[House Hearing, 110 Congress]
[From the U.S. Government Printing Office]




                               BEFORE THE

                            SUBCOMMITTEE ON

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION


                              MAY 1, 2007


                           Serial No. 110-13


         Printed for the use of the Committee on the Judiciary

      Available via the World Wide Web: http://judiciary.house.gov

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                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. SCOTT, Virginia            HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
MAXINE WATERS, California            DANIEL E. LUNGREN, California
MARTIN T. MEEHAN, Massachusetts      CHRIS CANNON, Utah
WILLIAM D. DELAHUNT, Massachusetts   RIC KELLER, Florida
ROBERT WEXLER, Florida               DARRELL ISSA, California
LINDA T. SANCHEZ, California         MIKE PENCE, Indiana
STEVE COHEN, Tennessee               J. RANDY FORBES, Virginia
HANK JOHNSON, Georgia                STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois          TOM FEENEY, Florida
BRAD SHERMAN, California             TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin             LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York          JIM JORDAN, Ohio
ADAM B. SCHIFF, California

            Perry Apelbaum, Staff Director and Chief Counsel
                 Joseph Gibson, Minority Chief Counsel

           Subcommittee on Commercial and Administrative Law

                LINDA T. SANCHEZ, California, Chairwoman

JOHN CONYERS, Jr., Michigan          CHRIS CANNON, Utah
HANK JOHNSON, Georgia                JIM JORDAN, Ohio
ZOE LOFGREN, California              RIC KELLER, Florida
WILLIAM D. DELAHUNT, Massachusetts   TOM FEENEY, Florida
MELVIN L. WATT, North Carolina       TRENT FRANKS, Arizona
STEVE COHEN, Tennessee

                     Michone Johnson, Chief Counsel
                    Daniel Flores, Minority Counsel

                           C O N T E N T S


                              MAY 1, 2007

                           OPENING STATEMENT

The Honorable Linda T. Sanchez, a Representative in Congress from 
  the State of California, and Chairwoman, Subcommittee on 
  Commercial and Administrative Law..............................     1
The Honorable Chris Cannon, a Representative in Congress from the 
  State of Utah, and Ranking Member, Subcommittee on Commercial 
  and Administrative Law.........................................     2


Mr. Steve Bartlett, President and CEO, Financial Services 
  Roundtable, Washington, DC
  Oral Testimony.................................................     8
  Prepared Statement.............................................    10
Ms. Shirley Jones Burroughs, Gastonia, NC
  Oral Testimony.................................................    15
  Prepared Statement.............................................    16
Mr. Henry J. Sommer, President, National Association of Consumer 
  Bankruptcy Attorneys, Philadelphia, PA
  Oral Testimony.................................................    18
  Prepared Statement.............................................    21
Ms. Yvonne D. Jones, Director, Financial Markets and Community 
  Investment, U.S. Government Accountability Office, Washington, 
  Oral Testimony.................................................    49
  Prepared Statement.............................................    51


Letter and study by the American Bankers Association, the 
  Consumer Bankers Association, et al., submitted by the 
  Honorable Chris Cannon, a Representative in Congress from the 
  State of Utah, and Ranking Member, Subcommittee on Commercial 
  and Administrative Law.........................................     4
Prepared Statement of the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan, 
  Chairman, Committee on the Judiciary, and Member Subcommittee 
  on Commercial and Administrative Law...........................     7
Prepared Statement of Eugene Crane, President, National 
  Association of Bankruptcy Trustees.............................    71
Letter and supporting documents from the American Bar 
  Association, submitted by the Honorable Linda Sanchez, a 
  Representative in Congress from the State of California, and 
  Chairwoman, Subcommittee on Commercial and Administrative Law..    74
Letter and supporting documents from Chad Wm. Schulze, Esquire, 
  Milavetz, Gallop & Milavetz, P.A., submitted by the Honorable 
  Linda Sanchez, a Representative in Congress from the State of 
  California, and Chairwoman, Subcommittee on Commercial and 
  Administrative Law.............................................   113
Official Form 22A (Chapter 7), submitted by the Honorable Linda 
  Sanchez, a Representative in Congress from the State of 
  California, and Chairwoman, Subcommittee on Commercial and 
  Administrative Law.............................................   159

               Material Submitted for the Hearing Record

Report on Personal Bankruptcy Statistical Study by SMR Research 
  Corp., submitted by the Financial Services Roundtable, to the 
  Honorable Howard Berman, Chairman, Subcommittee on Courts, the 
  Internet, and Intellectual Property............................   180
Response to Post-Hearing Questions from Steve Bartlett, President 
  and CEO, Financial Services Roundtable, Washington, DC.........   204
Response to Post-Hearing Questions from Henry J. Sommer, 
  President, National Association of Consumer Bankruptcy 
  Attorneys, Philadelphia, PA....................................   208
Response to Post-Hearing Questions from Yvonne D. Jones, 
  Director, Financial Markets and Community Investment, U.S. 
  Government Accountability Office, Washington, DC...............   211
Documents of personal bankruptcy filing of Shirley Jones 
  Burroughs, Gastonia, NC........................................   213
Prepared Statement of David C. Jones, President, Association of 
  Independent Consumer Credit Counseling Agencies................   259



                          TUESDAY, MAY 1, 2007

                  House of Representatives,
                         Subcommittee on Commercial
                            and Administrative Law,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:30 a.m., in 
Room 2141, Rayburn House Office Building, the Honorable Linda 
T. Sanchez (Chairwoman of the Subcommittee) presiding.
    Present: Representatives Sanchez, Johnson, Lofgren, 
Delahunt, Watt, Cannon, and Feeney.
    Staff Present: Susan Jensen, Counsel; Michone Johnson, 
Chief Counsel; Daniel Flores, Minority Counsel; James Paul, 
Professional Staff; Norberto Salinas, Counsel; Elias Wolfberg, 
Professional Staff; Alexandrine DiBianchi; Erik Stallman, 
Senior Counsel to Representative Lofgren; Jason Everett, 
Legislative Assistant to Representative Watt; and James Paul, 
Professional Staff.
    Ms. Sanchez. This hearing of the Committee on the 
Judiciary, Subcommittee on Commercial and Administrative Law 
will now come to order. I will recognize myself first for a 
short statement.
    Two years ago last month, President Bush signed into law 
the Bankruptcy Abuse Prevention and Consumer Protection Act, 
pushing through the most complex and dramatic changes of our 
Nation's bankruptcy law in more than 25 years. Today's hearing, 
which focuses on consumer bankruptcy, is one of a series that 
our Subcommittee will conduct on the impact of the 2005 
amendments on the bankruptcy system.
    We have heard extensively from the consumer community that 
many of the consumer bankruptcy reforms were problematic. In 
particular, the act's means testing requirement to determine a 
debtor's ability to repay debts and mandate that consumer 
debtors receive credit counseling prior to filing for 
bankruptcy relief were two provisions that have proved to be 
    Recent developments in the subprime mortgage industry have 
brought to light additional problems with the act. After being 
lured into easy mortgage refinancing arrangements with teaser 
interest rates, more and more American homeowners find they are 
unable to make their monthly mortgage payments. As a result, 
many attempt to enter into bankruptcy to minimize the risk of 
losing their homes through foreclosure.
    However, bankruptcy, which once served as a safety net for 
the honest, but unfortunate debtor, has now become a minefield 
of ``gotchas.'' According to a recent survey of bankruptcy 
attorneys by the National Association of Consumer Bankruptcy 
Attorneys, 81 percent agreed that it is more difficult for 
people facing foreclosure to obtain bankruptcy relief since the 
2005 act became law.
    Let me give just one example. To satisfy the means test, a 
chapter 7 debtor must now complete Official Form 22, this form 
right here, that consists of 57 sections. This complex form 
requires a debtor to supply extensive financial information and 
supporting documentation. We are putting people through a 
bureaucratic maze while they are trying desperately to regain 
their financial footing.
    I challenge my colleagues as homework this evening to see 
how long it takes you to complete this form. I have looked at 
it, and it looks substantially more difficult than our own 
Federal employee disclosure forms.
    So it is against this backdrop and with the benefit of 2 
years having passed since the enactment of the 2005 act that we 
look forward to hearing from today's witnesses.
    To help us further explore these issues, we have a truly 
notable witness panel. We are pleased to have former 
Congressman Steve Bartlett, President of the Financial Services 
Roundtable; Ms. Shirley Jones Burroughs; Mr. Henry Sommer, 
President of the National Association of Consumer Bankruptcy 
Attorneys; and Ms. Yvonne Jones, the Financial Markets and 
Community Investment Director at the Government Accountability 
Office, or GAO.
    I now, at this time, would like to recognize my colleague 
and Ranking Member, Mr. Cannon, the distinguished Member from 
Utah, for any opening remarks he may have.
    Mr. Cannon. Thank you, Madam Chair.
    The Bankruptcy Abuse Prevention and Consumer Protection Act 
of 2005 was signed into law by President George W. Bush on 
April 20, 2005. The act represents one of the most 
comprehensive overhauls of the Bankruptcy Code in more than 25 
years, particularly with respect to its consumer bankruptcy 
reforms. These consumer bankruptcy reforms include, for 
example, the establishment of a means test, a mechanism to 
determine a debtor's ability to repay debts; and the 
requirement of that debt is that the consumer debtor receives 
credit counseling prior to filing for bankruptcy relief. Most 
of the act's provisions went into effect October 17, 2005.
    This Subcommittee held a hearing in July 2005 to assess how 
the executive order for United States Trustees and the Judicial 
Conference were proceeding regarding the formation and issuance 
of various rules, forms, guidelines, and procedures that were 
required under the law. In addition, the Senate Judiciary 
Committee held a hearing on the implementation of this law in 
December of last year. The upshot of both of those hearings is 
that, while it is a little too early to tell, there are some 
indicators that the law may have had a dramatic, positive 
effect on the American bankruptcy system.
    For example, after the initial spike in personal bankruptcy 
filings, there were almost 620,000 filings in the first 2 weeks 
of October 2005. The number of filings has dropped to almost 
20-year lows. The number of filings has gradually increased but 
remains significantly below the pre-reform numbers.
    Another major focus of the reforms was to get debtors who 
can pay some of their unsecured loans, generally things like 
credit card debt, to pay what they can afford under a chapter 
13 bankruptcy. The post-reform numbers do show that chapter 13 
bankruptcies form a larger share of personal filings than they 
did at pre-reform. This is despite the fact that the Director 
of the Executive Office of the U.S. Trustees stated, at least 
at the bankruptcies conference, that only one half of 1 percent 
of all chapter 7 bankruptcies are being converted to chapter 13 
bankruptcies under the means test. That low number of 
conversions may be reflected in the IRS methodology, which is 
more generous to filers post-reform than it was pre-reform, but 
again, data remains preliminary.
    One interesting aspect of bankruptcy reform was the 
requirement that filers obtain credit counseling before filing 
for bankruptcy. This provision was put into place to educate 
debtors about their options and to give them some sound money 
management tools in the hopes that consumers would be able to 
avoid bankruptcy and the black mark on their credit history, if 
they could.
    While a recent GAO study shows that the benefits of that 
provision is disputed, there have been some salutary aspects. 
For example, credit counseling services have essentially 
obtained a new Federal regulator in the form of the U.S. 
Trustees. GAO reports that the great majority of 
representatives are consumer advocacy groups, Federal agencies, 
industry participants, and other stakeholders.
    Those we spoke with believe that credit counseling agencies 
approved by the trustee program have been reputable. In 
addition, no Federal or State law enforcement officials we 
spoke with identified any Federal or State enforcement actions 
related to consumer protection issues against any providers 
subsequent to their approval.
    While the data, the hard data, are not readily available, 
the trustees report that nearly 10 percent of all credit 
counseling certificates have gone unused, indicating that many 
individuals may have been steered into alternative paths to 
bankruptcy. If those numbers hold up, it would mean that almost 
37,000 individuals were saved from bankruptcy from May to 
October of last year alone. That is a significant achievement.
    I would like to introduce a letter and a study into the 
record by the American Bankers Association, the Consumer 
Bankers Association, the Independent Community Bankers of 
America, the Financial Services Roundtable, and the Mortgage 
Bankers Association, among others.
    Ms. Sanchez. Without objection, so ordered.
    [The information referred to follows:]
  Letter and study by the American Bankers Association, the Consumer 
Bankers Association, et al., submitted by the Honorable Chris Cannon, a 
Representative in Congress from the State of Utah, and Ranking Member, 
           Subcommittee on Commercial and Administrative Law

    Mr. Cannon. Thank you, Madam Chair.
    Ms. Sanchez. Thank you.
    Mr. Cannon. That speaks to the importance of these 
bankruptcy reforms.
    Finally, the Subcommittee is intending to hold a series of 
hearings on bankruptcy, and I would like to place on the record 
two topics which I believe are worthy of discussion: first, the 
need for more bankruptcy judges, which has been approved by the 
House and has failed in the other body on several occasions; 
second, the compensation of trustees in chapter 7 cases, who 
are paid $60 per case regardless of the time it takes to 
    I thank you, Madam Chair. I appreciate your consideration. 
I yield back the balance of my time.
    Ms. Sanchez. I thank the gentleman for his statement.
    Our honorable Chairman of the full Committee, Mr. Conyers, 
who was here moments ago, had to leave for a memorial service. 
So, without objection, I would like to enter his opening 
statement into the record.
    [The prepared statement of Mr. Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative 
  in Congress from the State of Michigan, Chairman, Committee on the 
Judiciary, and Member Subcommittee on Commercial and Administrative Law
    It is no secret that I was strongly opposed to the bankruptcy 
legislation signed into law two years ago. In my judgment, the bill 
favored credit card companies and corporations over ordinary consumers; 
it exposed women and children to major new debts; and it did little to 
anything to crack down on abusive lending practices.
    The bill's proponents asserted that it was a fair compromise that 
only punished wealthy debtors. But the bill I saw appeared to give 
creditors massive new rights to bring threatening motions against low 
income debtors. It permitted credit card companies to reclaim common 
household goods which are of little value to them, but very important 
to the debtor's family, and made it next to impossible for people below 
the poverty line to keep their house or their car in bankruptcy.
    The bill's supporters argued it protected alimony and child 
support. But the bill I reviewed seemed to create major new categories 
of nondischargeable debt that compete directly against the collection 
of child support and alimony payments; and allowed landlords to evict 
battered women without bankruptcy court approval, even if the eviction 
posed a threat to the woman's physical well being.
    At the same time the legislation appeared to do little to 
discourage abusive under-age lending, nothing to discourage reckless 
lending to the developmentally disabled, nothing to regulate the 
practice of so-called ``subprime'' lending to persons with no means or 
little ability to repay their debts, and nothing to crack down on 
unscrupulous pay-day lenders that prey on members of the armed forces.
    Today, at long last, we begin the process of evaluating this bill 
in cold hard light of day. We have asked the GAO to study many of these 
issues that I have raised, and I hope we can use the hearing process to 
further educate the Members about the real life impact of this 
    Once we obtain the facts, we can consider what actions are needed 
to relevel the playing field and allow hard working families the 
opportunity to begin their lives again.

