.5 trillion and will be at $2 trillion by
2022. I think I said billion by mistake.
For me, sort of in line with what Ms. Jayapal said earlier,
when we talk about this gaming the system, it is fair to say
the system is gaming young people. That the system right now
forces young people to go into tremendous debt with really no
ability to get out, and the consequences for that on the
individual borrower, as well as our economy broadly, is
enormously significant.
I want to just respond to a question that was raised
earlier about how do we make sure young people aren't just
gaming the system? There was--Mr. Rao, made references to this
report. The GAO study found that only a fraction--in fact, I'll
summarize the GAO findings.
First, the general default rate on educational loans is
approximately 18 percent. Of that 18 percent, 3 to 4 percent of
the amounts involved are discharged in bankruptcy cases. Thus,
approximately 0.5 to 0.25 of 1 percent--0.5 of 0.25 of 1
percent of all matured education loans are discharged in
bankruptcy. This compares favorably with the consumer finance
industry.
So, there wasn't a problem of young people gaming the
system. It was 0.5 or 0.25 of 1 percent. You must wonder what
resulted in the creation of this undue hardship standard. In
addition to there being no evidence that it is necessary, Mr.
Rao, why has this standard been difficult to administer, and
why has this undue hardship application kind of varied from
case to case? What does that mean for kind of this system
overall?
Mr. Rao. Yes, Chair Cicilline. As I mentioned in my
statement, it is just not a viable way to approach the student
loan problem. The cost alone--so there is the issue of the
vagueness of the standard and the fact that judges apply it in
different ways and the fact that it has been interpreted by the
circuit courts to apply a very strict standard.
Even putting that aside for the moment, the system requires
that there be a litigation. We are talking about the consumers
who would be most eligible for an undue hardship could barely
pay for the cost to file the underlying bankruptcy case, let
alone tens of thousands of dollars to fund contested
litigation.
The Department of Education fights these cases very hard,
as well as the contractor that is hired by them, ECMC. So, it
is just not happening. People aren't getting undue hardship
discharges.
Mr. Cicilline. Many of my colleagues in this hearing have
referenced our additional responsibility to figure out how we
make the cost of higher education affordable and accessible,
and we are dealing today with some of the symptoms of a system
that is broken, where people are accumulating enormous debt and
are unable to pay it.
We have to do both. We have to address this question, but
we also have to deal with kind of the source of the problem in
a different Committee with different legislation.
I really want to thank you because this is a very serious
issue. We hear about it all the time from young people and from
families. I hear about it every day from my sister, who has two
children who just finished school and are saddled with enormous
student loan debt. We hear this wherever we go. So, these are
important bills that we intend to move.
The last issue I want to just raise is a slightly different
issue, and that relates to Chapter 7 bankruptcies. Trustees Act
as a fiduciary appointed by the Justice Department to ensure
that debtors comply with various requirements, including filing
documents with the court and surrendering their nonexempt
assets for liquidation, along with other essential
responsibilities.
The fee for trustees is paid by debtors, and in addition to
paying for legal representation and compulsory debt counseling,
debtors must also pay a $335 fee to file for Chapter 7
bankruptcy. The Chapter 7 trustees receive just $60 of this
filing fee, a compensation level that has not been adjusted in
25 years and the only method of compensation in more than 90
percent of Chapter 7 cases. So, this is a significant problem.
It is an understatement that increasing Chapter 7 trustees'
compensation is long overdue. Everyone recognizes that.
Mr. Rao, you previously testified in favor of adjusting
this problem to resource the funds outside of steep increases
in consumer debtor filing fees. What are some of those sources,
and what are some other ways to reduce consumer debtors'
burdens in bankruptcy while also addressing this sort of
unfairness of the $60 fee, which has been unchanged for 25
years?
Mr. Rao. Yes, Chair Cicilline. Trustees are also
compensated by the assets which are sold in a bankruptcy case,
and there is a certain percentage that are in the Bankruptcy
Code as to how much of a percentage of the asset that they are
able to receive as a commission.
Our proposal would be to adjust those cutoffs so that they
would receive higher amounts in those asset cases through the
commission on the sale of assets.
The other way to approach the problem, the opposition that
we have had to the bills that have been introduced is that they
focus solely on having debtors pay for the increased
compensation through filing fees. The other possibility is to
make it possible so that there are savings for consumers in
reducing some of the filing requirements so that there is less
burden on them in filing the case, and then possibly there may
be that they could share some of the costs through an increase
in filing fee, but only if there is a compensating reduction in
their cost of access to the bankruptcy system.
Mr. Cicilline. Thank you.
With that, I think there are--no, sorry. I just want to
make sure I properly close the hearing.
First, I want to say thank you to the witnesses for this
incredibly useful testimony. It will inform and guide our work.
I ask unanimous consent to include a number of letters and
statements in the record regarding proposed measures to address
issues in our Bankruptcy Code--two statements from the American
College of Bankruptcy, one endorsing the Family Farmer Relief
Act and the Small Business Reorganization Act, one supporting
the HAVEN Act, and a statement from the Association of Young
Americans endorsing the Student Borrower Bankruptcy Relief Act.
Without objection.
[The information follows:]
CICILLINE FOR THE RECORD
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Mr. Cicilline. This concludes today's hearing. Thank you
again to our distinguished witnesses.
Without objection, all Members will have 5 legislative days
to submit additional written testimony--sorry, additional
written questions for the witnesses or additional materials for
the record.
Without objection, this hearing is adjourned.
[Whereupon, at 12:03 p.m., the Subcommittee was adjourned.]
APPENDIX
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