Sen. Kerry on Bankruptcy Reform

The following are excerpts from Senate floor statements made by Sen. John F. Kerry (D-Mass.) on the Bankruptcy Reform Act of 2001 (S. 420 in the 107th Congress), the predecessor bill to H.R. 975 in the current Congress. S. 420 passed the Senate 83-15 on March 15, 2001 (with Sen. John Edwards, D-N.C., voting in favor), but did not become law. Sen. Kerry offered one significant amendment during the floor debate: to strike the bill's small-business provisions in favor of a study by the Small Business Administration. This amendment was tabled by a vote of 55-41. Excerpts from the debate on the amendment are also included below.

Mr. President, the Bankruptcy Reform bill we are voting on today has a valid, uncontroversial and necessary purpose. It is intended to curb bankruptcy abuse and ensure that those who can afford to pay their debts, do pay their debts. And I would say to you, Mr. President, if this were all about those goals—if this were a debate about personal responsibility—there would be a very different dialogue in the U.S. Senate, and it would have given us a very different bill than the one we're voting on today. But Mr. President, the bill we are voting on is seriously flawed and will harm innocent debtors who are genuinely in need of the protections and the "fresh start" that bankruptcy procedures are intended to provide. It is for that reason that I must vote against this bill.

During the 106th Congress, I voted in favor of the Senate bankruptcy bill, because I believe that we need to reform the system and curb abuse. I had some serious reservations about that bill and had hoped that many of the concerns I had at that time would be addressed in conference. Unfortunately, the conference bill, like the bill we are voting on today, did not target only those who abuse the bankruptcy system. What we needed during the 106th Congress, and what we need now, is bankruptcy reform that does not lump together those who need the protections of bankruptcy with those who abuse the system.

We must absolutely prevent the abuse of the bankruptcy system by the millionaires whom we know have received the protections of the bankruptcy system despite their ability to repay their debts. But even beyond the flagrant, high-profile abuse of the bankruptcy system that we have read about in the papers, we must also be sure that every consumer acts responsibly and does not charge meals, vacations and clothes that he can't afford, only to turn to the bankruptcy system to bail him out of his debt.

At the same time, we must not forget that a fresh start in bankruptcy serves a valuable purpose for many individuals who truly need its protections. When an individual gets into financial trouble because, for example, she has catastrophic, unforeseen medical expenses, it is better for her, for her creditors and even for society as a whole if she is given the opportunity to have her debts discharged and is given a fresh start. The alternative is that the innocent but unlucky debtor may have as much as 25 percent of her wages garnished by her creditors. Most people live paycheck to paycheck and would be put in serious financial trouble if their paychecks were reduced by that much. In those circumstances, consumers have no choice but to cut back on other, important expenses. They stop paying for their auto insurance and health insurance. They deplete any savings they might have and stop contributing to their retirement accounts. This is a perverse result that doesn't benefit anyone and certainly should not be the outcome of our efforts to reform the bankruptcy system.

As you know, this bill implements a means-testing system that would create a presumption that a chapter 7 bankruptcy, or fresh-start bankruptcy, should be dismissed or converted to a chapter 13 reorganization if a certain financial formula is satisfied. The means test applies an IRS standard to determine whether a case should be dismissed or converted. The IRS standard is inflexible, and it provides no room for a bankruptcy judge to determine whether the circumstances that led to the debtor's financial situation warrant treatment under chapter 7. A father with a sick child is treated the same way as a reckless spender who ran up his credit cards on luxury items. Judges should have some discretion to distinguish those situations and exempt from means-testing debtors who, due to circumstances beyond their control, have come to the court to ask for the protection bankruptcy is intended to provide.

The purpose of the means test is to ensure that more individuals file in chapter 13 and therefore pay off more of their debts. That sounds like a laudable goal. But it is likely to fail. Simply because more people are forced into chapter 13 plans does not mean that they will be able to successfully complete those plans. Even under the current system, only a third of those who file for chapter 13 successfully complete their plans. Simply funneling more individuals into chapter 13 does not in any way guarantee that more debts will be paid off.

Finally, the means test imposes financial disclosure requirements that put significant burdens on all debtors, not just the 10 percent or fewer whom experts say abuse the system. Under the means test, everyone who files for bankruptcy must engage in more preparation, more paperwork and more attorney and other expenses prior to filing for bankruptcy, leaving fewer assets to distribute to creditors.