    Ms. Sanchez. And without objection, other Members' opening 
statements will also be included in the record.
    Without objection, the Chair will be authorized to declare 
a recess of the hearing.
    I am now pleased to introduce the witnesses on our panel 
for today's hearing. Our first witness, former Congressman 
Steve Bartlett, is the President of the Financial Services 
Roundtable. Mr. Bartlett served as a Member of Congress for the 
Third District of Texas from 1983 to 1991 and as Mayor of 
Dallas, Texas, from 1991 to 1995.
    Our second witness is Shirley Jones Burroughs. Ms. 
Burroughs is a resident of Gastonia, North Carolina, and has 
recently participated in the chapter 13 filing process.
    Our third witness is Henry Sommer. Mr. Sommer is the 
President of the National Association of Consumer Bankruptcy 
Attorneys and a member of the National Bankruptcy Conference. 
Mr. Sommer is also the supervising attorney at the pro bono 
Consumer Bankruptcy Assistance Project in Philadelphia and is 
Editor in Chief of ``Collier on Bankruptcy'' and the entire 
Collier line of bankruptcy publications.
    Our final witness is Yvonne Jones. Ms. Jones is the 
Director of the Financial Market and Community Investment Team 
at GAO. Prior to joining GAO in 2003, Ms. Jones worked at the 
World Bank, developing projects in the education sector in East 
Asian countries, assisting sub-Saharan African countries to 
reduce their commercial bank debt levels and help design 
financial restructuring programs in Eastern and Central Europe 
and the former Soviet Union.
    I thank all of you for your willingness to participate in 
today's hearing. Without objection, your written statements 
will be placed into the record in their entirety, and we would 
ask that you limit your oral remarks to 5 minutes.
    You will note that we have a lighting system that starts 
with a green light. At 4 minutes, it will turn yellow to warn 
you that you have a minute to wrap up, and then at 5 minutes, 
it will turn red. If you do notice that the light turns red, we 
would appreciate your best efforts to try to quickly wrap up 
your testimony.
    After all of the witnesses have presented their testimony, 
Subcommittee Members will be permitted to ask a round of 
questions, subject to the 5-minute rule.
    Mr. Bartlett, will you please now proceed with your 


    Mr. Bartlett. Thank you, Madam Chair and Ranking Member 
Cannon and Members of the Committee. It is a pleasure to be 
here. My name is Steve Bartlett. I am the President and CEO of 
the Financial Services Roundtable.
    I do appreciate this Committee holding this oversight 
hearing. There is much to be learned about the bankruptcy 
reform law, and this Subcommittee helps us to understand it. I 
have attached several attachments to my statement, and I would 
ask that they be included in the record.
    Ms. Sanchez. Without objection, so ordered.
    Mr. Bartlett. Madam Chair, bankruptcy reform is still new. 
It was passed 2 years ago, as you noted, by overwhelming 
bipartisan support; and our organization has been quite 
involved in the implementation of it.
    So far, from the perspective of the American consumer and 
the economy, the new bankruptcy reform law is working quite 
well. Bankruptcy filings are down; more Americans than ever are 
getting quality credit counseling, and as a result, consumers 
have the opportunity to become better educated about financial 
    A few statistics: Consumer bankruptcy filing rates have 
dropped from an annualized rate of 1.5 million a year in the 
previous 5 years down to, last year, 573,000. We think they 
will normalize at around 700,000 to perhaps 800,000 a year. It 
dropped by about half.
    Second, more consumers are choosing chapter 13 repayment 
plans over chapter 7, and that is as the law intended.
    Third is counseling. We have conducted some surveys of the 
certified counselors, and our estimates are that about 57,000 
traditional credit counseling sessions were occurring per month 
prior to the law, and that is now a total of 148,000 per month, 
so it, roughly, tripled as to the number of counseling 
    Now, recall that the principal policy objective of 
bankruptcy reform was the following: that people with above-
median, income who can repay some or all of their debts, ought 
to do so while making chapter 7 bankruptcy a relief available 
to those who cannot. That was the intent, and that is what is 
    Bankruptcy reform has also strengthened the ability of 
homeowners to use chapter 13 to stop foreclosures and to catch 
up on past-due mortgages. Several reforms were made on that. 
That is the intent of chapter 13; that is one of the outcomes. 
In these difficult times of an increased foreclosure rate, that 
is what is happening.
    Third, credit counseling is now more readily available and 
is quality credit counseling. As the GAO report noted on credit 
counseling, the credit counseling reinforces the potential for 
good coming from the new law's credit counseling mandates.
    According to the GAO, the Justice Department has generally 
done a good job in weeding out potential bad actors among 
counselors. We, in our industry, found that there was a large 
need which, frankly, we had not expected that is being filled, 
and that is the certification process of being able to certify 
the quality, nonprofit, good-guy counselors from the others.
    There have been few complaints, if any, that I know of 
about competency of approved counselors. More consumers are 
getting better counseling and financial education than ever 
before. In fact, the Justice Department estimated that about 10 
percent of consumers who get prebankruptcy counseling do not 
file for bankruptcy.
    Now, as an industry, we are working to build on the law 
mechanisms to reach consumers sooner rather than later. We 
think that credit counseling can live up to its full potential 
better if we bring people in earlier for earlier counseling. We 
have instituted MyMoneyManagement.net over the Internet as a 
way of reaching consumers at the earliest indications that they 
have difficulties.
    We have also instituted a program called ``Hope'' in which 
we reach out to homeowners who own mortgages, borrowers or 
homeowners, to say, ``At the earliest signs of trouble, please 
call. We will work with you. We will work with the lenders by 
using independent counselors to try to settle the situation and 
to try to prevent foreclosing.''
    Counseling is good; earlier counseling is better than later 
counseling, and certified counselors are essential to the 
process. These agencies that have been certified are doing a 
good job. They are reaching out to consumers. We are getting no 
complaints. In fact, these agencies are quite beneficial to the 
American consumer. We are better off for the efforts of these 
agencies. They are on the front lines. They bear the heavy 
    Based on the reports that we received from the approved 
agencies, these agencies are working as Congress had intended. 
They are waiving counseling fees for those who cannot pay. Our 
reports indicate about 22 percent of those who come in for 
counseling have the fee waived. The fee itself is nominal, an 
average of about $50.
    Now, much of the attention has been focused on 
prebankruptcy counseling, and I think the GAO did note, as did 
my stop sign, that it is time to stop.
    Madam Chair, may I conclude with several points?
    The bankruptcy reform legislation passed by the House by 
wide bipartisan margins is working. It is working for the 
consumer and the economy. Those who have need have access, full 
access, to bankruptcy; and above-median-income people who can 
repay a portion of their debts do so. Bankruptcies are down; 
credit counseling is up.
    We urge you to continue to give the law a chance to work 
with adequate oversight.
    Ms. Sanchez. Thank you, Mr. Bartlett.
    [The prepared statement of Mr. Bartlett follows:]
                  Prepared Statement of Steve Bartlett
                          summary of testimony
    Good morning, Madam Chair and Ranking Member Cannon, my name is 
Steve Bartlett and I am President & CEO of The Financial Services 
Roundtable. Thank you for inviting me to participate in this hearing to 
examine the implementation of Public Law 109-8, the bankruptcy reform 
statute that was signed into law two years ago.
    I have several attachments to my statement and I would ask that 
they be included in the record.
    The Financial Services Roundtable represents 100 of the largest 
integrated financial services companies providing banking, insurance, 
and investment products and services to the American consumer. Our 
companies account directly for $65.8 trillion in managed assets, $1 
trillion in revenue, and more than 2.4 million jobs.
    The American consumer is the lifeblood of the economy and it is in 
the best of interests of Roundtable member companies to have well-
educated consumers who manage debt prudently. With such breadth and 
debt, Roundtable members are in a good position to assess impact of 
legislative changes such as bankruptcy reform.
    Bankruptcy Reform is still new. So far, from the perspective of the 
American consumer and the economy, the new bankruptcy reform law is 
working quite well. Bankruptcy filings are down, more Americans than 
ever are getting credit counseling and, as a result, consumers have the 
opportunity to become educated about prudent financial management. Let 
me cite some statistics to demonstrate my point:

          consumer bankruptcy filing rates have dropped 
        dramatically to 573,203 in 2006 from an average annualized rate 
        of 1.5 million for the prior 5 five years; private sector 
        estimates for 2007 range from 500,000 to 800,000 consumer 

          more consumers are choosing Chapter 13 repayment 
        plans over Chapter 7 than under the old law; 27.5% consumer 
        elected Chapter 13 under the old law or as compared to 35-40% 
        under the new law who select Chapter 13 under the new law

          there were 1,230,195 total credit counseling sessions 
        at Justice Department-accredited agencies as of March, 2007, 
        compared to an average of 57,087 total counseling sessions per 
        month for 2005, the year before bankruptcy reform

    These numbers indicate that the means-test and the pre-bankruptcy 
credit counseling mandate are working. Recall that the principal policy 
objective of bankruptcy reform was to say that people with above-median 
income who can repay some or all of their debts ought to do so while 
leaving in place bankruptcy relief for those who really need it. That 
seems to be happening under the new law.
    In addition, bankruptcy reform has strengthened the ability of 
homeowners to use Chapter 13 to stop foreclosures and catch up on past 
due mortgages. Even prior to the reform law, Chapter 13 was often used 
by consumers to save their home. Now, if mortgage lenders misapply 
mortgage payments in a Chapter 13 plan, they can be subject to punitive 
damages. As lenders adjust to this new requirement, Chapter 13 will be 
an even better option for saving the family home.
    One major result of bankruptcy reform is increased credit 
counseling, which educates consumers. Credit counseling can help keep 
consumers from getting into financial trouble and, for those consumers 
for whom bankruptcy is an appropriate option, credit counseling keeps 
consumers out of financial trouble in the future.
    In fact, the Department of Justice has estimated that 10% of 
consumers who get pre-bankruptcy counseling do not file for bankruptcy. 
This means that counseling is important and meaningful for some 
consumers, even if there is anecdotal evidence that it may not help 
others. Counseling is widely available from numerous sources through 
multiple channels-in-person counseling, telephone counseling and 
Internet counseling. To the extent that the counseling program could be 
made to work better for more consumers, we should do so. It would be a 
mistake to cut consumers off from financial education. We think the 
number of consumers who decide not to file for bankruptcy could be 
higher. Industry is working to build on the law to reach consumers much 
sooner in the financial cycle so that credit counseling can live up to 
its full potential. If consumers wait until they are completely 
underwater, counseling may not live up to its full potential. At the 
Roundtable, we have started mymoneymanagement.net as a way of providing 
consumers early access to quality credit counseling. In addition, we 
have instituted a program called HOPE to help homeowners and mortgage 
lenders negotiate win-win solutions when a mortgage becomes past due.
    The non-profit counseling agencies have stepped up to the plate to 
make bankruptcy reform work. They applied to become certified agencies 
and promised to live by the ethical requirements established by the 
Justice Department. As the GAO noted, there have been few, if any, 
complaints about DOJ approved agencies. They perform a valuable public 
service by providing financial management advice to consumers and the 
lending industry is pleased they choose to participate in the pre-
bankruptcy counseling process.
    We are all better off for the efforts of these agencies. They are 
on the front lines and bear the heavy load. Based on the reports we 
have received from most of the approved agencies, it seems clear these 
agencies are acting as Congress intended. For instance, they are 
waiving counseling fees for those who can't pay. According to our 
statistics, counseling fees were waived for 22% of counseling sessions. 
And fees are relatively modest. At the Roundtable, the lending industry 
created a grant program to support credit counseling approved agencies, 
of which there are 157.
    The credit lending industry has also created a website--
mymoneymanagement.com--which guides consumers to DOJ-approved agencies. 
Some of our member companies are already directing customers to this 
site as soon as they show signs of financial difficulties to assist 
consumers earlier in the process.
    It is important to understand that Justice Department certification 
is a significant enhancement for the quality of credit counseling 
available to consumers. There has not been a governmental ``seal of 
approval'' that identifies quality agencies before. Also, the increased 
attention around bankruptcy reform and credit counseling seems to have 
driven up demand for credit counseling.
    While much of the attention has focused on pre-bankruptcy 
counseling, post-bankruptcy educational counseling is immensely 
important as well. This counseling comes at a very important time for 
the average consumer. The consumer, having filed for bankruptcy, will 
be ready to learn new financial skills.
    The Roundtable believes that counseling requirements could be 
improved by regulations. In a comment letter, we suggested that pre-
bankruptcy certificates should be valid for one year, rather than 
merely 6 months, to allow consumers more time to consider alternatives 
to bankruptcy. The Roundtable submitted a letter to the Department of 
Justice detailing regulatory changes and I have attached that letter to 
my statement. The Roundtable has also joined with the Consumer 
Federation of America and a leading counseling trade association 
proposing consensus recommendations for regulatory changes to make the 
system work for all stakeholders--lenders, borrowers and counselors.
    The Roundtable strongly believes each issue can be addressed 
through regulatory implementation strategies designed to further 
Congressional intent.
    Prior to enacting Public Law 109-8, Congress had not reformed 
bankruptcy laws since 1978. We need to let the law mature before 
understanding its real impact.
    Congress did the right thing for consumer and the economy in 
passing bankruptcy reform; now it's time to make sure that this 
legislative success is implemented correctly. Time will tell if the 
major consumer protection provisions in bankruptcy reform will work as 
intended. Under the new law, mortgage lenders can be subject to 
punitive damages for misconduct in Chapter 13 cases. And unsecured 
lenders have to consider voluntarily reducing balances or take 
increased losses in bankruptcy. And single moms and custodial parents 
have much-enhanced access to the assets of people who owe child 
support. Finally, the Federal Reserve is now engaged in a rulemaking 
process to improve the quality of financial disclosures made to 
consumers. When Congress voted for bankruptcy reform, Congress voted 
for these crucial consumer protections.
    However, there are implementation challenges. For instance, as will 
be discussed in my full statement, the forms being produced by the 
Judicial Conference have the potential to disrupt the means-test by 
allowing debtors to claim deductions for non-existent expenses, for a 
car they do not own, for example. Bankruptcy reform was surely not 
intended to allow above-median income debtors to escape repayment by 
deducting expenses they don't actually have. We feel that this issue, 
as well as any others, should be addressed through the rulemaking 
    In conclusion, I would make several points. The bankruptcy reform 
legislation passed both the House and the Senate by wide, bi-partisan 
margins. The new law is working for the consumer and the economy. Those 
in need still have full access to bankruptcy and above median income 
people who can repay a portion of their debts do so. Bankruptcies are 
down; quality credit counseling is up; consumers have access to better 
information about financial management. What we need now is careful, 
bi-partisan oversight.
    I thank the Subcommittee for conducting this hearing, and I am 
grateful for this opportunity to testify. I look forward to answering 
your questions.


