Kennedy Release on Bankruptcy Reform Bill, S.420

FROM THE OFFICE OF SENATOR EDWARD M. KENNEDY OF MASSACHUSETTS

[2] Despite their words of warning, two of the most profitable industries in America -- the credit card industry and the banking industry -- have insisted upon a harsh bill that will fatten their bottom line while unfairly penalizing vulnerable Americans.

[3] While we do need to pass a bill to reduce the fraud and abuse within the bankruptcy system, this bill will not accomplish that goal. This bill will hurt women, children, and hard-working American families -- those who truly need the bankruptcy system to prevent unintended financial hardship.

[4] This is no time to pass such harsh legislation. For weeks, President Bush has warned the nation about the perils of an economic downturn. Pointing toward layoffs and rising unemployment, decreasing consumer confidence, and minimal economic growth, President Bush is urging Congress to act to strengthen the economy. But punitive bankruptcy reform legislation does not fall into that category. Now more than ever, we need to ensure that Americans losing their jobs or struggling with medical debt have the second chance for economic security that the bankruptcy laws are intended to provide. It makes no sense to pull the rug out from under them, just as the economy is weakening.

[5] We need to separate the myths from the facts -- and focus on the real winners and losers under the proposed legislation. By any fair analysis, this bankruptcy bill is the credit industry's wish list -- a blatant effort to increase its profits at the expense of working families.

[6] We know the circumstances and market forces that often push middle class Americans into bankruptcy.

[7] Rising unemployment and company layoffs are major parts of the problem. In recent months, the slowing economy has caused a noticeable jump in the national unemployment rate. It rose to 4.2% in January -- the highest level in 16 months. The slowing economy has also triggered massive layoffs. Within the past weeks, Verizon announced its plan to cut approximately 10,000 jobs, and Daimler Chrysler announced it would drastically cut its workforce by eliminating 26,000 jobs over the next three years. Xerox plans to eliminate 800 jobs on top of the 5,200 cut last Fall. Telecommunications giant World Com reported plans to lay off up to 15% of its workforce -- a loss of 11,500 jobs. Sara Lee plans to lay off 7,000 employees. AOL-Time Warner wants to cut 2,000 jobs. Lucent Technologies plans to eliminate 10,000 workers. The layoffs go on and on. Overall, companies have announced plans to lay off close to 70,000 workers -- and the year has just begun.

[8] Often, when workers lose their current good jobs, they are unable to recover. In a February 2000 survey conducted by the Bureau of Labor Statistics that approximately one-fourth of workers displaced from full-time wage and salary jobs received earnings substantially lower than what they had received before they lost their jobs. It is all too common for laid-off workers to be forced to accept part-time jobs, temporary jobs or jobs with fewer or no benefits at all.

[9] Divorce is another major cause of bankruptcy. Divorce rates, have soared in recent decades -- and the financial consequences are particularly devastating for women. Divorced women are four times more likely to file for bankruptcy than married women or single men. In 1999, 540,000 women who head their own households filed for bankruptcy to try to stabilize their lives. 200,000 of them were also creditors trying to collect child support or alimony. The rest were debtors struggling to make ends meet.

[10] Another major factor in bankruptcy is the high cost of health care. 43 million Americans have no health insurance, and many more are under-insured. Each year, millions of families spend more than 20% of their income on medical care. Older Americans are hit particularly hard. A 1998 CRS Report states that even though Medicare provides generally good health coverage for older Americans, half of this age group spend 14% or more of their after-tax income on out-of- pocket health costs, including insurance premiums, co-payments and prescription drugs

[11] A report published in Norton's Bankruptcy Adviser says,

"The data reported here serve as a reminder that self-funding

[13] These Americans are not cheats and frauds -- but they DO constitute the vast number of Americans in bankruptcy. Two out of every three bankruptcy filers have an employment problem. Two out of every five bankruptcy filers have a health care problem. Divorced or separated people are three times more likely than married couples to file for bankruptcy. Working men and women in economic free fall often have no choice except bankruptcy. Yet, the credit card industry is determined to deny them the safety net they need.

[14] There is no doubt that large numbers of Americans will be harmed by this legislation. They do the right thin and play by the rules. They work hard and try to provide for their children. But sometimes, unexpected tragedy strikes, and nothing can prepare them for the financial difficulties they will encounter.

[15] The Trapp family of Plantation, Florida is one of these families. They are not wealthy cheats trying to escape from their financial responsibilities. They arc a middle class family engulfed in debt because of circumstances beyond their control.

[16] Mr. and Mrs. Trapp worked as letter carriers for twelve years. Both worked before and after their three children were born. They had a good life -- but an unexpected medical obstacle occurred. Their 4 year old daughter, Annelise, contracted a muscle disease that is similar to a very rare form of Muscular Dystrophy. Her muscles are very weak. She needs a respirator to breathe, and she also needs constant nursing care.

[17] The Trapps' had good health insurance through the United States Postal Service. But even with this comprehensive coverage, Annelise's medical expenses left the family with massive debts. Their insurance has paid millions of dollars, but the Trapps' portion of the bills was still $124,000. This debt combined with $26,000 owed on a specially manufactured van to accommodate Annelise made it impossible for the family to meet its financial obligations. They were forced to declare bankruptcy.