A narrowly targeted reform bill designed to reduce abuse of the system would have provided bankruptcy judges with the discretion to dismiss or convert a case to chapter 7, but would not have mandated it. It would have provided creditors the opportunity to ask for a dismissal or conversion, but would not have put the burden on every filer to prove that he or she deserves the protections of chapter 7. This bill simply fails to take that reasonable, targeted approach toward curbing abuse.

In its attempt to thwart abuse of the system, the bill we are voting on will also result in some innocent debtors losing their rented homes and apartments. Current bankruptcy law allows individuals in bankruptcy to remain in their apartments as long as they keep paying their rent while the bankruptcy is pending, and as long as they repay any unpaid rent. A landlord must go to the bankruptcy court for permission to evict tenants who have filed for bankruptcy. There is no question that some tenants will abuse this provision and withhold rent while gambling on the fact that the time and expense of going to bankruptcy court will prevent the landlord from getting permission to evict the tenant. This bill, which allows landlords to evict debtors without going to bankruptcy court, punishes the innocent tenant who is paying his rent while it attempts to get at those who abuse the system. And once again, the answer lies in more narrowly targeting reform. We simply need to make it easier and less expensive for a landlord to evict a tenant when that tenant has failed to pay his rent. It is not necessary, nor is it good public policy, to allow a landlord to evict a tenant who is paying rent and who will pay back any debts owed.

Perhaps one of the most disturbing parts of the bill is its impact on children. The bill's supporters claim that by moving child support claims from seventh to first priority in chapter 7 cases, the bill "puts child support first." What they don't say is that this provision is virtually meaningless and will help very few children. The reason is because few debtors in chapter 7 have any assets to distribute to priority unsecured creditors, such as credit card companies, after secured creditors receive the value of their collateral. Therefore, this change would affect only the smallest number of cases.

In addition, by forcing more debtors to file chapter 13, more debt, including credit card debt, will have to be repaid. The result is that banks and credit card companies will be in direct competition with single parents trying to collect child support after bankruptcy. Once again, Mr. President, a bill that claims to reform the system may actually make it worse for those most in need.

While this bill puts more burdens on the innocent debtor, it does not place more responsibility on the creditors who provide the consumers with the opportunity to take on increasing amounts of debt. A simple provision requiring credit card bills to state the length of time it would take and the interest that would be paid on the current debt if only the monthly minimum was paid would have provided real reform. Such a provision would have provided valuable information to consumers and given them the tools they need to decide whether they can afford to take on any new debt. This bill, however, fails to include such a balanced reform provision. Instead, it includes an inadequate disclosure provision that would free 80 percent of all banks from any disclosure responsibility and place the burden of disclosure on the Federal Reserve for two years. After that time, it is unclear whether and how the consumer disclosure requirements would be maintained.

Impact on Small Business

This bill is not only detrimental to consumers, but it also hurts our small businesses. This effort to reform our bankruptcy laws will make it more difficult for entrepreneurs to start a small business and impose additional regulations and reporting requirements on small businesses who file for bankruptcy. I believe we must do everything possible to ensure the viability of small businesses and to assist in fostering entrepreneurship in our economy. It has been Congress's long-held belief that regulatory and procedural burdens should be lowered for small business wherever possible. However, the Bankruptcy Reform Act fails to meet this challenge. Instead, this legislation promotes additional red tape and a government bureaucracy that we have worked to reduce for small business. Specifically, the provisions included in the Bankruptcy Reform Act impose new technical and burdensome reporting requirements for small businesses who file for bankruptcy that are more stringent on small businesses than they are on big business. Further, the bill will provide creditors with greatly enhanced powers to force small businesses to liquidate their assets.

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A narrowly targeted reform bill designed to reduce abuse of the system would have provided bankruptcy judges with the discretion to dismiss or convert a case to chapter 7, but would not have mandated it. It would have provided creditors the opportunity to ask for a dismissal or conversion, but would not have put the burden on every filer to prove that he or she deserves the protections of chapter 7.—Sen. John F. Kerry

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Any big business would have difficulty complying with these new burdensome reporting requirements. But think of the difficulties an entrepreneur or a mom-and-pop grocery store will have in complying with this dizzying array of new and complex reporting and other requirements. These small businesses are the most likely to need, but least likely to be able to afford, the assistance of a lawyer or an accountant to comply with these new taxing requirements. That is why during the consideration of this bill I offered an amendment to strike the small-business provisions which will make it easier for creditors to force liquidations of small business during the bankruptcy process. Unfortunately, that amendment was not adopted.

A limited number of provisions do help small businesses and family fishing businesses. The amendments that I offered last year to extend the reorganization plan filing and confirmation deadlines for small business are included in this bill along with a provision to include small businesses in the creditors' committee. Those amendments help small businesses, but they cannot compensate for the greater burdens this bill imposes.