                      TESTIMONY OF STEVE BARTLETT
    Good morning, Mr. Chairman and Ranking Member Schumer, my name is 
Steve Bartlett and I am President & CEO of The Financial Services 
Roundtable. Thank you for inviting me to participate in this hearing to 
examine the implementation of Public Law 109-8, the bankruptcy reform 
statute that became effective on October 17, 2005. I would also like to 
express my appreciation to the Department of Justice for providing 
leadership in implementing the provisions of Public Law 109-8.
    Mr. Chairman, I have several attachments to my statement and I 
would ask that they be included in the record.
                   the financial services roundtable
    The Financial Services Roundtable represents 100 of the largest 
integrated financial services companies providing banking, insurance, 
and investment products and services to the American consumer. Member 
companies participate through the Chief Executive Officer and other 
senior executives nominated by the CEO. Roundtable member companies 
provide fuel for America's economic engine, accounting directly for 
$50.5 trillion in managed assets, $1.1 trillion in revenue, and more 
than 2.4 million jobs. As you might imagine, Roundtable members are in 
a pretty good position to assess impact of legislative changes such as 
bankruptcy reform.
   overview of implementation and macroeconomic perspective on reform
    Mr. Chairman, at least since the turn of the twentieth-century, the 
American people have always had access to bankruptcy when overwhelmed 
and unable to repay their debts. This is as it should be. There is no 
reason to force people to toil under the burden of debts they can never 
repay. For this reason, we have had a ``fresh start'' enshrined in our 
bankruptcy laws since 1898. During the Great Depression in 1930s, 
Congress created voluntary repayment plans as an alternative to 
straight liquidation.
    However, as originally envisioned, straight liquidation under 
Chapter 7 was meant to be a last resort for people with no ability to 
pay. Congress continued America's progressive tradition by enacting 
Public Law 109-8 to channel higher income consumers into repayment 
plans while permitting the truly destitute and the poor to go into 
straight liquidation. The Roundtable supports both the letter and 
spirit of these important reforms.
    Mr. Chairman, to provide a quick explanation of how the new law is 
being implemented, I would say the sense of the Roundtable member 
companies is that the law is working well and consumers as well as the 
economy are benefiting.
    The number of bankruptcy filings has plummeted since 2004 and 2005. 
Some of this was certainly due to people rushing to file under the old 
law. Our companies and most analysts who have looked at the situation 
believe the drop off in filings is due to more than just people filing 
in 2005 to beat the new law.
    We agree with those in Congress who have recently pointed out that 
losses to the economy that result from bankruptcy filings slow economic 
growth to some extent. When a business--any business, large or small--
loses money because a customer files for bankruptcy, the business often 
has to increase what it charges other customers. I would submit that 
this is not good for consumers or the economy.
    I know that some, including Senator Grassley who sits on this 
Subcommittee, have considered the effect of Public Law 109-8 and have 
put the total costs savings to the American economy at around $60 
billion. Reduced losses of this size are a positive for the economy.
    This leads me to my first question I would identify for the 
Subcommittee: How has bankruptcy reform affected the American economy? 
The answer to that question will take a cumulative effect over the next 
few years, but it is an important question to ask.
    The low rate of consumer bankruptcies presents other significant 
questions for the Subcommittee as it tries to assess the success or 
failure of Public Law 109-8.

          Is the infrastructure in place to handle a surge in 
        filings; specifically, are there enough certified credit 

          Does the Department of Justice have enough resources 
        to implement the means test?

    I don't know the answers to these questions yet. I would, however, 
urge diligent monitoring of the implementation of the new law to ensure 
there are adequate resources available to make the system work.
                           credit counseling
    I would also like to mention the potential for social and economic 
good coming from the pre-bankruptcy credit-counseling mandate. As the 
Subcommittee knows, in order to file for bankruptcy under the new law, 
a consumer must first get a certificate from an approved counseling 
agency attesting to the fact that the consumer has completed a 
counseling session. A certificate is good for 6 months. And, prior to 
receiving a discharge of debt, a consumer must undergo another 
counseling session designed to teach on-going financial skills.
    The Department of Justice has publicly stated that they believe 
around 10% of the pre-bankruptcy certificates issued have not been used 
yet. This is a positive sign. But I think we can do better.
    The industry funded a ``no-strings-attached'' grants program for 
every approved agency that sought a grant. There are 153 approved pre-
bankruptcy counseling agencies and another 275 agencies have been 
approved to provide post-bankruptcy educational counseling.
    These non-profit agencies, both NFCC and AICCA agencies, perform a 
valuable public service by providing financial management advice to 
consumers and we are pleased they choose to participate in the pre-
bankruptcy counseling process. Based on the reports we have received 
from over 70% of approved agencies, it seems clear these agencies are 
acting as Congress intended. For instance, we believe they are waiving 
counseling fees about for those who can't pay. In October, 2006, fees 
were waived for 22% of counseling sessions. And fees are relatively 
modest at about $36 per session.
    In addition, there has been a dramatic increase in traditional 
credit counseling sessions this year as compared to last year, which 
may be linked to the new law. I have attached to my statement a report 
prepared for the Roundtable that discusses what most approved 
counseling agencies are telling us about the situation on the ground.
    One difficulty the Roundtable has identified is how to get to 
consumers sooner in the financial cycle. If we just wait until 
consumers are completely ``under water,'' it may be that the counseling 
mandate will not live up to its full potential. To make counseling more 
effective, the Roundtable has created a website--
mymoneymanagement.com--that refers consumers to DOJ-approved agencies 
for credit counseling before they are considering bankruptcy. In fact, 
some of our member companies are now directing their customers who fall 
behind in payments to this website so those consumers can get help 
earlier. All of us in the responsible lending community hope this will 
help consumers sooner, to the benefit of everybody.
    I have one final note on credit counseling. As can be seen in my 
attachment, the Roundtable has received scattered reports that 
bankruptcy attorneys have been seeking to blunt the effect of the 
counseling mandate by steering clients to agencies they consider 
``friendly.'' We have been told by counseling agencies that in some 
cases attorneys pay directly for the counseling services. I would 
suggest to the Subcommittee that these business practices, if they 
continue, could erode the significant potential consumer benefits of 
pre-bankruptcy counseling. I am aware that members of the Subcommittee 
have written a letter to the Deputy Attorney General about one specific 
agency and the Roundtable applauds this oversight initiative.
                             the means test
    In addition to credit counseling, one of the centerpieces of 
bankruptcy reform was the means test. In this regard, I would make 
several observations to the Subcommittee. The good news is that during 
the last year, the number of objections to the means-testing filed in 
court has been modest. The Department of Justice is diligently 
implementing the means-test.
    In addition, to date, no creditor has filed a means-test objection 
as it has the right to do under the new law. I think this is so in part 
because higher income debtors are either skipping bankruptcy or are 
self-selecting to go into Chapter 13. Thus, there is no evidence at all 
to support the fears expressed by some before enactment of Public Law 
109-8 that creditors would use this new right inappropriately.
    The Subcommittee should know that one positive effect of the new 
law which I attribute to the means test is an increase in the number of 
Chapter 13 cases relative to Chapter 7 cases. It seems as if more 
consumers are opting for Chapter 13 in light of the new law. This is 
certainly a positive trend and one of the major goals of the 
    The final point I would make regarding the means-test involves the 
Judicial Conference rule making process. In particular, I would call 
the Subcommittee's attention to the fact that the forms created to 
measure repayment capacity to implement the means test seems to allow 
debtors to calculate repayment ability by deducting for expenses they 
don't actually have. For instance, consumers are directed to deduct an 
expense for owning a car even if they don't own one.
    The Roundtable believes that this creates an inaccurate measure of 
repayment ability. The means test was designed by Congress to 
accurately measure repayment ability; allowing debtors to deduct 
phantom expenses is not consistent with Congressional intent. I have 
attached to my statement a letter submitted by associations commenting 
on the Interim Rules and making this point.
             constitutional challenges to public law 109-8
    Mr. Chairman, the very full legislative record developed by 
Congress before the enactment of Public Law 109-8 focused on the manner 
in which debtor attorneys were responsible for abuses of the system. I 
certainly would never want to paint all attorneys as corrosive to the 
bankruptcy process. I know there are many well-intentioned and serious 
attorneys who represent consumers considering bankruptcy in an 
appropriate way. But, as the hearing record makes clear, there were 
bankruptcy mills that simply processed consumers without providing 
meaningful legal advice or looking out for the best interests of 
consumers. The Federal Trade Commission even issued a warning to the 
public about deceptive advertising by attorneys.
    Congress sensibly reacted by imposing disclosure requirements on 
attorneys and prohibiting them from advising consumers to defraud 
creditors. These consumer protections were designed to help consumers 
by giving them full access to all the information they need to make 
informed choices.
    So, it is with some concern that I must call the Subcommittee's 
attention to a lawsuit filed in Connecticut to have these consumer 
protections declared unconstitutional. The plaintiffs in this case 
believe that attorneys have a right under the Constitution to deceive 
the public or hide information from clients or advise consumers to 
commit fraud by running up debts just before filing for bankruptcy to 
game the means-test.
    The Justice Department is aggressively litigating on the other side 
of the issue. However, if these consumer protections are invalided by 
judges, I hope Congress can find some way to protect unwary and 
unsophisticated consumers from the kinds of deceptive practices the 
Federal Trade Commission warned about.
    In conclusion, I would make several points. The Roundtable 
supported bankruptcy reform and was pleased to see the legislation pass 
both the House and the Senate by wide, bi-partisan margins. The new law 
seems to be working for the consumer and the economy. It is working 
better than anticipated--those in need still have full access to 
bankruptcy and upper income people seem to be skipping bankruptcy or 
opting for repayment plans. Bankruptcies are down; more Americans are 
getting quality credit counseling; consumers have access to better 
information about financial management. What we need now is careful, 
bi-partisan oversight.
    I believe that Public Law 109-8 has the potential to be of 
continuing great benefit to consumers and to the economy. As I said at 
the beginning of my testimony--``so far, so good.'' The work of the 
Congress is not over. There are challenges and surely there will be 
unforeseen bumps in the road. I thank the Subcommittee for conducting 
this hearing, and I am grateful for this opportunity to testify. I look 
forward to answering your questions.

    Ms. Burroughs, will you now proceed with your testimony.