[18] Proponents of the bill argue that the Trapp family would not be affected by the means test, because their current income is below the state median income. That is not true. Before Mrs. Trapp left her job, the family's annual income was $83,000 a year or $6,900 a month. Under the bill, the Trapp family's previous six months' income would be averaged, so that they would have an average monthly income of about $6,200 -- above the state median -- even though their actual monthly gross income at the time of filing was $4,800.

[19] Based upon the fictitious income assumed by the legislation, the Trapp family would be subject to the means test. And the means test formula -- using the IRS standards -- assumes that the Trapps have the ability to repay more than their actual income would allow.

[20] This harsh legislation is an undeserved windfall for one of the most profitable and powerful industries in America. Credit card companies are engaged in massive and unseemly nationwide campaigns to hook unsuspecting citizens -- like the elderly, college students, and the working poor -- on credit card debt, In 1999 alone, Americans received 3 billion -- 3 billion credit card solicitations. That's more than three times the 900 million mailings they received in 1992

[21] The average American household is carrying $7,500 worth of debt -- 150% higher than a decade ago. A major cause of the problem is that the cost of credit has gone up, and credit card companies are bolstering their profits through heavy penalties and aggressive collection practices. Credit card companies are also targeting marketing campaigns at those who cannot afford to pile up such debts. Instead of helping these individuals recover from their debts, the industry is supporting legislation that will only drive them deeper into financial despair.

[22] Supporters of the bill argue that is not a pro-credit card industry bill. But, to deal effectively and comprehensively with the problem of bankruptcy, we have to deal with the problem of debt. We must see that the credit card industry does not abandon fair lending policies to fatten its bottom line, or ask Congress to become the collector for its unpaid credit card bills.

[23] The industry and congressional supporters of the bill attempt to argue that the bankruptcy bill will help -- not hurt -- women and children. But that is false and misleading.

[24] Proponents of the bill praise the alimony and child support provisions. They say that these provisions will make child support and alimony payments the number one priority in bankruptcy. But this rhetoric masks the complexity of the bankruptcy system. When taken individually, some of these provisions are positive steps towards helping women and children collect the support to which they are entitled. However, they do not address the main problem created by the bankruptcy bill.

[25] Thirty-one organizations that support women and children have said, "Some improvements were made in the domestic support provisions . . . However, even the revised provisions fail to solve the problems created by the rest of the bill, which gives many other creditors greater claims -- both during and after bankruptcy -- than they have under current law." It is obvious that if this bankruptcy legislation is enacted, women and children will be the ultimate losers in the process.

[26] It is true that the pending legislation moves support payments to first priority in the bankruptcy code. But the first priority ranking only matters in the limited number of cases in which the debtor actually has assets to distribute to a creditor. As 116 professors of bankruptcy and commercial law have stated,

"Granting 'first priority' to alimony and support claims is not

[28] Although many of the new domestic support provisions are helpful, they don't solve the problem created by this bill -- and some of those provisions undermine the ability of women to collect support payments. Under the bill, a prerequisite to Chapter 13 approval is the payment of support claims. The goal is worthwhile, but other provisions in this bill will drain debtors of available funds and prevent them from meeting the requirements of a Chapter 13 plan AND from making child support payments. If there is not enough money to cover all obligations, including the new obligations created by this bill, more Chapter 13 plans will fail, making the provision worthless and making it less likely that women and children will get the support they deserve.

[29] This legislation not only unfairly targets middle class and poor families -- it also leaves flagrant abuses in place. Any credible bankruptcy reform bill must include a homestead provision without loopholes for the wealthy.

[30] The pending bill does include a half-hearted loophole- filled homestead provision. However, it will do very little to eliminate fraud. With a little planning -- or in some cases, no planning at all -- wealthy debtors will be able to hide millions of dollars in assets from their creditors. For example, Allen Smith of Delaware -- a state. with no homestead exemption -- and James Villa of Florida -- a state. with an unlimited homestead exemption -- were treated very differently by the bankruptcy system. After trying desperately to make ends meet in the midst of financial distress, Allen Smith eventually lost his home. However, James Villa was able to hide $1.4 million from his creditors by purchasing a luxury mansion in Florida which he was able to keep after bankruptcy.

[31] Last year, the Senate passed the Sessions-Kohl homestead amendment which corrected this abuse of the bankruptcy system. But that provision is not in this bill. Surely, a bill designed to end fraud and abuse should include a loophole-free homestead provision.

[32] For any bankruptcy reform to be effective, the homestead loophole must be closed permanently. It should not be left open just for the wealthy. Yet the bill's supporters refuse to fight for such a responsible provision with the same intensity they are fighting for the credit card industry's wish list, and fighting AGAINST women, AGAINST the sick, AGAINST laid-off workers, and AGAINST other individuals and families who will have no safety net if this unjust bill passes.

[33] Proponents of the bill also argue that it will help small businesses. This is another credit card industry myth.

[34] This bankruptcy reform bill is not based on any serious business need. In fact, its overhaul of Chapter 11 will hurt -- not help -- small businesses. Chapter 11 was enacted to serve the interests of business debtors, creditors, and other constituencies affected by business failures -- particularly employees. A principal goal of Chapter 11 is to encourage business reorganization in order to preserve jobs. Supporters of the bill ride roughshod over this important goal. They create more hurdles, additional costs, and a rigid, inflexible structure for small business in bankruptcy. As a result, fewer small business creditors will be paid, and more jobs will be lost.

[35] It a travesty that hard-working American families will be the victims of bankruptcy reform. AFL-CIO President John Sweeney said it well,

"This bill punishes working families who need protection from