Bankruptcy Reform

BANKRUPTCY REFORM

Mr. GRASSLEY. Mr. President, I rise today to discuss the impact of Public Law 109-8, the bankruptcy reform legislation of which I was the lead sponsor here in the U.S. Senate. On October 17, 2006, we will see the one-year anniversary of the new law. This law was the result of many years of comprehensive study and intense debate in Congress. There was much give and take among all interested parties over several Congresses, and the final bill that was signed into law was the result of compromise, upon compromise, upon compromise. In fact, people tend to forget that this law passed both the House and Senate by wide bipartisan margins. It is a law that was sorely needed. It is a law whose central premise--if an individual wants to file for bankruptcy and can repay some of his debt, he should do just that, repay some of that debt--is supported by almost everyone. The law's central premise is about fairness. It is about good old common sense.

The bankruptcy reform legislation was driven by a desire to restore balance to a system that had become too easy: a system where clever lawyers gamed the integrity of the bankruptcy system for the benefit of those who wanted to get out of their debts scott-free and to the detriment of those who played by the rules. In fact, bankruptcy rates in the 1990s and early 2000 timeframe exceeded bankruptcy rates during the Great Depression, despite the fact that the economy was going strong during much of this time. So with this law we closed some loopholes, made upper-income Americans repay more of their debts if they were going to seek bankruptcy, and enacted important consumer protection provisions so people could be more knowledgeable about their finances. The law retained bankruptcy for those who truly are in need of that relief, while injecting more integrity and fairness in the bankruptcy system.

So how has the new bankruptcy law worked? So far, I think it is too soon to make firm judgments. But early reports indicate the new law has been working very well. We have seen bankruptcy rates fall dramatically from about 2 million bankruptcies in 2005 to the point where I doubt there will be over 1 million bankruptcies in 2006, if current trends continue. In my mind, this is bound to help the American economy. Fewer bankruptcy filings lead me to believe that only those individuals who truly are in need of a fresh start are filing for relief. Furthermore, a natural outgrowth of fewer bankruptcy filings is a much lower cost to the American consumer and the U.S. economy.

As my colleagues may recall, the Clinton administration's Treasury Secretary, Larry Summers, told Congress that high levels of bankruptcies tend to push up interest rates. I have called that the ``bankruptcy drag'' on the economy. It is just common sense. When a business loses money because a customer files for bankruptcy instead of paying his bill, that business has a couple of options: Either the business can absorb the loss and spend less on growth and expansion or the business can increase what it charges other customers to offset the loss, imposing what many of us in Congress called a bankruptcy tax. It follows that businesses can weather the storm when the occasions where customers don't pay their bills are relatively rare, but when you have a scenario where filing bankruptcy is easy and customers are filing bankruptcy on a regular basis--whether they really need it or not, no questions asked--and they aren't paying their bills, well, then businesses get into trouble. Unfortunately, businesses that don't get paid aren't the only ones impacted by this.

The reality is, either way, u1timately it is the consumers and the economy that suffer the most when bankruptcies spiral out of control. People who play by the rules and pay their way are the ones who end up picking up the tab. I would rather see the ``bankruptcy drag'' reduced, freeing up businesses to grow, add jobs, and contribute to the Nation's economy and the people's prosperity. I would rather see the $400 ``bankruptcy tax'' burdening American families each year reduced so they can spend their money in a more productive way. And based merely on the bankruptcy filing numbers available from the Federal courts, I think that it is fair to say that Public Law 109-8 has been a success for our economy. Public Law 109-8 has driven a stake through the heart of this bankruptcy drag.

I have struggled with how to put a dollar figure on how much bankruptcy reform has saved the economy since it became the law of the land. During Congressional debate, we received testimony that the average amount discharged in bankruptcy is $41,000 per filing. If one does some simple math, taking the total number of consumer bankruptcies filed in the first half of this year and doubling that number, it seems we could see about 550,000 consumer bankruptcies in 2006--perhaps a little more, perhaps a little less.

As I said, the Federal courts reported that we had just over 2 million consumer bankruptcies filed in 2005. So using the $41,000 figure, bankruptcy losses cost our economy $82 billion in 2005. On the other hand, it looks as if, because of the new law, bankruptcy losses for 2006 will only be about $22.5 billion. Let me repeat: $82 billion in 2005 and $22.5 billion in 2006 after the law was put in effect.

We are not talking peanuts. That is a substantial savings for our economy. That is around $60 billion that would have been lost, that would have put a drag on our economy. And I am confidant that at least some of that money has been or will be redirected to economic growth. If this isn't success, I don't know what is.

It is also important to remember the unprecedented new consumer protections included in the new bankruptcy law. Let me mention some of them. Retirement savings receive more protections from the reach of creditors. Likewise, education savings also receive enhanced protections under the new law. And lenders who won't compromise with financially-troubled borrowers can be penalized for not negotiating out-of-court settlements.

People considering filing for bankruptcy now have access to no-cost or low-cost credit counseling and financial education. We want people who make bad financial choices to learn how to deal with their finances and quit the spending cycle. After all, better educated consumers are a benefit to everyone. The law even encourages education of young people on how to manage their money. And credit card companies are required by the new law to warn consumers about the dangers of making only minimum payments and to clearly identify payment amounts.

Moreover, bankruptcy mills that deceived people into filing for bankruptcy when they had other options available are now subject to new regulation. People should be aware that bankruptcy is not the only way out in times of financial trouble. Even a Federal Trade Commission Alert warned against bankruptcy mills and advised the American consumer that filing for bankruptcy adversely affects an individual's credit rating. Bankruptcy should be a last resort, rather than the first stop in regaining one's financial bearings.

So, all in all, Public Law 109-8 contains some of the most sweeping consumer protections enacted by Congress in a long time.

Of course, as I said earlier, it is too early to gauge the full impact of Public Law 109-8. Bankruptcy attorneys so frightened consumers by exaggerating the impact of bankruptcy reform that many consumers rushed to file prior to enactment of the law. And after the law was enacted, many consumers who truly need bankruptcy were scared away.

Some of the consumer protections contained in the law--such as minimum-payment warnings for credit cards and the like--have not yet been implemented by the Federal Reserve.

Also, the debtor attorneys who want to operate bankruptcy mills are seeking to get out from under the new regulations by claiming in court to have a constitutional right to advise consumers to run up debt on the eve of bankruptcy and not comply with the new law. I am pleased that the Justice Department is aggressively resisting this effort. These lawyers just want a license to go back to their old ways of making a quick buck by shuffling unsuspecting consumers into bankruptcy without advising them of the downsides of bankruptcy or their alternatives. These lawyers also are dragging down our economy. Bankruptcy should be reserved for those persons who have no other options, not for people who use clever legal advice to make big purchases on the eve of bankruptcy with no intention of ever repaying the debt because they can wipe away their debts clean, no questions asked.

So I will keep a watchful eye on developments in the future. But for now, almost one year later, bankruptcy reform seems to have been a success.

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