    Ms. Burroughs. Well, I am here today because I had to file 
bankruptcy due to, I guess, just not knowing what everything 
was that was in the contract when I first signed. I know there 
is no law to excuse not reading everything in a contract, but 
when we got to the closure, it was just not what I expected. 
You wanted to get it over with; you just rush and you sign 
    I did not get, you know, anyone to explain what half the 
meanings of the documentations were. And then, when you cannot 
make payments, it is just a hard thing because you have no one 
to really explain what you did not do. And that is why I am 
here today, to try to help someone else.
    Ms. Sanchez. You are talking, of course, about the closing 
on a house that you purchased----
    Ms. Burroughs. Right.
    Ms. Sanchez [continuing]. and the documentation that was 
required for that?
    Ms. Burroughs. Correct.
    Ms. Sanchez. Can you tell us just a little bit about how 
that sort of put you into the circumstance of having to 
consider bankruptcy as an option?
    Ms. Burroughs. Just the fact that, you know, the payments--
we had to refinance a couple of times because--due to the fact 
of my husband's losing income and that I lost my job at once. 
And we just had to refinance to try to stay on top of things, 
and refinancing was only making the rates go up instead of 
lowering the rates, and it just got to a point where, you know, 
what do we do?
    Ms. Sanchez. As a result of not being able to make the 
payments, you considered bankruptcy as an option?
    Ms. Burroughs. Correct.
    Ms. Sanchez. Can you tell us a little bit about how you 
came to consider that as an option and what you decided to do, 
    Ms. Burroughs. In November, I think it was, as a last 
resort, we decided, you know, we could not just keep not 
paying. We had to find an option. So we decided to file for 
bankruptcy and try to make things--you know, we wanted to make 
payments, but we knew we was just falling behind.
    Ms. Sanchez. Did you consult with somebody before you 
decided to enter the bankruptcy process?
    Ms. Burroughs. We did not consult with anyone. We found 
Attorney Wayne Sigmon, and I think we went to the Internet, and 
we found him, and we met him in court on the day of 
foreclosure, and we went through all the options with him. My 
husband did, anyway.
    Ms. Sanchez. And was your decision to enter into bankruptcy 
sort of your attempt to save your home?
    Ms. Burroughs. It was.
    Ms. Sanchez. Okay.
    Do you feel that the process that you went through in terms 
of buying your house, you know, the folks who did the financing 
for the house--do you feel they explained things adequately or 
honestly and gave you an assessment of what your payments would 
look like in the future?
    Ms. Burroughs. No. Because when we went in--you know, our 
mortgage has changed so much. I mean, I think the mortgage has 
changed three times with new buyers and, you know, refinancing 
with different companies. It was just getting out of control. 
We never knew what to expect with payments, and it just was out 
of control.
    Ms. Sanchez. Have you found the bankruptcy process to be an 
easy, straightforward, and clear process for you?
    Ms. Burroughs. No, it was not easy. I mean, it is a lot of 
paperwork. But you do what you need to do. It is less stressful 
now, going through, you know, knowing I can make a payment, and 
everything is okay.
    Ms. Sanchez. So how have your payments changed since going 
through the bankruptcy process?
    Ms. Burroughs. I think we are making payments around, 
maybe, $2,000, I will just say, for the second and first 
mortgage all together. The payments went down at least $1,000, 
and they decreased even more since my husband has been placed 
on active duty, so----
    Ms. Sanchez. Okay. Thank you so much for your 
participation. I am sure other Members of the panel will have 
questions for you. Thank you again, Ms. Burroughs.
    [The prepared statement of Ms. Burroughs follows:]
             Prepared Statement of Shirley Jones Burroughs
    I am Shirley Jones Burroughs and I reside in Gastonia, North 
Carolina with my husband and two children, ages 16 and 19. My husband 
and I have worked all our lives to provide for our family. My husband 
is a truck mechanic and I work for an insurance company. We purchased 
our home in December, 1999. Our joint gross income for 2004 was 
$92,745.00 including $5,931 we withdrew from our retirement plans to 
make debt payments. In 2005 our gross income was $74,288.00 for my 
husband and $23,392.00 for me. In 2006 our gross income was 
$55,681.01for my husband, $28,220.00 for me, and $4,270.00 withdrawal 
from his retirement. We hated to dip into our retirement savings, but 
we were trying to keep up with our debts and avoid bankruptcy.
    When we purchased our home, we entered into a first mortgage with 
Homecomings Mortgage and a second mortgage with EMMCO THE MORTGAGE 
SERVICE STATION INC., which was assigned to Associates Financial 
Services of America, Inc. (``Associates''). In March, 2000, and 
approximately four months after we purchased our residence, Associates 
contacted us and offered to refinance our mortgages. They stated that 
we could lower our payments through refinancing and consolidate all of 
our debts.
    On March 30, 2000 we refinanced both mortgages through Associates. 
Our new first mortgage in the sum of $109,730.75 was used to pay the 
balance due to Homecomings Mortgage of $91,808.19 and the balance due 
to Associates of $16,374.12. The second mortgage in the sum of 
$10,199.98 was used to pay other debts including $2,888.55 to American 
General and $6,396.21 to CitiFinance. We received no cash proceeds from 
the refinancings. The new first mortgage payment was $1,170.22 per 
month with interest at 12.49 percent per annum and the new second 
mortgage payment was $214.37 with interest at 18 percent per annum.
    On June 29, 2001 we again refinanced our second mortgage with 
CitiFinancial Services, Inc., (formerly Associates). In this 
refinancing our new loan amount was $9,990.24 with an Annual Percentage 
Rate of 15.45 percent. Our first payment was $184.86, and then we had 
29 scheduled payments of $179.94 and then 90 more scheduled payments of 
$153.07. To my knowledge, we received no cash proceeds from this 
    On August 16, 2002 we once again refinanced our two mortgages with 
CitiFinancial. These refinancings were done upon CitiFinancial's 
promise that our monthly payments would be reduced. In the 2002 first 
mortgage we financed $113,938.76 with interest at an annual percentage 
rate of 11.95 percent, a first payment of $1,621.41 and 359 payments of 
$1,167.57. $113,630.87 of the cash proceeds of this loan were paid to 
CitiFinancial. In the 2002 second mortgage we financed $10,350.57 with 
interest at an annual percentage rate of 14.61 percent payable in 30 
scheduled payments of $186.43 and then 90 more scheduled payments of 
$150.11. The cash proceeds of this second mortgage refinancing went to 
payoff the June 29, 2001 CitiFinancial second mortgage. Again, we 
received no cash proceeds from either refinancing. All of the amounts 
added to our mortgages went to the fees and charges in the multiple 
    In 2006 we began to fall behind in our mortgage payments to 
CitiFinancial mainly because I was unemployed for some time. On 
November 22, 2006 CitiFinancial commenced a foreclosure proceeding in 
the State Court to foreclose upon the first mortgage. The foreclosure 
sale date was scheduled for January 24, 2007.
    After exploring available options to try to save our home from 
foreclosure, we found that our only real option was to file a Chapter 
13 bankruptcy case. Through the Internet, we found our bankruptcy 
attorney, Mr. Wayne Sigmon. He explained that we could file a Chapter 
13 case and cure the payment arrears on the first mortgage to 
CitiFinancial in monthly court payments over a 60 month period while 
continuing to make our regular monthly payments due to CitiFinancial 
after the filing of our bankruptcy case directly to CitiFinancial. As 
to the second mortgage, he advised that we could ``lien strip'' the 
second mortgage through a lawsuit he would file in our bankruptcy case 
against CitiFinancial since the market value of our residence was less 
than the principal balance due upon the first mortgage. In this way the 
second mortgage would no longer be a lien upon our residence and the 
balance due would be treated as unsecured debt in our Chapter 13 case.
    Our Chapter 13 case was filed on January 22, 2007. Our plan called 
for monthly payments to the Chapter 13 Trustee of $1,050.00 plus direct 
payments to CitiFinancial ``outside of the plan'' of $1,160.00. These 
payments were feasible because our combined monthly net income was 
$4,332.64 which consisted of $3,132.65 from my husband's job and 
$1,200.00 from my unemployment compensation.
    In our Chapter 13 case we scheduled CitiFinancial's first mortgage 
arrears to be $5,800.00 which was 5 monthly payments of $1,160.00 each. 
We scheduled the outstanding principal balance to be $132,802.53. Both 
of these figures came from monthly statements we had received from 
CitiFinancial. At our Chapter 13 meeting of creditors, we were shocked 
to learn that CitiFinancial filed a proof of claim in our case alleging 
that the first mortgage arrears as of our Chapter 13 filing date were 
$14,789.03 and that the total balance due is $135,218.81. A copy of 
this proof of claim is attached hereto as Exhibit ``A''. Obviously, if 
our arrears are $14,789.03, our Chapter 13 payments will increase 
significantly. Our attorney advised us that mortgage servicers often 
inflate claims in Chapter 13 cases and that he would review the 
documents and file a formal objection to this claim.
    Our attorney has now reviewed our CitiFinancial mortgage documents 
and he has objected to the proof of claim. He has advised that our 
mortgage is a classic example of predatory mortgage lending. The 
mortgage interest is compounded on a daily rather than monthly basis. 
This is why we now owe somewhere between $132,000 and $135,000 on the 
mortgage while the original amount financed was $113,938.76. He advised 
that he has seen this type of interest computation in numerous 
CitiFinancial mortgages. Attached hereto as Exhibit ``B'' is an 
amortization schedule that shows how our mortgage balance would have 
been reduced if our loan had interest compounded monthly rather than 
daily. To my knowledge, we were never warned by CitiFinancial about the 
possibility that we would make numerous payments on our loan and still 
owe substantially more than we borrowed.
    Our attorney has also advised that our mortgage contains an 
arbitration provision. CitiFinancial never explained to us how an 
arbitration provision works and I had never even heard of arbitration 
until my attorney brought it to my attention.
    On March 22, 2007 my husband, a member of the Army reserve, was 
called to active duty and he has been deployed to Iraq. His net monthly 
military pay after taxes is $1,141.75 so that our combined monthly 
income has dropped from $4,332.64 to $3,024.27, a difference of 
$1,307.97 per month. With this decrease in income, I cannot afford to 
make both my Chapter 13 Trustee payments and my monthly mortgage 
payments to CitiFinancial. My attorney has filed a motion in the 
bankruptcy court requesting that, pursuant to the Servicemembers Civil 
Relief Act, the interest rate on our secured debts be reduced to 6 
percent per annum while my husband is on active duty. If this motion is 
allowed, my direct monthly payment to CitiFinancial should be $767.07 
(Exhibit ``C'' hereto), plus a monthly payment upon the alleged 
$14,789.03 arrears through the Trustee of $285.91 (Exhibit ``D''), and 
an approximately 5% Trustee's commission on the arrearage payment 
($14.29) for a total monthly payment to CitiFinancial of $1,067.27.
    Even this payment will be a real struggle for us to make now that 
we have reduced income and greater expenses due to my husband's service 
in Iraq. If, as proposed by the consumer groups, the Bankruptcy Code 
allowed us to reamortize the CitiFinancial mortgage at a 6 percent per 
annum fixed rate over a thirty year term from the bankruptcy petition 
date, even with CitiFinancial's alleged balance due of $135,218.81, the 
payment would be $810.71 (Exhibit ``E''), a monthly savings of $256.56. 
My children and I could dearly use this money to live on.

    Ms. Sanchez. Mr. Sommer, will you please begin your 


    Mr. Sommer. Thank you, Madam Chair and Members of the 
Committee. My name is Henry Sommer, and I am an attorney who 
specializes in bankruptcy and consumer law matters. For over 32 
years, I have represented families and individuals in 
Philadelphia who have sought my help with serious debt 
problems, often involving foreclosure.
    I am President of the National Association of Consumer 
Bankruptcy Attorneys, and I am testifying today on behalf of 
our 2,700 members. I would like to address my testimony to two 
principal topics: one, how the 2005 amendments have impacted 
consumer debtors, and two, how the bankruptcy laws should be 
amended to give homeowners a more effective remedy to deal with 
the foreclosure crisis our Nation is now facing.
    In answering the fundamental question posed by this 
hearing, I would say that the 2005 amendments to the Bankruptcy 
Code are not protecting consumers; they are hurting consumers. 
To call this a ``consumer protection act'' is a classic example 
of George Orwell's ``Newspeak.'' In fact, it is widely 
recognized as one of the most anticonsumer pieces of 
legislation ever passed by Congress.
    The amendments were premised upon allegations that there 
was widespread abuse in the consumer bankruptcy system and that 
many who filed chapter 7 bankruptcy cases could afford to pay a 
significant portion of their debts. The reality is, this was 
never true, and the experience since the effective date of the 
amendments has borne that out. Very few debtors, only about one 
half of 1 percent, have been charged with abuse under the 
bill's vaunted means test, even though its threshold of abuse 
is very low. A debtor can be charged with abuse if a debtor is 
deemed able to pay as little as $100 a month toward her debts 
or deemed able to pay only a tiny percentage of what is owed.
    Not surprisingly, we have seen no trace of the $400-to-$550 
benefit which the bill's backers promised would redound from 
its passage to every household in the country. Indeed, abusive 
credit card practices, including higher and higher late 
charges, have only increased, at least until some companies 
recently agreed to change a few of those practices while 
testifying at hearings in this new Congress.
    The biggest impact of the new law has been the enormous 
increase in the cost and burdens of filing a bankruptcy case. I 
doubt that it was the intention of even those who voted for the 
bill to increase documentation requirements, bureaucratic 
paperwork and other costs so much that honest, low-income and 
working families, not the high rollers at whom the amendments 
were supposedly aimed, are deterred or prevented from obtaining 
the bankruptcy relief they need. But that is what has happened.
    The filing fee has increased by 50 percent. There are new 
fees for credit counseling and education which usually total 
another $100, and there has been such a great increase in the 
documentation required in every case that attorneys have had to 
increase their fees at least 50 percent. Bankruptcy has gone 
from being a relatively low-priced proceeding that can be 
handled quickly and efficiently to being an expensive minefield 
of new requirements, tricks and traps that can catch the 
innocent and unsuspecting debtor.
    There is simply no reason, especially in the cases of 
lower-income debtors, that all of this extensive documentation 
demanded by the amendments is necessary. Every consumer 
bankruptcy attorney has had the experience of explaining these 
requirements to prospective clients only to have the clients go 
away discouraged and never return.
    Every consumer debtor must obtain all payment advices for 
the 60 days before the bankruptcy is filed, a tax return or a 
tax transcript for the most recent year and sometimes 
additional years. They must provide an attorney with 
information detailing every penny of their income for the 6 
months before the petition is filed; they must provide bank 
statements to the trustee and evidence of current income. They 
must attend a prepetition credit counseling briefing even if 
their problems are unavoidable medical catastrophes and not 
unwise spending. They must attend a financial management course 
in order to receive a discharge.
    Attorneys must complete numerous additional forms, 
including a 6-page means test form that requires arcane 
calculations about which there are many different legal 
interpretations, and this is on top of the 20 or 30 pages of 
forms that were already required in every bankruptcy case.
    According to the United States Trustee Program, attorneys 
must also provide clients with pages and pages of so-called 
disclosures, many of which are irrelevant to the client's case 
or inaccurate, which then requires additional time explaining 
them. And trustees in some districts demand even more 
documents. And if a consumer debtor is subject to an audit they 
have to provide even more, including 6 months worth of income 
documentation, 6 months of bank statements and an explanation 
of each and every deposit and withdrawal from any account over 
those 6 months. And the bankruptcy credit counseling 
requirement is primarily yet another barrier to bankruptcy. 
Even the credit counselors report that only 2 to 3 percent of 
the perspective debtors they see can even contemplate a debt 
management plan.
    Now, most of this documentation is unnecessary, even to the 
ostensible goals of the 2005 amendments. In the vast majority 
of cases consumers are nowhere near the thresholds at which the 
abuse provisions kick in.
    Ms. Sanchez. Mr. Sommer, your time is expired, so if you 
can conclude, and then we'll get back to you with questions.
    Mr. Sommer. Well, let me just say that the second thing I 
wanted to talk about was some amendments we proposed that would 
help people facing foreclosure. We think the Bankruptcy Code 
needs to be amended to deal with the new kind of mortgages, the 
exploding ARMs that were not present in 1978 when chapter 13 
was drafted. And the details are attached to my testimony. 
Thank you.
    [The prepared statement of Mr. Sommer follows:]
                 Prepared Statement of Henry J. Sommer

    Ms. Sanchez. Thank you, Mr. Sommer, we appreciate your 
testimony. And as I said, your written testimony will be 
submitted fully for the record.
    Ms. Jones, if you would please proceed.

