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 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 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 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 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 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.
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