Additionally, I am pleased that an amendment sponsored by Sen. Collins and I, which will extend chapter 12 bankruptcy protections to our family fishermen, has been included in the bill. Mr. President, small, family-owned fishing businesses are in serious trouble. Severe environmental factors such as coastal pollution, warmer oceans and changing currents have resulted in severely depleted fish stocks around the country. We are making progress in rebuilding stocks; however, the cost of this progress has been a steep decline in the amount of fishing allowed in Georges Bank and the Gulf of Maine. This in turn has made it much more difficult for fishermen in Massachusetts and Maine to maintain profitable businesses.

This amendment Sen. Collins and I sponsored will ensure that fishermen have the flexibility under chapter 12 of the Bankruptcy Code to wait out the rebuilding of our commercial fish stocks without back-tracking on our conservation gains to date. It will help preserve the rich New England fishing heritage in Massachusetts without wiping out the fiercely independent small-boat fishermen.

Despite those provisions, which I do believe improve the system, overall this bill does not provide for real bankruptcy reform. Mr. President, sponsors of this bill say it is necessary because we are in the midst of a "bankruptcy crisis." There has been widespread and justifiable concern over the increase in consumer bankruptcies during the 1990s. There were more than 1.4 million bankruptcy filings in 1998. However, personal bankruptcy filings have fallen steadily since then, down to 1.3 million in 1999 and to 1.2 million last year. That is fewer bankruptcies per capita than there were at the time the bankruptcy bill was first introduced. I cannot help but think that had we enacted bankruptcy reform in 1998, the sponsors of the bill would have been taking credit for this downturn in bankruptcies.

But without congressional intervention, bankruptcies have been on the decline. The reason, Mr. President, is simple. Lenders are profit-maximizing institutions that select their own credit criteria. If there is an increase in personal bankruptcies, credit card companies simply won't offer their cards to consumers who don't have the means to pay. The free-market thus corrects any upswing in bankruptcy.

Although the free market will correct the over-extension of credit to those who can least afford it, the market will not address the small percentage of bankruptcy filers who abuse the system. We need legislation for that. But that legislation should be targeted, it should be narrowly crafted, and it should avoid punishing those who truly need and deserve bankruptcy protection. This bill does not do that, and I must vote against it.

Debate on the Kerry Amendment

Mr. Kerry. Mr. President, the provisions included in the Bankruptcy Reform Act impose new technical and burdensome reporting requirements for small businesses that file for bankruptcy that are far more stringent on small businesses than they are on big businesses. Furthermore, the bill would provide creditors with greatly enhanced powers to force small businesses to liquidate their assets at a time when it may not be advisable, and with reporting requirements that may, in fact, force a liquidation that does not have to take place.

Specifically, the bill will require small businesses to provide periodic financial and other reports containing information ranging from cash receipts, cash disbursements and comparisons of actual cash receipts and disbursements with projections in prior reports.

Just in case they missed anything, the bill includes a provision that includes reports on such matters as are in the best interests of the debtor and the creditors. This shifts all of the power in such a way as to place an extraordinary burden on mom-and-pop stores and mom-and-pop operations and small businesses that simply do not have the capacity to be able to comply.

Any big business would have difficulty complying with these burdensome requirements. But I think we ought to measure what we are doing here against the necessity that we see in the declining number of bankruptcies, the declining level of assets that are at stake, and the great upside of what these entities provide to the country.

So for that reason, I hope my colleagues will join me in specifically asking for a study, a short-term study, that will enable us to better judge whether these changes in the current system are needed. I believe we ought to do everything possible to ensure the viability of small businesses and to assist in fostering entrepreneurship in the economy. The Bankruptcy Reform Act, as it is today constructed, does not meet that challenge.

I ask my colleagues to join me in removing the small-business provisions, undertake the study, and then we can revisit it, if we need to, based on a sound analysis of precisely how we might proceed in a least intrusive, a least burdensome manner.

Mr. Grassley. Mr. President, I am not going to respond to the substance of the amendment but to give some background on where we have come over the last five or six years on this legislation for the consideration of people who will want to debate against the amendment by the senator from Massachusetts.

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If small business fails to comply with the new reporting requirements that are in this legislation, then creditors are given entirely new powers, and those powers could force bankruptcy court judges to liquidate small businesses or to completely dismiss their proceedings. This could force many small businesses to expend a huge amount of resources to fend off challenges by any creditor simply for not complying with one of the new burdensome reporting requirements that are put into this legislation.—Sen. John F. Kerry

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When Sen. Heflin from Alabama was a member of the Senate, he and I served as either chairman or ranking member of the judiciary subcommittee over bankruptcy issues.