                         WASHINGTON, DC

    Ms. Jones. Madam Chairwoman and Members of the 
Subcommittee, I appreciate the opportunity to participate in 
today's hearing on the impact of the Bankruptcy Abuse 
Prevention and Consumer Protection Act of 2005. My statement 
focuses on the credit counseling and debtor education 
requirements of the act and is based on our report that was 
released last month.
    The Bankruptcy Act requires individuals to receive credit 
counseling before filing for bankruptcy and to take a debtor 
education course before having their debts discharged. 
According to the act's legislative history, a goal of the 
prefiling credit counseling requirement is to ensure that 
consumers understand the options available to them and the 
consequences of filing for bankruptcy.
    However, the requirement raised a number of concerns, in 
part due to ongoing investigations of some practices in the 
credit counseling industry, such as steering clients to 
inappropriate debt repayment plans. Also, some Members of 
Congress and others were concerned that the cost and 
availability of counseling and education services could be 
barriers to people wishing to file for bankruptcy.
    Responding to those concerns, Congress required that 
providers of credit counseling and debtor education meet 
certain criteria and obtain approval from the U.S. Trustee 
    Overall, we found that the Trustee Program's process for 
approving credit counseling and debtor education providers was 
generally systematic and thorough. As of April 2007, the 
Trustee Program had approved 159 credit counseling and 285 
debtor education providers. Few formal complaints have been 
made against these providers and Federal and State law 
enforcement authorities with whom we spoke did not identify any 
recent enforcement actions against them under consumer 
protection laws.
    And as of last month no credit counseling provider approved 
by the Trustee Program had had its tax exempt status revoked. 
However, the Internal Revenue Service told us it was examining 
the tax exempt status for these providers. The Trustee Program 
said it was carefully monitoring the situation.
    We also found that the content of the credit counseling and 
debtor education sessions generally complied with statutory and 
program requirements. We did not find evidence that prefiling 
credit counseling agencies discourage clients from filing for 
bankruptcy. And very few clients appear to enter into debt 
repayment plans administered by these agencies.
    At the same time, however, we found that the value of the 
credit counseling requirement is not clear. Anecdotal evidence 
suggests that by the time most clients receive counseling their 
financial situations are dire, leaving them with no viable 
alternative to bankruptcy. The requirement for credit 
counseling may thus be more of an administrative obstacle than 
a timely presentation of meaningful options. Because there's 
currently no mechanism for tracking the results of counseling 
sessions it is difficult to assess how well the counseling 
requirement is serving its purpose.
    In our report we recommended that the Trustee Program 
develop the capacity to track and analyze the results of the 
prefiling counseling. The Trustee Program agreed with this 
    We also found that there was less debate about the debtor 
education requirement. Most participants in the bankruptcy 
process believed this requirement was beneficial.
    Concerning fees, we found that consumers are generally 
charged $50 or less per session, which industry observers and 
consumer advocates generally believe to be reasonable. The 
Bankruptcy Act requires that counseling be offered without 
regard to a client's ability to pay, and evidence suggests that 
fees are generally being waived as appropriate.
    However, we found that providers' policies on fee waivers 
varied. To help ensure that all providers waive fees as 
appropriate, we recommended that the Trustee Program issue 
formal guidance on what constitutes a client's ability to pay. 
The program agreed with this recommendation and will begin 
developing such guidance later this year.
    Finally, we found that the number of approved counseling 
and education providers appear sufficient to give consumers 
timely access to these services. And although in-person 
counseling and education sessions are not available in certain 
parts of the country, this concern is somewhat mitigated 
because the great majority of clients appear to be counseled by 
telephone or via the Internet.
    Accessing services in foreign languages has been a 
challenge for some consumers. We found the Trustee Program is 
taking steps to better communicate providers' language and 
translation services. Currently, 64 credit counseling and 48 
debtor education providers offer courses in Spanish, and two 
large nationwide providers can hold sessions in up to 150 
    In conclusion, we found that within a limited time frame 
the Trustee Program established policies and procedures for 
selecting credit counseling and debtor education providers, and 
thus far relatively few concerns have been raised about the 
competence of approved providers.
    Madam Chairwoman, this completes my prepared statement. I 
would be happy to respond to any questions that you or other 
Members of the Subcommittee may have.
    [The prepared statement of Ms. Jones follows:]
                 Prepared Statement of Yvonne D. Jones

    Ms. Sanchez. Thank you, Ms. Jones, for your testimony.
    Before we begin the first round of questions there are 
several documents that I would ask be admitted into the record 
without objection. I would like to submit the National 
Association of Bankruptcy Trustees' statement of President 
Eugene Crane on the Second Anniversary of the Bankruptcy Abuse 
and Consumer Protection Act.
    [The prepared statement of Mr. Crane follows:]
            Prepared Statement of Eugene Crane, President, 
              National Association of Bankruptcy Trustees
    Madam Chair Sanchez, Ranking Member Cannon, and other distinguished 
Members of the Subcommittee, let me thank you for the opportunity to 
provide the views of our Association to your Subcommittee on this very 
important subject.
    The National Association of Bankruptcy Trustees (NABT) is an 
organization of panel trustees, independent fiduciaries appointed in 
every chapter 7 bankruptcy case. Of the approximate 1,200 such Trustees 
nationwide, the vast majority are members of the organization. Our 
organization carries out the major work involved in the bankruptcy 
system, handling thousands upon thousands of cases each year. We 
protect both debtors and creditors from abuse of the system.
    We carry out important public policy priorities as directed by the 
Congress, such as insuring that child support orders are enforced, 
safeguarding patient health care needs and records, and protecting 
pensions obligations. We help local, state and federal governments by 
being one of the largest collectors of back taxes in the U.S.
    In most chapter 7 cases, the Debtors never appear before a judge, 
but are examined by the Trustees beginning with a review of the 
petitions filed, and a hearing conducted by the Trustees to which 
creditors may appear and participate. Many functions and required 
performance duties are contained in the Bankruptcy Act and Bankruptcy 
Rules and the Office of the United States Trustee (U.S.T.) Acts to 
oversee the carrying out of such duties. The U.S.T. is a part of the 
Justice Department.
    The activities carried out are mandated by many provisions of the 
law, rules and regulations, and are necessary and crucial to the 
operation of bankruptcy. The Bankruptcy Abuse and Consumer Protection 
Act , (the ``ACT'') effective October 2005, added many new and 
different duties to the Trustee. Trustees have an obligation to secure 
relief for honest but unfortunate debtors and to investigate filings 
for abuse, wrongdoing and improper filings as well as to protect the 
interests of all parties to a proceeding and, pursue and reduce to cash 
all assets available to insure an equitable distribution of assets.
    The NABT is committed to maintaining the effectiveness and fairness 
of the system and to that end we believe there are several areas of the 
law that Congress may want to look at with an eye toward 
implementation, in appropriate instances, to allow trustees to 
effectively perform their duties and achieve the intended legislative 
purposes. Most importantly, adequate compensation will be needed to 
insure continued operation by Trustees.
    As with many complex and detailed new laws, some untested 
provisions proved to be contradictory, burdensome and in some 
instances, difficult or too elaborate to perform. NABT urges Congress 
to promptly address and remedy the ACT's defects and unforeseen 
    Let me discuss a few key aspects of the law and other key issues 
related to the bankruptcy system.
                             act provisions
1. Notification of Child Support Claimants
    Sec. 704(a)(10) of the ACT imposes a new notice requirement 
mandating service of notices at filing and at discharge to all agencies 
and persons to whom a support obligation is due. NABT is at work 
developing methods to implement the new Sec. 704(a)(10), through which 
child support claimants will be notified of their rights as creditors 
in Chapter 7 classes of Debtors from whom a support obligation is due. 
We envision that this provision will, with the cooperation of the 
EQUST, be effectively implemented through a series of procedures and 
notices provided by the panel Trustee throughout the case. We believe 
that, through this process, claimants owed domestic support obligations 
can and will be made aware of the options available to them to enforce 
Court-ordered support.
2. Additional Information Required of Debtors
    NABT believes that the additional information which is required to 
be furnished to the Trustee (and others), prior to the first meeting of 
creditors, will aid in the identification and liquidation of assets for 
the benefit of creditors. We are actively working on methods of 
delivery which allow us to effectively utilize the volume of 
information which will be provided to us by each Debtor. Additionally, 
we will attempt to insure that this information will remain 
confidential, and be used solely for the purposes intended by the 
    Review of this required information will serve to insure that all 
assets are disclosed and, where appropriate, applied to the payment of 
creditors' claims. It will also, in many cases, more adequately define 
the Debtors' circumstances, which will allow the panel Trustee to 
perform the job more effectively.
3. Waiver of Filing Fee
    The amended 28 U.S.C. Sec. 1930 (f) (1) provides for the waiver of 
Chapter 7 case filing fees for individuals with ``income less than 150 
percent of the income official poverty line'' if the Court determines 
the individual is unable to pay the fee in installments. Trustees are 
paid compensation of $60 for administering cases in which no assets are 
available for liquidation. The funding for these fees is derived from 
the Chapter 7 case filing fee [see 11 U.S.C. Sec. 330(b)(1 )j and 
Miscellaneous Bankruptcy Court Fees prescribed by the Judicial 
Conference of the United States [see 11 U.S.C. Sec. 330(b)(2)].
    There is no provision in the ACT for payment to Trustees where the 
filing fees are waived. A statistical survey shows that the number of 
informa pauperis cases where filing fees are waived ranges as high as 
9.78% in some jurisdictions. Trustees are now faced with a reduction in 
compensation for their work in administering those cases. This apparent 
oversight needs to be corrected and a system established to provide 
adequate funding for payment of Trustee fees in these cases.
4. Protecting Patient Records
    The ACT adds a new Sec. 351 to the Code that provides a procedure 
for notification and disposal of patient records in cases where the 
Trustee does not have sufficient funds to pay for the storage of 
records in the manner required under applicable federal or state laws. 
The ACT fails to take into account that in some circumstances Trustees 
will lack sufficient funds to comply with the procedure established 
under Sec. 351. For example, under Sec. 351 Trustees are required to 
undertake various costly actions including: storing records for one 
year; publishing a notice in one or more appropriate newspapers; 
notifying every patient and appropriate insurance carrier by mail; 
communicating by certified mail with each appropriate federal agency; 
and destroying the records, It is estimated that these costs could 
range anywhere from $3,500.00 in smaller cases (500 or fewer patients) 
to $35,000.00 in medium cases (10,000 patients) and higher in large 
cases (up to 100,000 patients and more). If Trustees do not have the 
funds to pay for the storage and notices required in Sec. 351, patient 
records may not be administered properly and could be lost.
    The problem can be corrected by allowing a court in no asset or 
limited asset cases, upon motion of the Trustee, to direct the person 
or persons responsible for maintaining, storing or disposing of patient 
records under state law, prior to the appointment of the Trustee, to 
resume the responsibility of preserving the records. In such 
circumstances, the responsible party would be directed, by court order, 
to perform the functions required under Sec. 351.
5. Payment in Converted Cases
    The ACT was intended to provide a mechanism and payment schedule 
for Chapter 7 Trustees to receive compensation in cases converted or 
dismissed pursuant to 707(b). The ACT included changes to Sec. 1326(b) 
of the Code specifying the payment schedule to be applied if Trustees 
are allowed compensation due to the conversion or dismissal of case 
under Sec. 707(b). These changes are inadvertently ineffective, 
however, unless Sec. 326 of the Code is also modified to provide for 
Trustee compensation in converted or dismissed cases. Under current 
judicial interpretations of Sec. 326, Trustees have been denied 
compensation in cases converted or dismissed under Sec. 707(b) because 
Trustees have not actually disbursed or turned over monies to parties 
in interest in such cases (which that statute requires as a 
    The problem can be corrected by adding a new subsection (e) to 
Sec. 326 to provide that the Court may allow reasonable compensation 
for services rendered by the Trustee, if the Debtor in a Chapter 7 case 
commences a motion to dismiss or convert and such motion is granted, or 
if the case is converted from Chapter 7 to another chapter, and the 
actions or positions of the Chapter 7 Trustee were a factor in the 
conversion of the case. Since cases are most often converted from 
Chapter 7 to 13 without the processing of a formal Sec. 707(b) motion 
(a threat of a motion is often sufficient), Trustees should be allowed 
compensation if their actions or positions were a factor in the 
conversion of the case (i.e., discovery of undisclosed or undervalued 
    Trustees have and will continue to direct those Debtors who have an 
ability to repay some or all of their debts into a Chapter 13 repayment 
plan. It was the intent of Congress to reward us for these efforts, and 
encourage our continued vigilance.
6. Avoiding Automatic Dismissal in Asset Cases
    The ACT modifies Sec. 521 of the Code to compel an automatic 
dismissal of cases where certain information is not timely provided. If 
a Debtor does not reaffirm or surrender collateral within 45 days after 
the first meeting of creditors, the automatic stay under Sec. 362(a) is 
terminated and the property ``shall no longer be property of the 
estate,'' even if there is equity in that property for the benefit of 
the estate.
    The automatic dismissal language raises concerns insofar as it 
renders valuable property ``no longer property of the estate'' and 
places it beyond the reach of the Trustee or the court. Trustees may 
not be able to determine whether there are unencumbered non-exempt 
assets to administer by the deadlines imposed under Sec. 521, in part, 
because debtors who are dilatory in reaffirming/surrendering are often 
unresponsive to trustees. Although trustees may ask for extensions of 
the Sec. 521 deadlines, circumstances may prevent the trustee from 
having sufficient information to support a motion for an extension of 
7. Increase in ``No Asset'' Fee
    Under the present law, Trustees receive $60 for administering 
Chapter 7 cases in which ``no assets'' are liquidated. The last 
increase in this Trustee compensation occurred in 1994, when the fee 
was raised from $45 to $60.
    The ACT imposes new, and more duties on Chapter 7 Trustees. There 
are significantly more documents to review, notification of specific 
classes of creditors (child support claimants), a higher degree of 
scrutiny of the true economic status of individual Debtors (review of 
income tax returns and payment advices prior to conducting a Section 
341 meeting of creditors), and more statistical reporting in order to 
allow a monitoring of the effectiveness of the system.
    NABT is actively involved in educating Trustees as to 
implementation of the ACT and fulfillment of these new requirements. It 
is the statutory duty of Chapter 7 Trustees to acclimate themselves to 
the new system, so that they can continue to properly administer 
bankruptcy cases.
    Sixty dollars (the fee for the last 12 years) is not fair and 
adequate compensation to administer a bankruptcy case. Our Association 
strongly believes that an increase in this fee, even if it is 
moderately less than the $40 per case increase Congress passed last 
year, is in order. Without a fee increase, many young attorneys will 
choose not to become Trustees. This will make the system slower, more 
cumbersome and less efficient for all parties involved, both debtors 
and creditors. There has been bipartisan support for raising Trustee 
compensation for no asset cases. We again urge the Congress to act on 
this increase without delay. We would also request that any increase be 
subject to a consumer price index adjustments so that are fees are not 
frozen as they have been for the past 12 years.
8. Percentage Compensation in Cases with Assets
    Section 326 needs to be amended to address and provide for 
increased percentage applications, particularly to small asset cases, 
if not to all asset cases. Trustees are not paid on surplus 
distribution to debtors, but only on ``all moneys disbursed or turned 
over in the case by the trustee to parties in interest, excluding the 
debtor. . . .'' The section should be amended to increase the 
percentage applications extending the 25% on the first $5,000 to the 
first $25,000, with commensurate adjustments thereafter. An increase in 
this category would offset the small fee compensation we receive per 
case. Additionally, creditors and the public benefit if trustees are 
adequately incentivized to locate assets that might be hidden from the 
bankruptcy court.
    As we mentioned above, the figures in Sec. 326 should also be 
subject to consumer price index adjustments every three years, like 
other parts of the bankruptcy code. We know the Act provides for 
increases automatically for chapter 13 trustees (5 U.S.C. 5303); 
debtors' exemptions (11 U.S.C. 522); involuntary case qualifying 
amounts; chapter 13 qualifying amounts; preference actions; and many 
more, but there is no increase for trustees.
    This concludes my statement. NABT looks forward to working with you 
during this Congress, particularly on the compensation issue which 
affects our members ability to carry out this Act.
    Thank you.

