Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005

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Mr. McCONNELL. Mr. President, I rise today on behalf of every American who each year is forced unknowingly to pay a hidden tax. We all know we have to pay an income tax, a sales tax, a payroll tax, but what about a bankruptcy tax? You may not have heard of this tax, but you and every other man, woman, and child in America pay it every single year. It is the accumulated cost of higher interest rates on credit, higher downpayments on a car or other essential items, and higher penalty fees and late charges for financial transactions. It is the result of the abuse of America's bankruptcy system which allows people who still have the ability to pay back some or all of their debt to declare bankruptcy and escape responsibility for what they owe.

Somebody has to pay those unpaid bills. And that somebody is you. Companies have no choice but to pass them on to the consumer.

When I mention this bankruptcy tax, you may think I am talking about small change, the kind of money you can find under your couch cushions. You would be wrong. According to a Department of Justice study, the bankruptcy tax amounts to a staggering $400 for every man, woman, and child in America once a year every year. Let me repeat that so I can be sure it soaks in. That is $400 for every man, woman, and child in America once a year every year.

That amount of money would mean a lot to a family in my home State of Kentucky where the median income is $36,936 a year. That means the average Kentuckian has to work 4 days a year to pay the bankruptcy tax. In fact, it is the lower income families who feel the sting of the bankruptcy tax the most. Higher interest rates can stop them from getting access to credit for a home, transportation to a necessary job, or even higher education.

Our bankruptcy system was originally created to give those who were hopelessly mired in debt a way out and a second chance. As long as it was used sparingly and applied only to those who most needed its mercy, it was the compassionate way for America to make sure that none of her neediest became trapped in a lifetime of deficit and despair. But in recent years, too many are abusing the bankruptcy system. Last year nearly 1.6 million individuals filed for bankruptcy, a record high. This number is five times greater than the number of individual bankruptcy filings 20 years ago.

It seems odd so many more Americans would choose bankruptcy over that 20-year period, especially when you recognize that the last 20 years have set new records for economic growth, low unemployment, and low interest rates. The answer to this mystery is fraud and abuse of the bankruptcy system. In fact, the FBI has estimated over 10 percent of all bankruptcy filings involve at least some fraud.

Bankruptcy was created as a ladder to greater economic opportunity. It should not be an escape hatch to avoid responsibility. A few weeks ago this Senate, on a bipartisan basis, passed the moderate, commonsense Class Action Fairness Act to curb some of the abuses of our legal system. It was the first substantive bill passed by this new Congress. It was supported by Democrats and Republicans and has been signed into law by President Bush. I am very pleased that this 109th Congress has started off in a tone of bipartisan agreement and cordiality. I think passing the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 can be the next step in furthering that sense of cooperation. Like the Class Action Fairness Act, this bill is a moderate, commonsense bill with bipartisan support. It passed out of the Judiciary Committee with bipartisan support. It has passed this Senate with bipartisan majorities before. It should be entirely within our power to pass it now and send it on to the President for his signature.

Right now individuals have two options for declaring bankruptcy. They may file under chapter 7, surrender their assets to be sold, and then be released from all debt. They start again with a fresh slate, leaving their creditors unpaid.

The second option is to file under chapter 13. In that case an individual must work with a bankruptcy court and draft a payment plan to satisfy as much outstanding debt as possible, given the debtor's income. The problem is too many people are filing under the more lenient chapter 7, leaving their debts unpaid even when they have sizable income and sizable assets. Some are choosing it as an avenue to commit fraud.

The bill currently before the Senate will institute a means test to sort out those who file chapter 7 but actually have the ability to live up to their obligations. This is not a draconian measure, by any means. Only about 7 to 10 percent of chapter 7 filers will be screened out by the means test which will be administered by a bankruptcy court.

Any debtor who earns less than their State's median income--and that includes about 80 percent of the debtors in question--will remain in chapter 7. Those earning more than the State median income will be allowed to deduct certain obligations and expenses from their net worth, thus allowing some of them to also remain in chapter 7. And anyone left will be able to show special circumstances for why they should be allowed to still file under chapter 7. So there will be plenty of opportunities for the neediest among us to file chapter 7 and use the safe haven of bankruptcy as it was originally intended.

Those remaining will be required to file under chapter 13. It is not too much to ask people to pay back what they owe when they clearly have the means to do so. And those who are abusing the system will be exposed. Catching the individuals who are defrauding the system to avoid responsibility will save America $3 billion a year--a good start for reforming our system. That $3 billion rightfully belongs to the American people who are forced to pay the egregious bankruptcy tax. They are being robbed by an unscrupulous few.

It is our responsibility to end the fraud and abuse in the bankruptcy system by passing this bill. It will strengthen our economy, and it is also the right thing to do.

I yield the floor and suggest the absence of a quorum.

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