During this period of time, he and I came to the conclusion that there were changes in the economy—the globalization of the economy and a lot of other reasons—and that we ought to give considerable attention to greater changes of the Bankruptcy Code rather than the very small changes we enacted from time to time during the 1980s.

So we set up the Bankruptcy Commission, of which this legislation we are dealing with now is a product. That Commission was not made up of any members of Congress. It was made up of appointees by legislative leaders and by the President of the United States. These people truly are authorities in bankruptcy legislation, including Prof. Warren from Harvard, who is the person Sen. Kerry was quoting.

The Commission studied the issues for over a year, and put a lot of work into recommendations for both consumer bankruptcy and for business bankruptcy reform.

When it came to the recommendations on business bankruptcy reform, the recommendations of the Commission came down to the Congress on an 8-1 vote.

We are being asked by the Senator from Massachusetts to do this amendment for the sake of small business. I think it is essential that all of us take into consideration the needs of small business, so I do not find fault with the interests he is trying to espouse here. But I think we need to take into consideration that his amendment is taking the business bankruptcy provisions of our bill and setting them aside and asking us to study [again] what we should do in regard to business bankruptcy reform.

I don't think enough has changed in the last four or five years that an 8-1 recommendation of the Bankruptcy Commission for business bankruptcy reform should be undone by this amendment of the Senator from Massachusetts.

We set this commission up to do exactly what it did. It came out with an overwhelming recommendation that is before the Senate.

Beyond that, in the period of time of 1997-98, when we moved the Commission's recommendations through the Senate, through the House, through conference, through the House a second time, dying on the floor of the Senate because it came late in the session, and then starting over again with the same Commission recommendations in 1999, moving it through the Senate, moving it through the House, moving it through conference, moving it to the President of the United States, where it was subjected to a pocket veto—through all of this consideration of the Bankruptcy Commission's recommendations, there has been little dispute about the business provisions compared to the more controversial aspects of the consumer and personal bankruptcy recommendations of the Commission.

That is directly related to the fact that the Commission's recommendations came out 8-1 and, almost unchanged, have become the legislation that first Sen. Durbin and I introduced and then, it was Sen. Torricelli who joined me in introducing bankruptcy legislation. That was introduced in exactly the same way in the last Congress, as a result of our moving ahead with the same conference report that Pres. Clinton pocket-vetoed.

I don't know why all of a sudden somebody thinks we ought to throw these fairly noncontroversial small-business and business-bankruptcy provisions out of this bill for further study. Each member of this body is going to have to make up his or her mind on the substance of the amendment by Sen. Kerry. I want them to at least understand that the small-business provisions we have now before us are based on a study of a Commission and recommended by an 8-1 vote.

Mr. Kerry. Mr. President, let me address quickly the elements of my amendment which seek to strike the small-business provision within this bankruptcy bill. I emphasize to my colleagues: We don't strike it and not do anything; we strike it and ask for a study by the Small Business Administration for the most efficient and effective way of dealing with small-business bankruptcies. The reason for that is as follows.

My colleague, Sen. Grassley, a little while ago—and I respect enormously the efforts he is making on this bill, and I respect the efforts generally in the Senate to try to reform the Bankruptcy Code—but Sen. Grassley talked about how the Bankruptcy Review Commission voted out the small-business provisions. He talked about an 8-1 vote. Let me emphasize to all my colleagues, the vote of the Bankruptcy Review Commission was 8-1 on the entire report. But indeed on the particular provision with respect to small business, the commission was very divided. It was an extraordinarily close vote, 5-4. That 5-4 vote reflected the tension that existed over this question of how to treat small business. There was not a generalized acceptance of their approach.

Second, we in the Senate are just beginning to focus on what the potential impact to small business might be as a consequence of this bill. I emphasize to my colleagues there are two reviews of this bankruptcy effort. One is the commission. But the National Bankruptcy Conference, which is a conference made up of experts, also has weighed in on this bill. The National Bankruptcy Conference has endorsed my approach to this issue of striking the small-business sections. In other words, the National Bankruptcy Conference and many of the small-business entities of the country believe that what the Senate is about to do is undo some of the things we attempted in the last few years with the small-business regulatory reform and all of the efforts we have undertaken to lift from small business in this country undue amounts of paper burden, regulatory burden, government-mandated intrusion.