    Ms. Sanchez. Also, a document from the American Bar 
Association with respect to the subject of today's hearing, 
``Are Consumers Really Being Protected Under the Act?''
    [The information referred to follows:]
  Letter and supporting documents from the American Bar Association, 
submitted by the Honorable Linda Sanchez, a Representative in Congress 
     from the State of California, and Chairwoman, Subcommittee on 
                   Commercial and Administrative Law

    Ms. Sanchez. Also, testimony--it's actually a letter 
attaching the decision of a District Court in Minnesota 
regarding the term ``debt relief agency,'' as defined in the 
appropriate U.S. Code.
    [The information referred to follows:]
    Letter and supporting documents from Chad Wm. Schulze, Esquire, 
  Milavetz, Gallop & Milavetz, P.A., submitted by the Honorable Linda 
Sanchez, a Representative in Congress from the State of California, and 
     Chairwoman, Subcommittee on Commercial and Administrative Law

    Ms. Sanchez. And, lastly for the record, I would also like 
to submit the infamous Form 22 with its 57 parts of inquiry 
that folks who are interested in filing bankruptcy claims must 
fill out to begin that process.
    [The information referred to follows:]
    Official Form 22A (Chapter 7), submitted by the Honorable Linda 
Sanchez, a Representative in Congress from the State of California, and 
     Chairwoman, Subcommittee on Commercial and Administrative Law

