Posted by Todd Zywicki:
Bankruptcy Reform Hearing:
Yesterday, the Senate Judicary Committee held a hearing on the
Bankruptcy Reform Legislation that has been introduced yet again. The
legislation has been kicking around for 7-8 years now, and this is the
Fourth Congress that has considered it. Everytime it has been voted on
it has passed both houses of Congress by overwhelming majorities, only
to get hung on various procedural or peripheral issues. Copies of the
written testimony are available [1]here. I have lost track of how many
times I have testified on this bill, but I think this was the fifth.
There is an old lawyers' joke that sums up yesterday's hearing, about
the guy who murders his parents and then pleads for mercy from the
court because he is an orphan. Much of the hearing focused on a
similar idea--after blocking reform for 7 years, now opponents charge
that the problem with the bill is that "time has passed it by" and the
world has changed so much since the bill was first written. (See the
opening lines of [2]this testimony for instance).
The irony is obvious, but also seems largely irrelevant. The fraud and
abuse that is endemic to the consumer bankruptcy system that the
legislation was originally written address unquestionably is still
there. The [3]FBI estimates, for instance, that at 10% of consumer
bankruptcy cases involve fraud:
Bankruptcy fraud schemes include the hiding of assets, false
statements, multiple filings, forged petitions and petition mills
that crank out phony information. Two-thirds of all bankruptcy
fraud involves hidden assets.
Similarly, the best estimates remain that approximately 10% of
bankruptcy filers are high-income filers who could repay a substantial
portion of their unsecured debt in bankruptcy if they went into a
chapter 13 repayment plan, but instead file chapter 7 and pay nothing
at all.
In addition, other abuses that the legislation would prevent, have
continued unabated during the past 7 years. For instance, it has been
reported that O.J. Simpson bought a new house in Florida in order to
take advantage of Florida's unlimited homestead exemption and to avoid
payment of his civil judgment. Had the bankruptcy reform legislation
been enacted years ago, however, he would not have been able to do
that, because the legislation specifically imposes a waiting period to
prevent exactly this sort of forum-shopping from occurring. Similarly,
as [4]child-support collection expert Philip Strauss testified
yesterday, the bankruptcy code has continued to interfere with the
efforts of divorced women and children to collect child support and
alimony payments. It is the continued failure to enact the bankruptcy
reform legislation, of course, that has allowed these problems to
persist. And, of course, the continued failure to enact reform means
that these problems will continue to multiply.
Now, none of these problems of fraud or abuse have solved themselves
in the past 7 years that the legislation has been pending. Much was
made at the hearing of possible additional new problems and abuses
that have appeared on the scene during the past several years,
especially arising from bankruptcy-related corporate scandals such as
Enron and WorldCom. It may be that Congress wants to draft new
legislation to deal with new forms of fraud and abuse.
But I can't see that the fact that new forms of fraud and abuse have
appeared on the scene is any reason why we should continue to turn a
blind eye to the old-fashioned forms of fraud and abuse that the
legislation targets, such as repeat filings, concealing assets, and
discharging debts that you could at least pay part of. Seriously, how
many divorced women have to be sandbagged by the bankruptcy system in
collecting the obligations owed them by their husbands, or how many
O.J. situations do we have to sit through before we say "enough is
enough"? Again, according to the [5]FBI, "[In] 1995 alone, almost 250
fraudulent bankruptcies were filed every day." In 1995, there were
874,642 consumer bankruptcies filed annually. Last year there were
1,584,170, or a little less than double. If the FBI's figures are
correct (and no one has offered any different estimate), that now
means that there are about 434 fraudulent filings every day, and
roughly the same number of filings by those who would be affected by
the means-testing provisions in the bill and would be required to
repay what they can of their debt in order to be eligible for a
discharge.
The purpose of the bankruptcy laws should be to preserve a fresh start
for honest, unfortunate debtors who need it; but not became a haven
for fraud and abuse for those who are gaming the system. Turning a
blind eye to bankruptcy fraud and abuse doesn't help anyone--either
honest filers, creditors, small businesses, or those who are left
paying the bills to make up for those who ditch their financial
obligations by opportunistically filing bankruptcy. In fact, by
decreasing the public confidence in the integrity and honest of the
bankruptcy system and bankruptcy filers, in the long run ignoring
rampant fraud and abuse will undermine public support for the
bankruptcy system, hurting the honest, unfortunate debtors the system
is set up to help. The vast majority of bankruptcy filers are honest,
unfortunate people who have gotten in a bad situation and need a hand
up. But we know that there is substantial undetected fraud and abuse
and to simply ignore it is folly. Surely no one would argue that we
shouldn't try to prevent fraud in the welfare, Medicare, or Social
Security system--so why would we want to simply ignore the rampant
fraud and abuse in the bankruptcy system?
There are a myriad of other issues in the bankruptcy reform
legislation that I will plan to touch on in additional posts over the
next few days, including the new argument from yesterday's hearing
that some 50% of consumer bankruptcy filings are health-related (lots
of problems with that figure). But I wanted to pass along initial
reactions to yesterday's hearing. Right now though I need to catch up
on everything else that I have had to set aside all week to get ready
for the hearing yesterday.
References
1. http://judiciary.senate.gov/hearing.cfm?id=1381
2. http://judiciary.senate.gov/testimony.cfm?id=1381&wit_id=3996
3. http://www.fbi.gov/hq/cid/fc/video_text/bf_txt.htm
4. http://judiciary.senate.gov/testimony.cfm?id=1381&wit_id=3993
5. http://www.fbi.gov/hq/cid/fc/video_text/bf_txt.htm
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