What we will be doing in this bankruptcy bill is putting back on to small businesses the very kind of burden we have tried to lift. I emphasize the National Bankruptcy Conference endorses my approach, which is to strike this section and ask for a Small Business Administration analysis of what will happen. I remind my colleagues, the number of chapter 11 filings with respect to small business has dramatically decreased over the last decade from 24,000 in 1991 to below 10,000 last year.

The fact is, there is no showing whatever on the record that small businesses represent the kind of problem that invites the kind of onerous, intrusive documentation and recordation that is in this legislation.

If small business fails to comply with the new reporting requirements that are in this legislation, then creditors are given entirely new powers, and those powers could force bankruptcy court judges to liquidate small businesses or to completely dismiss their proceedings. This could force many small businesses to expend a huge amount of resources to fend off challenges by any creditor simply for not complying with one of the new burdensome reporting requirements that are put into this legislation.

These requirements place a burden on small mom-and-pop operations that are the lifeblood of the growth of this country. Sixty to eighty percent of the jobs in this country are created by small business, maintained by small business, and almost all the growth in the country. There is no showing that small businesses present the kind of problem with respect to the bankruptcy process that merits this kind of approach.

Mr. Hatch. Mr. President, the effect of the amendment is to strike §§431 to 445, all of subtitle B of title IV of the bill, the provisions which reform bankruptcies for companies that are "small businesses." A "small business" is a company that, together with its affiliates, has debts under $3 million and is not primarily a real estate-owning and operating company, but only if an unsecured creditors' committee has not been appointed. [I] also propose a Small Business Administration study of bankruptcy and small businesses.

Although the Bankruptcy Code now contains provisions on small-business bankruptcies, they are optional and rarely used. Present chapter 11 is complicated and expensive for debtors. It is a lawyer's paradise because their services are very necessary. Chapter 11s also tend to be long, drawn-out affairs, seemingly managed by the professionals to extract the largest possible fees. Small-business creditors often complain about the delays and expense of trying to collect debts owed them.

The bill provides the following reforms:

It creates streamlined, standardized forms so small-business bankruptcies can be more cheaply managed by small-business debtors. Under present law, a chapter 11 reorganization is made expensive by the need to tailor a plan and disclosure statement, a job done by a highly paid lawyer.

The bill creates nationwide uniform reporting requirements so that chapter 11 cases involving a small business can be standardized, simplifying the procedures debtors must comply with.

The bill standardizes the information a small business must provide to the trustee, like tax returns, schedules, financials and the like.

Debtors must meet plan filing and confirmation time deadline standards, specially developed for small-business cases.

The duties of the U.S. Trustee with respect to a small-business case are spelled out.

The bill also contains controls on abusive use of chapter 11, like multiple filing of cases and unreasonable delay in resolving the case.

It contains a study of small-business bankruptcy by the Small Business Administration.

[It] requires in single-asset real estate company cases that interest be paid to creditors at a certain point in the case.

[It] provides administrative expense priority to any amount the debtor owes arising from certain real estate lease defaults.

Congress created in 1994 a National Bankruptcy Review Commission to study the bankruptcy laws and suggest reforms, which closely studied small business bankruptcy and recommended reforms. The provisions the Kerry amendment would cut out are the result of those recommendations.

The NBRC found that small-business bankruptcies needed reforms in order to benefit both small-business debtors and to benefit small businesses when they were creditors. The bill provides the protections and benefits the NBRC recommended.

The amendments streamline bankruptcy for small businesses. It allows them to save lawyer fees. It allows them to promptly reorganize, to their benefit and that of their creditors.

Additional study is unnecessary. This matter has already been studied for four years by a blue-ribbon panel of bankruptcy experts, who unanimously recommended the reforms. But even if more study is necessary, the bill provides for the same study Sen. Kerry is now proposing.

Mr. Grassley. I wish to respond to Sen. Kerry's comments about my representation of the Bankruptcy Review Commission.

The commissioners themselves said the vote was 8 to 1 on the small business provisions. So it is not accurate that there are major tensions with respect to these provisions.

I have a letter that I will put in the record that shows a former commissioner of the Bankruptcy Commission saying the vote was 8 to 1 on the small-business provisions.

I ask unanimous consent the letter be printed in the record.

There being no objection, the letter was ordered to be printed in the record as follows:

To: Senator Charles E. Grassley
From: James I. Shepard

Sen. Grassley: The National Bankruptcy Review Commission adopted the Small Business Provisions in its report with solid support, the vote was 8 to 1 in favor. There was little dissension, the vote was not 5 to 4 as has been stated, the commission was not bitterly divided but, in fact, was strongly in favor of the provisions.

Thank You,
James I. Shepard.