    Ms. Sanchez. And without objection, so ordered.
    We are now going to begin a round of questioning. Members 
will each have 5 minutes to question the witnesses. I would ask 
the witnesses to be mindful of the fact that we have but little 
time each to ask questions, so try to be brief in your 
    And I would like to begin with Mr. Bartlett with my first 
question. You've testified also before the Senate Judiciary 
Committee last December, and in that testimony you stated that, 
quote, ``We need to reach consumers much sooner in the 
financial cycle so that credit counseling can live up to its 
full potential. If consumers wait until they are completely 
under water, counseling may not live up to its full 
    How would you propose to reach consumers much sooner in the 
financial cycle? Because apparently, as we've seen from Ms. 
Burroughs, sometimes people with the best of intentions have to 
begin the bankruptcy process, and that is really when the 
counseling kicks in.
    Mr. Bartlett. Madam Chair, ironically one of the probably 
unintended or at least undiscussed outcomes of the new law is 
that consumers are getting to counseling earlier, but they're 
not getting in in a way that shows up in the statistics. We 
survey all the certified credit counseling agencies and we've 
determined that about 30,000 counseling sessions a month, 
additional sessions happen with these certified agencies more 
than were happening in prior years. And we think that is 
because these agencies are certified, consumers can find them 
on the Internet, they've been certified by the U.S. Justice 
Department, so it gives the consumers a much higher sense of 
    We think the other thing that is happening is that with the 
publicity about it, with the conversations about it, we think 
that consumers are increasingly aware that the earlier they get 
to the counseling the better they are and the easier it will be 
and easier to accommodate.
    And then third is we as an industry, we are pushing all 
kinds of information to consumers to say get thee to a 
counselor. If you're having difficulty, then counselors can 
help because they can help you with your money management.
    So is it going to be perfect? Is everyone going to get to a 
counselor early in the process? No.
    Ms. Sanchez. So you believe the majority of consumers are 
getting the credit counseling that they need early enough in 
the process?
    Mr. Bartlett. No, I wouldn't say majority. I wish life were 
that good. I would say that a lot more today because of this 
new law than were prior to the law, because of the 
certification process and the industry is promoting it, is 
telling consumers to get to a counselor and we're making it 
    Ms. Sanchez. Mr. Sommer, do you have any thoughts about 
whether or not debtors are getting their credit counseling 
advice in a way that is timely given the circumstances that 
they're in in terms of thinking about bankruptcy?
    Mr. Sommer. Unfortunately, most debtors go to counseling 
only when they find out the requirement to file bankruptcy. And 
by then, as the counselors themselves say, hardly any of them 
are financially capable of doing a debt management plan.
    The counseling is particularly a problem in timing when 
people are facing foreclosure, such as Ms. Burroughs, because 
it can serve as an impediment when the foreclosure sale may be 
very imminent. And there are courts that have said that people 
who get counseling on the same day as they file bankruptcy 
can't file bankruptcy.
    So we think there are certain categories of people at a 
minimum who ought to be exempted from counseling when it's 
clear counseling can't stop a mortgage foreclosure.
    Ms. Sanchez. Thank you. Mr. Bartlett, in his prepared 
testimony described a lawsuit filed in Connecticut in which he 
said the plaintiffs in this case believe that attorneys have a 
right under the Constitution to deceive the public, hide 
information from clients, or advise consumers to commit fraud 
by running up debts just before filing for bankruptcy to gave 
the means test. Are you familiar with that lawsuit, Mr. Sommer?
    Mr. Sommer. Actually, our organization is a plaintiff along 
with the Connecticut Bar Association in that lawsuit.
    Ms. Sanchez. What would your response be to Mr. Bartlett's 
    Mr. Sommer. Well, that is simply a false characterization 
of a lawsuit. It would be ridiculous to argue that attorneys 
have the right to counsel their clients to commit fraud, and we 
made no such argument, as the papers would demonstrate. Our 
argument was that professional ethics already prohibit that 
kind of activity. And really the provisions of the law which 
prohibit advice about lawful activity impair attorneys' ethical 
duties to fully advise their clients about lawful means of 
dealing with their problems.
    Ms. Sanchez. Thank you. Mr. Bartlett, over the nearly 8 
years that the BAPCPA was under consideration by Congress, we 
continuously heard that each American family was paying a $400 
to $550 ``bankruptcy tax'' for bankruptcy filing. Since the 
enactment 2 years ago have interest rates dropped 
    Mr. Bartlett. I don't know that they have, and I don't know 
that you could point to one law as either increasing or 
decreasing interest rates.
    Ms. Sanchez. Have the costs of goods and services been 
lowered in response to the perceived savings resulting from the 
enactment of the act?
    Mr. Bartlett. I would say the cost have declined. We're 
running at an average of about a 1.5 million consumer 
bankruptcies a year prior to the law. And last year it was 
537,000. We think it will be about half, about 700,000. So it 
would be 700,000 fewer bankruptcies.
    Ms. Sanchez. But I'm specifically referring to this 
``bankruptcy tax'' that we heard about over and over and over 
again. I mean, I can only tell you what my experience is. I get 
solicitations for credit cards in the mail every day. And the 
interest rates that they're asking me to pay are 24.99 percent. 
I think the lowest one I have recently received, and I have an 
excellent credit rating, I might add, was like for 19.99 
    I haven't seen a significant decrease in the interest rates 
on credit cards that are being offered as a result of the 
enactment 2 years ago. And yet one of the major arguments we 
heard over and over and over again in response to why we should 
support this bill was that consumers are paying this huge 
``bankruptcy tax'' and that if we just cut down all the 
frivolous bankruptcy filings every consumer's interest rates 
are going to go down.
    Mr. Bartlett. Madam Chair, the purpose of the new law, the 
reform, is to stipulate that those consumers who can pay some 
or all of their debts and who are above the median income are 
expected to do so. That is exactly what's happening. And those 
that cannot can go into chapter 7. And that is what's happening 
also, about 700,000 chapter 7s. And then the--about 700,000 in 
bankruptcy. And the rest are not filing for bankruptcy because 
they can pay some or all of their debts. And that was what the 
law intended and that is what's happening.
    Ms. Sanchez. So the argument about ``bankruptcy tax'' was 
just a specious argument then; it was never intended to save 
consumers money through lower interest rates?
    Mr. Bartlett. I don't think it was specious at all. I think 
the total savings are the total savings and those are reflected 
in the total cost of goods and services in the economy. If 
people file for bankruptcies and don't pay their debts and they 
could pay their debts, that is a bad thing. We think that is a 
bad thing if someone can pay their debts and aren't required 
    Ms. Sanchez. I'm just going to interrupt you and say I take 
offense at the argument that it was going to have this effect 
that consumers were going to pay less in interest rates if we 
could reduce the number of actual bankruptcy filings.
    My time has expired. I would now like to recognize my 
distinguished Ranking Member for 5 minutes of questioning.
    Mr. Cannon. Madam Chair, I'm happy to defer to Mr. Feeney, 
who I think has another obligation, and to the other Members of 
the Committee who may have other interests or commitments, and 
I would be happy to go last.
    Ms. Sanchez. I appreciate your generosity.
    Mr. Feeney.
    Mr. Feeney. I thank the Chairwoman, and I thank the Ranking 
Member for his hospitality.
    On that last point, Mr. Bartlett, is it your position that 
there are dozens, hundreds, perhaps thousands of variables, 
including international markets, that affect interest rates on 
an ongoing basis and the cost of goods?
    Mr. Bartlett. Of course. There are a lot of things that set 
the interest rates, Chief among them the Federal Reserve. The 
cost of bankruptcy is a real cost and it's a cost that is 
spread out throughout the economy.
    Mr. Feeney. Is it your position marginally of the thousands 
of variables, including international variables, one variable 
that tends to lower in your opinion the cost of interest and 
the cost of goods would be relatively tight bankruptcy rules so 
that fewer people are availing themselves of them?
    Mr. Bartlett. I think that's correct. I think bankruptcy 
should be available to people that cannot pay their debts and 
not available to those who can, roughly speaking.
    Mr. Feeney. And in general, losses to the economy that 
result from, I don't want to say frivolous, but liberal 
bankruptcy applications, what will they tend to do to job 
creation for Americans, prosperity and the national economy, 
realizing again that it's just one of thousands of potential 
    Mr. Bartlett. We have two effects. If bankruptcy allows 
people who otherwise can pay their debts not to do so, as it 
did prior to this law, two things happen. One is that credit 
tightens up for everyone because creditors are then much 
stricter on offering the credit. So those that can and would 
pay their debts are sometimes denied and they shouldn't be.
    Secondly, the costs go up. So those goods that someone 
purchased and didn't pay for have to be paid for by everyone 
    Mr. Feeney. Have you seen any studies or have you reviewed 
any work of others or do you have an opinion as to the rough 
percentage of bankruptcies that come about because of poor 
decisions and poor understanding of financial literacy versus 
bad luck, people that have a bad health situation, people that 
get thrown out of a job. At the turn of the century if you were 
an expert in manufacturing buggy whips, when the automobile 
came along you were in some trouble. Do you have an opinion 
relatively what the preponderance of the burden is?
    Mr. Bartlett. The survey I've seen that is most on point to 
your question was done by the gold standard group of credit 
counselors, the National Federation of Credit Counselors. Most 
of their agencies are certified by the Justice Department. And 
they asked their consumers or their clients who would call for 
credit counseling, and they would ask them what do you think 
got you into trouble? And I think it was about 69 percent of 
those debtors self-identified. They said what got us into 
trouble was poor money management.
    About 30 percent was a major loss of job or loss of income. 
And the rest was medical or divorce or disability. About 4 
percent, something like that. So about 69 percent, according to 
that study, is poor money management. Other counselors I talked 
with confirmed that that's about the right ratio.
    Now, that leaves a large group that is loss of income, and 
if that loss of income is permanent, well, then some kind of 
restructuring has to occur. If it's temporary, then lenders can 
figure out some way to accommodate.
    Mr. Feeney. Well, I don't think--my guess is you don't, and 
I don't want to blame the victim here, but a big part of the 
problem--you talked about early counseling and education if 
somebody gets into trouble and before they get above their head 
in hot water, but the truth is that a significant portion of 
the problem, perhaps the 70 percent figure, give or take, that 
you cited comes from lack of parents and especially our public 
education system early on, having people understand things like 
the Rule of 72, compound interest of money, what happens to 
savings. I mean, America's savings rates is one of the real 
problems for our economy. And so are there things that the 
Business Roundtable can suggest over time that will help all 
Americans avoid unnecessary problems as opposed to people that 
just have a horrible misfortune?
    Mr. Bartlett. We see it as a shared responsibility. We as 
an industry, we have the responsibility to explain the terms 
clearly, and we sometimes fall short of that, with all candor, 
but we work at it every day. We have the responsibility then to 
reach out to consumers that get in trouble, provide counseling, 
try to help them refinance if we need to, try to provide some 
way that they can get out of trouble, provide for counseling so 
that they can make better management decisions. The consumers, 
the borrowers, also have a responsibility to avail themselves 
of that counseling early to make better management decisions. 
Congress has a responsibility to provide oversight of this law, 
the courts have a responsibility, the attorneys, the bankruptcy 
attorneys have a responsibility to explain clearly what----
    Mr. Feeney. I want to ask one more quick one. On balance 
you've got $1.1 trillion worth of activity that your companies 
represent on an annual basis. On balance are those companies 
much better off if we have fewer people get in hot water or 
more people get in hot water?
    Mr. Bartlett. The companies are better off when the 
consumers are better off and the consumers are better off when 
the companies are better off, so it's a shared responsibility.
    Ms. Sanchez. The time of the gentleman has expired.
    Mr. Johnson is recognized for 5 minutes.
    Mr. Johnson. Thank you, Madam Chair.
    Mr. Bartlett, it wasn't the consumer debtors lobby that was 
responsible for causing the passage of this so-called Consumer 
Protection Act of 2005, was it? It wasn't the debtors lobby or 
the consumers who were itching for a change, was it?
    Mr. Bartlett. Well, the consumers are our customers.
    Mr. Johnson. Well, no, no, no, no, no. Answer my question. 
It wasn't the consumer lobby that was asking for a change in 
the Bankruptcy Code?
    Mr. Bartlett. Right, I think that is accurate.
    Mr. Johnson. It was actually the creditors lobby, those who 
extend credit, isn't that correct?
    Mr. Bartlett. Congressman, I think it was the Members of 
Congress that voted for the bill.
    Mr. Johnson. But there was a sustained lobbying effort that 
brought about a change in the existing bankruptcy law, and that 
effort was led by the creditors lobby, isn't that correct?
    Mr. Bartlett. On the lobbying side, yes, sir.
    Mr. Johnson. And the creditors, what they wanted to do was 
make it more difficult for debtors to be able to file for 
relief under the Bankruptcy Code, either 7 or 13, isn't that 
true, they wanted to make it more difficult?
    Mr. Bartlett. No, sir.
    Mr. Johnson. Well, they actually succeeded though in making 
it more difficult and onerous for people who were in dire 
straits to actually file a successful petition for either 13 or 
7, isn't that correct?
    Mr. Bartlett. No, sir.
    Mr. Johnson. Okay. Well, you disagree and I disagree with 
you on that. But a person such as Ms. Burroughs--Ms. Burroughs, 
I think you testified that you read some papers, you had to 
refinance your home a couple of times because of a job loss and 
your husband was deployed to Iraq, he's still serving over 
there. You apparently signed some papers to close a loan that 
provided for accelerated payments, your mortgage payments were 
going up and it was just difficult for you all to be able to 
make it under those circumstances, and so you got to the point 
where you had no alternative but to declare bankruptcy, is that 
    Ms. Burroughs. Right.
    Mr. Johnson. And you went in and filed a chapter 13.
    Now, how, Mr. Bartlett, has this so-called Consumer 
Protection Act of 2005 helped people such as Ms. Shirley Jones 
    Mr. Bartlett. It continued to make it possible for her to 
file for bankruptcy if she could not pay her debts.
    Mr. Johnson. It made it more difficult for her to file, 
didn't it?
    Mr. Bartlett. No, sir, I don't believe so. That is why she 
filed and she successfully filed for chapter 13, because she 
can pay some of her debts.
    Mr. Johnson. It cost her more to file though, didn't it?
    Mr. Bartlett. Congressman, it allowed her to keep her home, 
which is what chapter 13 is for. Among other things, it allows 
her to keep her home as a secured debt so as she makes her 
payments on the home she can keep it. Without the protection of 
bankruptcy, of chapter 13, she could not do that.
    Ms. Sanchez. Will the gentleman yield for a quick second?
    Mr. Johnson. Yes.
    Ms. Sanchez. But, Mr. Bartlett, that relief was available 
prior to the changes in the act in 2005, is that not correct?
    Mr. Bartlett. That's correct. We strengthened the act in 
some ways.
    Ms. Sanchez. But the ability for a debtor who experiences a 
job loss or some loss in income to keep their home was 
available prior to the changes in the act? That is the question 
I'm asking you. A simple yes or no question.
    Mr. Bartlett. Yes, it was.
    Ms. Sanchez. I thank the gentleman for yielding.
    Mr. Johnson. But basically what this new act did was remove 
the ability of persons like Ms. Burroughs to be able to have 
the court make an adjustment in the terms of the mortgage on 
her principal resident?
    Mr. Bartlett. Congressman, I don't believe a bankruptcy 
court under the old law was able to adjust to a secured rate, a 
secured mortgage. I think that bankruptcy, you can adjust the 
unsecured but not the secured. That is what makes it secured 
versus unsecured. That is the basic difference. In a secured 
mortgage that is why you have the lower rates, is because it's 
secured by property, unsecured is not.
    Mr. Johnson. All right. Thank you, sir. Let me ask Mr. 
Sommer to respond to that also.
    Mr. Sommer. The 2005 amendments did make chapter 13 more 
difficult in a number of ways. You have the credit counseling, 
you have the credit education, you have to file 4 years worth 
of tax returns, there are a number of other requirements that 
were added which make it more difficult and more expensive to 
save a home.
    Mr. Johnson. And suppose one does not have the documents 
that are required under the act that are prerequisite. What 
happens in that case?
    Mr. Sommer. There are many cases that have been dismissed 
for people not having those documents. Sometimes very minor 
defects. People who submitted most of their pay stubs, but not 
quite all within the 60 days, the United States Trustee moves 
to dismiss those cases. And so the dismissal rate is higher. 
And because the cost of bankruptcy is higher more people are 
trying to file without a lawyer and running into trouble.
    Ms. Sanchez. The time of the gentleman has expired.
    The gentlewoman from California, Ms. Lofgren.
    Ms. Lofgren. Thank you, Madam Chairwoman, and thank you for 
having this hearing, which I think is very important. As 
Members know, I thought that our enactment of this so-called 
reform bill was a mistake, and I think what we have learned 
since then has proven those concerns to be correct.
    I would like to just thank Mrs. Burroughs for coming here. 
I know it is hard to talk about your own experience, especially 
with your husband deployed in Iraq for our country. Your 
patriotism is something we want to acknowledge and appreciate. 
And to tell your story really I think explains the problem 
    You and your husband have worked hard to provide for your 
home with your two children. It's the American dream. I mean 
you are the American dream, and to have what happened to you 
occur shows what's wrong here. You have worked hard, you've 
actually had a very substantial income because of your hard 
work. And yet with this mortgage payment issue coupled with our 
Bankruptcy Act and your husband's deployment and your job loss, 
which believe me can happen in any family no matter how hard 
people work, you've ended up in this very distressing 
    As I think about all the things that we were concerned 
about in the markups, the years of discussion of the Bankruptcy 
Act, I don't know that the credit counseling provision was a 
major focus. And yet as it's played out it has had a very 
pernicious effect and, from the GAO report, almost no positive 
impact because by the time people get to this situation there's 
nothing left to manage. I mean they have a very serious 
    I'm interested, Mr. Sommer, and again thanks to you because 
of your advocacy, I'm from San Jose so I know about the 
consumer bankruptcies and their volunteerism, the interplay 
between home foreclosures and the credit counseling. Can you 
talk about that? People are scrambling to keep their homes and 
then all of a sudden there's this new requirement they didn't 
know about. Can you just explain that in more detail?
    Mr. Sommer. Well, basically first of all, you should 
understand that credit counseling cannot stop a mortgage 
    Ms. Lofgren. We know that.
    Mr. Sommer. A debt management plan deals typically with 
credit card debts and not with mortgage debts. What happens 
very often is that people are attempting to negotiate with 
their mortgage company. And a lot of the mortgage companies say 
they offer these loan modifications, people are negotiating, 
but at the same time the foreclosure is going full speed ahead. 
And it's not until the brink of the sale that they figure out 
that this loan modification isn't going to happen, I'm going to 
have to do something else. They come in at the last minute to 
file a chapter 13 to stop a foreclosure and then they find out 
they have to get the credit counseling. And sometimes it's just 
one more barrier. Usually they can get it, usually it's not a 
problem. There are a few courts that have held you can't get it 
on the same day you file the petition, which I think is wrong. 
But it's one more obstacle in their way at a time when they're 
absolutely frantic. And any educational purpose would be much 
better served by the education they would get later in the 
bankruptcy case.
    Ms. Lofgren. Well, here's a question I have. I mean, there 
are certainly the individual human tragedies that we care 
about, and Mrs. Burroughs and her family have outlined them. A 
family that earned $97,000 a year in 2005 and yet because of 
this mortgage problem and the interest rates and the 
compounding--it looks to me illegal compounding--they have been 
put in this situation. But then there's the macro situation. 
