Floor Statement of Senator Chuck Grassley on December 6th, 2006
Floor Statement of Senator Chuck Grassley on December 6th, 2006
Prepared Statement of Senator Chuck Grassley of Iowa
Chairman Sessions, I'm pleased that the Subcommittee is holding this hearing on the implementation of Public Law 109-8, the bankruptcy reform legislation. The Chairman's leadership helped make this commonsense reform a reality after many years of hard work. And I thank him for his continued efforts to make sure that our bankruptcy system is working as it should.
As the Chairman well knows, this law was the result of more than a decade of comprehensive study and intense debate in Congress. Whatever criticisms one may have about the legislation, everyone has to acknowledge that it was thoroughly vetted and debated here in Congress. There was a lot of compromise on both sides. And in the end, large bi-partisan majorities - Republicans and Democrats together - voted to enact bankruptcy reform.
Why so much support for bankruptcy reform? The majority of Americans knew that the bankruptcy system was broken and needed to be improved. My office received many letters and calls over the years complaining about bankruptcy abuse and unfairness with the system.
The central premise of bankruptcy reform - that if an individual wants to file for bankruptcy and can repay some of his debt, he should do just that, pay a portion of that debt - is supported by almost everyone. That's because it's fair to ask debtors who can repay to do so.
As I've said many times before, we needed to restore balance to a bankruptcy process that had become too easy, where clever lawyers gamed the integrity of the bankruptcy system for the benefit of individuals who wanted to get out of their debts scott-free and to the detriment of people who played by the rules. That's why bankruptcy rates in the 1990's and early 2000 timeframe exceeded bankruptcy rates during the Great Depression, despite the fact that the economy was going strong during much of that time period.
With the new bankruptcy law, Congress closed some loopholes and enacted some important consumer protection provisions so folks could be more knowledgeable about their finances. The new bankruptcy law created a means test in order to retain Chapter 7 bankruptcy for those who truly were in need of that relief, and to require those who could repay a portion of their debts to pay that debt to their creditors. The law injected more integrity and fairness in the bankruptcy system.
So how has the new bankruptcy law worked so far? Early reports indicate that it has been working well. We've seen bankruptcy rates fall dramatically. From about 2 million bankruptcies in 2005, to the point where there probably won't be more than one million bankruptcies in 2006, if current trends continue. In my mind, fewer bankruptcy filings are bound to boost the American economy.
Why do I come to this conclusion? When considering the effect of bankruptcy on the economy, I often recall Clinton Administration Treasury Secretary Larry Summers telling us that high levels of bankruptcies tend to push up interest rates. So, lowering bankruptcy rates will reduce the upward pressure on our economy. Based merely on these decreased filing rates, I think that it's fair to say that bankruptcy reform has been a success for our economy.
Earlier this year, I stated on the Senate floor that the numbers indicated that bankruptcy reform has saved our economy around $60 billion. That's a substantial savings for our economy. That's around $60 billion that would have been lost, that would have been a drag on our economy. And I'm confident that at least some of that money has been or will be re-directed to economic growth and American jobs.
It's also important to remember that there were a number of consumer protections included in the new bankruptcy law. Let me mention some of them. Retirement savings are now generally protected from the reach of creditors. Education savings are also generally protected. 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 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 handle their finances. And credit card companies are required by the new law to warn consumers about the dangers of making only minimum payments, as well as clearly identify payment amounts.
But there are challenges. The powerful special interests here in Washington that opposed bankruptcy reform have not gone away. They're still trying to undermine these commonsense reforms by filing lawsuits challenging these reforms and by supporting regulations that water down the law. For example, the federal courts produced a bankruptcy form that is supposed to measure repayment ability. But it's my understanding that this form actually directs consumers to claim deductions for expenses a debtor may not even have. That certainly wasn't the intent of the law. The form legitimizes gaming of the law, reduces the integrity of the system, and ultimately undermines the reforms we were trying to accomplish.
Moreover, everyone who has followed this issue for any length of time will recall how the Federal Trade Commission had to issue a public warning over sleazy business practices by bankruptcy mills. Congress responded to this by enacting some dramatic consumer protections. For example, under the new law, attorneys must disclose their fees to their clients. They must disclose the down sides of bankruptcy. And they must not counsel anyone to commit fraud by running up debt on the eve of bankruptcy.
But how has the bankruptcy bar responded? You'd think by cleaning up their act, and by increasing professionalism? Unfortunately that isn't the case. The bar has responded to our attempt to help consumers by seeking to declare these consumer protections unconstitutional. In fact, right now in a Connecticut court, consumer bankruptcy lawyers are trying to convince a federal judge that they have a right to advise people to commit fraud by telling consumers to run up debts they have no intention of ever repaying. Right now, these lawyers are trying to get out of disclosing to their clients what their fees are.
No wonder even the American Bar Association has acknowledged that there is a real need for special disciplinary rules for consumer bankruptcy lawyers. And there's growing evidence that consumer bankruptcy lawyers are trying to deny consumers access to valuable credit counseling by trying to buy off the counselors. Just recently, I joined Chairman Sessions in a letter to the Justice Department asking about one counseling agency that actually solicited business by promising not to advise consumers about alternatives to bankruptcy.
The Department of Justice has done an admirable job of defending the law. But they shouldn't have to use precious time and resources defending needed consumer protections.
They should be free to use their resources to protect consumers directly.
In addition, I've seen more than one instance of bankruptcy judges criticizing the new law in very inappropriate ways. This is extremely disappointing. This does not comport with my understanding of proper judicial behavior.
Of course, any judge should be free to exercise his or her judgment about how to interpret the new law, and I certainly would never want to infringe on the core work of a judge. But when judges give press interviews and call the new law 'garbage" or question Congress' motives for passing bankruptcy reform during a court hearing, I think a clear line has been passed. Congress writes the laws; judges are supposed to interpret and apply the laws in an impartial manner. The bottom line is Congress passed bankruptcy reform by a wide margin with both Republicans and Democrats supporting it. The President signed it into law.
That's how the American legal system is supposed to work. We have a democracy. Unelected federal judges don't get to substitute their own personal policy preferences for the considered decisions of the elected branches.
But that doesn't appear to matter to some bankruptcy judges who have decided they know better than everyone else how this country ought to be run.
That's why I intend to write a letter to Chief Justice Roberts asking him whether this conduct violates the ethical rules for judges. Judges are supposed to be neutral. They are supposed to understand their role in our system of government. I hope that Chairman Sessions will join me in looking into this matter and will sign onto my letter to the Chief Justice asking him to look into this conduct, which I believe is unacceptable.
All in all, Mr. Chairman, I think that the new law is working well. We need to be vigilant here in Congress as the law is implemented, and to make sure that people who don't want to follow the law's mandates and good reforms are not undermining the law or integrity of the bankruptcy system, or shirking their responsibilities to enforce the law. So, I'll keep a watchful eye on developments in the future. Again, thank you Chairman Sessions for your leadership on this issue and for holding this oversight hearing.
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