And we are concerned about what is happening to the American 
economy because of the level of foreclosures and what that 
might do to the entire liquidity of the American economy.
    Can you draw a connection between the foreclosure rate, 
this credit counseling provision, and the whole macro American 
economy that is such a concern to us?
    Mr. Sommer. What happened to Ms. Burroughs is very typical 
of people who have been subjected to these kinds of loans. She 
probably would have qualified for a market rate loan based on 
her income, but she was steered to somebody who gave her a 
subprime loan and then encouraged to refinance a number of 
times where she got nothing from the loans other than a much 
higher loan balance.
    I think it's symptomatic of the lack of regulation in that 
industry and probably the tilt policy wise in our banking 
regulators toward the private industry.
    Ms. Lofgren. If I may, my time has expired. I will just 
note that the foreclosure rate is causing certain parts of the 
country to panic because it's going to have an impact, not just 
on those who are suffering, but on the entire real estate 
market that is then going to have an impact on the entire 
economy of the United States. And sometimes when you have the 
little nail in the horseshoe, you can find something as simple 
as this that helped cause those problems. And I yield back.
    Ms. Sanchez. Thank you. The time of the gentlewoman is 
    The gentleman from Massachusetts, Mr. Delahunt, is 
recognized for 5 minutes.
    Mr. Delahunt. Mr. Bartlett, you in your testimony indicate 
that bankruptcy filings are down?
    Mr. Bartlett. Consumer bankruptcy filings are down by about 
half of what it had been for every year.
    Mr. Delahunt. Has there been a study in terms of causal 
relationship between the bankruptcy law and the fact that the 
bankruptcy filings are down?
    Mr. Bartlett. I don't know of a specific study on point. I 
don't know of anyone that believes it's for any other reason.
    Mr. Delahunt. But there hasn't been any scientific study?
    Mr. Bartlett. I would have to search my mind. I don't know 
of one. I hadn't heard the question asked before. I believe 
most people believe it was directly from this law.
    Mr. Delahunt. With all due respect, most people believe--
you know, when I was a kid I believed in Santa Claus.
    Mr. Bartlett. Most people believe in Santa Claus, too, Mr. 
    Mr. Delahunt. And Santa Claus can be good. But to suggest 
that there's a proximate cause between filings and the passage 
of the bankruptcy law in 2005 and the fact that it's down, I 
would respectfully suggest that there are multiple, there are 
most likely multiple reasons other than the bankruptcy law that 
filings, consumer bankruptcy filings are down by 50 percent.
    Mr. Bartlett. Congressman, that well could be. I do have 
some statistics as I'm now searching around.
    Mr. Delahunt. Okay. Search a little and tell us what the 
search discovers?
    Mr. Bartlett. We hired a statistician and did some 
statistical tracking of the bankruptcy filings. And what we 
discovered is that the law was enacted, as I recall, in April 
of 2005, and I'm going by memory, with an effective date in 
October of 2005, as I recall.
    Mr. Delahunt. Correct.
    Mr. Bartlett. And so bankruptcy filings, as I said earlier, 
had been analyzed.
    Mr. Delahunt. And there was a real spike going up to 
October 2005.
    Mr. Bartlett. Right. And then it dropped like a rock to 
where bankruptcy filings were almost nonexistent. There are a 
lot of reasons for that.
    Mr. Delahunt. So after October 2005 we entered into the age 
of good times again?
    Mr. Bartlett. No, sir. The filings were premature. Many of 
the filings were premature. It is clear that that spike in 
filings was caused by the anticipation of the October effective 
date. And then the filings came back up and leveled out 
beginning around April of 2006 and have trended up slightly 
since then, but by and large stayed about the same with some 
slight trend up.
    Mr. Delahunt. Thank you for the statistics, but going back 
to my original question, there's absolutely no evidence to 
support a causal relationship other than surmise between the 
dramatic decline over the past, well, past year or so in terms 
of bankruptcy filings. Having said that, I guess today is about 
how it's benefited the consumer. I remember sitting here--how 
much of the--what's the average decline in terms of the 
interest rate charged by credit card issuers since the 
bankruptcy bill has been, since the effective date of the 
bankruptcy bill?
    Mr. Bartlett. I don't know because I don't think it could 
track exactly that precisely. Interest rates are charged for a 
lot of reasons of which the costs of bankruptcies that 
shouldn't have been filed is one of them, but most of it is 
monetary policy set.
    Mr. Delahunt. It was represented to us that we would 
witness a decline in the interest rates by credit card issuers 
because the losses that they were experiencing as a result of 
bankruptcies was in the billions of dollars. But I would 
challenge you to go back to the Roundtable and come back to us 
with a statistic that shows that there has been any decline 
whatsoever in terms of credit card issuers in terms of a real 
benefit to the consumer. If you would do that for me, I would 
be--if you would just shake your head, even up and down 
    Mr. Bartlett. Congressman, I don't believe with your 
premise that you can have that exact a connection. I do believe 
if there are 700,000 fewer bankruptcies that had been occurring 
and are not occurring, those costs then are not absorbed as a 
dead weight by the economy and so therefore those costs are not 
spread back into the economy.
    Mr. Delahunt. Are you trying to tell me then that over some 
time we can expect those savings that have been achieved to 
result in lower interest rates to the consumer?
    Mr. Bartlett. Not in a way in which you can write it down 
on a statement, as you asked the question, but in a way of 
700,000 times the cost of each bankruptcy that is a lesser dead 
weight cost to the economy.
    Mr. Delahunt. I'm not talking about the economy in a macro 
level. I'm talking about real people like Mrs. Burroughs. You 
know, all the Mrs. Burroughses and the Congressman Delahunts 
and the Mr. Bartletts, are we going to finally see a reduction 
in credit card interest rates because of this bill?
    Ms. Sanchez. The time of the gentleman has expired, but I 
will allow the witness to answer briefly.
    Mr. Bartlett. Congressman, I don't believe we are going to 
agree on the context of your question. I'm trying here, but I 
believe it's a cost to the economy which is spread out to all 
consumers. I don't think that----
    Mr. Delahunt. I think you really have answered my question. 
Thank you.
    Ms. Sanchez. The time of the gentleman has expired. Thank 
you, Mr. Delahunt.
    Mr. Watt is recognized for 5 minutes.
    Mr. Watt. Thank you, Madam Chair, and thank you for 
conducting the hearing. Actually this gives me an opportunity 
to bring together service on two different Committees, the 
Financial Services Committee and this Subcommittee, in a way 
that I don't often have an opportunity to do.
    Let me first deal with this counseling thing. Obviously 
people are getting more counseling, credit counseling at some 
point. And one of the things that Ms. Jones said is that it's 
likely to be too late in the process. I think everybody agrees 
with that.
    Mr. Bartlett, you're familiar with the Homeownership Equity 
Protection Act. We've been dealing with possible amendments to 
it in Financial Services to deal with predatory lending. And 
one of the things in that act, one of the questions we've been 
trying to resolve, is whether some kind of mandatory credit 
counseling before a borrower could obtain a subprime loan would 
be appropriate. The current HOEPA Law has no provision in it. 
North Carolina's HOEPA law does have a provision in it that 
requires mandatory loan counseling before one can get a 
subprime loan.
    What is the Roundtable's position on whether we should 
carry that North Carolina standard into the Federal HOEPA Law?
    Mr. Bartlett. Congressman, first, let me say we appreciate 
your leadership on the Financial Services Committee in the area 
of subprime. We have a lot of work to do in that area, as you 
know, and we're all sharing the responsibility to do it.
    On mandatory credit counseling, we have not endorsed that 
yet. We've thought about it, we've talked about it and we may 
end up.
    Mr. Watt. Wouldn't that be one element, one means by which 
you can advance the counseling--I mean it would be a little bit 
different, obviously, but if the problem, if the real problem 
is that people are waiting too late to get credit counseling, 
this would provide some means of advancing it to an earlier 
stage. And one of those opportunities would be in a context 
where people are getting into these high risk loans which are 
not. We're not indicting subprime loans in general but they 
generally tend to be more risky than prime loans. That is why 
they're called subprime loans. So that would be one 
opportunity. Do you think that is a good idea personally, not 
speaking for the Roundtable?
    Mr. Bartlett. Let me suggest what I think is a good idea 
which comes pretty close to what you're asking. One is we've 
set up a whole series of voluntary counseling services in a 
project, as you know.
    Mr. Watt. But that is not working. I mean it's working at 
some level. I don't mean to suggest it's not working at all, 
but it's not achieving the uniform result that I think 
everybody at this table indicates. Better education and 
counseling would help in this area in some respects, isn't that 
    Mr. Bartlett. We are for earlier counseling, better 
counseling and----
    Mr. Watt. All right. We'll take that up in another context.
    Let me go to the second question which has been raised by 
Mr. Sommer here, because the current Bankruptcy Code really 
doesn't allow for any revisions to be made to a mortgage loan 
as it does with consumer loans. What do you say about Mr. 
Sommer now, I know that you're going to point out the problems 
that some of them are securitized, they are sold to other 
financing people. But wouldn't that be a good idea to give the 
bankruptcy court some flexibility in the area dealing with at 
least exploding adjustable rate mortgages and subprime loans, 
extending it to that extent?
    Mr. Bartlett. Mortgage lenders will refinance, will 
reservice, will modify loan agreements and were very willing to 
do so, and we work it out with the borrower and with the 
counselor and I suppose sometimes with the attorney. But to 
give a bankruptcy judge the right to make an unsecured loan, to 
make a secured loan as if it were unsecured, we think would 
disrupt mortgage availability for everyone. So we think that is 
the wrong answer. But modifying the loan so that people can 
afford them and work it through we think is the right answer, 
and that is what's happening now.
    Mr. Watt. You mean you don't want the assistance of a 
bankruptcy court in working through this process? You think 
it's actually better only if it can be done on a volunteer 
    Mr. Bartlett. We think you ought to be careful what you 
pray for. You may get it. And if you give bankruptcy judges the 
right to turn a secured loan into an unsecured loan after the 
fact, you will drive up the home mortgage market.
    Mr. Watt. Can I just hear Mr. Sommer's response, Madam 
Chair, and I ask unanimous consent for whatever time it takes 
for him to respond?
    Ms. Sanchez. Without objection.
    Mr. Sommer.
    Mr. Sommer. Well, our proposal is basically to have the 
bankruptcy court do what the mortgage companies say they are 
very willing to do, but in practice people have found them a 
lot less willing to do, which is the kind of loan modification 
that does reset the payments, not turn the loan into an 
unsecured loan, but reduce it to the value of the actual 
property, reduce the interest rate to a fixed rate, which can 
be done with virtually every other kind of secured loan in 
bankruptcy other than a mortgage on a principal residence.
    So we are really asking for amendments that simply put into 
practice what the mortgage companies say they want to do. And 
incidentally, a number of bankers have told me that they would 
like this because about half of the securitized trusts prohibit 
loan modification. So when they want to do the modifications, 
which is better both for them and the borrower, they are 
prohibited from doing it by the securitized trust, and this 
would solve that problem.
    Mr. Watt. Madam Chair, could I ask for unanimous consent 
from one additional minute?
    Ms. Sanchez. Without objection, the gentleman is recognized 
for 1 minute.
    Mr. Watt. Just to ask Mr. Bartlett, wouldn't the effect of 
that be to make lenders a lot more careful about overextending 
credit in home mortgage situations? I mean basically what he's 
proposing would allow a court just to bring it down to the 
value of the actual property. It will still be, it would still 
be a secured loan. What would be the problem with that?
    Mr. Bartlett. Well, the devil is always in the details. But 
if you allow a court to change the terms of the security of a 
mortgage then it's no longer a mortgage basically. Having said 
that, we want to, we do, we have all kinds of systems as 
lenders and as an industry to figure out a way to renegotiate 
the loan or the loan--terms of the loan or loan payment, loan 
modification. And it happens not just sometimes, it happens a 
lot to modify that loan to meet both needs. And that is what we 
do and that is what we set out to do. To put it in the hands of 
a court I think would make mortgage credit much more expensive 
and much less available to lower and moderate income people.
    Mr. Watt. I thank the Chair for the time. I did want to 
note that there is a very strong interplay between this and 
what we're trying to do in the predatory lending area on the 
other side. So this is very helpful in trying to tie the two 
issues together. And I thank the gentlelady for yielding the 
additional time.
    Ms. Sanchez. We appreciate your work on both Committees. 
And when there's an issue that crosses over like that we 
appreciate your expertise on this Subcommittee.
    Now I would like to recognize a very patient and very 
gracious Ranking Member for 5 minutes.
    Mr. Cannon. I'm not sure patience has a lot to do with it. 
I have to be here, I think, whereas other Members don't.
    I want to thank the gentleman, Mr. Watt, because we've been 
conflating a lot of ideas here, and your questions just cut 
through to the chase. And it really comes down to what happens 
to the cost of mortgages in the end, so I appreciate it.
    Ms. Jones, you haven't been asked a lot of questions 
because I think your testimony was very clear and we appreciate 
that and it's very helpful. And Mr. Bartlett, of course you've 
been asked a lot of questions and I appreciate your clarity, 
and especially on this last answer, because there's been a lot 
of concern here. Ms. Lofgren has left, but I want to associate 
myself with her remarks in relation to you, Ms. Burroughs. This 
is a very tough thing to come in. We've got all these things 
talking about fancy schmancy stuff. You've got to be on the 
Financial Services Committee to really get it in some ways. So 
we thank Mr. Watt for being here. But you're the person who got 
the creepy loan. If I'm reading this right--look, and I have 
some sympathy. I've done several mortgages in my life. Always 
the closing costs, with two exceptions, were much higher than 
anybody expected, and so you're digging deep to try to cover 
the costs. And then who knows what all that detail says. And 
we've created so many laws at the Federal level requiring 
disclosure that there are literally, I suspect, the last time I 
did a mortgage, there were probably two dozen pages I had to 
sign. I guess you could have read them. I didn't have time to 
read them. And frankly I don't have the expertise to do that. 
So that leaves us all in a bit of a bollix. But as I understand 
it, your biggest problem in life is not so much the bankruptcy 
process. In fact you seem relieved about being able to get 
through the bankruptcy process. Your problem was the creeps who 
probably misrepresented the loans that you entered into?
    Ms. Burroughs. Right.
    Mr. Cannon. The record should reflect that she's nodding, 
saying yes.
    Ms. Burroughs. Yes.
    Mr. Cannon. Thank you. So we have a problem. And many 
people have talked about the issue of the subprime loans. And 
our question is how we actually deal with that in the long 
    Now, Mr. Sommer, you talked about a cost of $500 per family 
and spoke in your oral testimony about how that wasn't being 
offset by about, I think you said, $100 per payment on average 
by that half percent of the people that end up paying into the 
system that were unexpected. Is that unfair for me to conflate 
those two statements that you made?
    Mr. Sommer. I'm not sure exactly what you're saying. But 
what I was saying is there's a tremendous cost to every 
bankruptcy debtor from all the additional burdens, and the vast 
majority of them are nowhere near----
    Mr. Cannon. We're talking about there's an anticipated 
savings per consumer of $500. And you conflated that with the 
payment made by an individual debtor in this very small half of 
1 percent that is now paying, the group that is additionally 
paying into the system.
    Mr. Sommer. I was referring to what some of the other 
Members referred to; the promises that were made by the credit 
industry about the savings to the economy of $400 to $500. And 
the fact is that there's a much larger burden, which is 
probably closer to $500 or $1,000 on each consumer bankruptcy 
debtor and added cost.
    Mr. Cannon. You talked in particular about the payment that 
is being made by this one-half of 1 percent that is now being 
put into a chapter 13 payment. That on average I think you said 
was $100, is that correct?
    Mr. Sommer. Oh, I know. The $100 is the floor on the means 
test formula threshold. In certain circumstances if you're 
deemed by the means test to be able to pay $100 a month, then 
you are presumed to be abusive and a motion can be filed to 
dismiss your chapter 7.
    Mr. Cannon. Were you putting those two things together; the 
$500 proposed savings? It seemed in your testimony you're not.
    Mr. Sommer. No, not really.
    Mr. Cannon. Because they're not really joined?
    Mr. Sommer. No, they have nothing to do with each other.
    Mr. Cannon. I'm concerned. We have the highest rate of home 
ownership in America today than we have ever had. We have some 
very serious problems now with the marginal lending and the 
advantage I think that some lenders are taking, and the perhaps 
fraud, in these marginal lendings. But isn't it true that if 
you begin to fiddle with the system that the cost for people 
who would otherwise be able to get into a home would rise, Mr. 
    Mr. Sommer. I don't think so. First of all, like Ms. 
Burroughs, a lot of people are sold mortgages that are at a 
much higher rate than they qualify for.
    Mr. Cannon. That is true. But that goes to the fraud of the 
lender. And also in Ms. Burroughs' case what she's saying is 
that lenders lied to her and she was expected to be a lawyer 
for herself and to go through and figure that out. That is a 
different issue than the financial system that allows her to 
get a mortgage, which one would hope would be a more honest 
    Mr. Sommer. I guess I assume by fiddling with the system 
you included passing consumer protection laws that might 
regulate some of those practices. That is fiddling with the 
system in a sense.
    Mr. Cannon. But we're talking here about bankruptcy.
    Mr. Sommer. As far as the bankruptcy system, I think that 
allowing people to modify their mortgages in this way would, 
number one, get the same benefits that loan modifications get, 
which the mortgage companies want and, second of all, would 
make lenders more careful, and we probably wouldn't have so 
many of these loans. So I'm not sure there would be a bad 
effect on the economy. I think it would be a good effect.
    Mr. Cannon. Well, if you didn't have so many loans--if the 
Chairman would indulge me--if you didn't have so many loans, 
obviously it would be nice to get rid of fraudulent loans, but 
I suspect that actual credit counseling and education of people 
who are going to get loans might actually help that, and there 
may be something we could do there.
    I appreciate the Chair's indulgence. Let me just say that 
this is a very, very important issue. This is not a Republican 
or a Democratic, a conservative or a liberal issue. This is an 
issue about how we set the rules so that we get the best system 
so that we have the fewest kind of sick loans by people who 
cheat but, on the other hand, have a market that allows money 
to come in and move around adequately and be protected so that 
the people who want a mortgage can get it.
    Thank you, Madam Chair. I yield back.
    Ms. Sanchez. Thank you. I would like to thank all of the 
witnesses for their testimony today. Without objection, Members 
will have 5 legislative days to submit any additional written 
questions which we'll forward to the witnesses and ask that you 
answer as promptly as you can, and those answers and questions 
will be made part of the record. Without objection, the record 
will remain open for 5 legislative days for the submission of 
any additional materials.
    Again, I thank everyone for their time and their patience. 
This hearing of the Subcommittee on Commercial and 
Administrative Law is adjourned.
    [Whereupon, at 12 p.m., the Subcommittee was adjourned.]
                            A P P E N D I X


               Material Submitted for the Hearing Record

Report on Personal Bankruptcy Statistical Study by SMR Research Corp., 
submitted by the Financial Services Roundtable, to the Honorable Howard 
      Berman, Chairman, Subcommittee on Courts, the Internet, and 
                         Intellectual Property

 Response to Post-Hearing Questions from Steve Bartlett, President and 
           CEO, Financial Services Roundtable, Washington, DC

  Response to Post-Hearing Questions from Henry J. Sommer, President, 
National Association of Consumer Bankruptcy Attorneys, Philadelphia, PA

  Response to Post-Hearing Questions from Yvonne D. Jones, Director, 
      Financial Markets and Community Investment, U.S. Government 
                 Accountability Office, Washington, DC

  Documents of personal bankruptcy filing of Shirley Jones Burroughs, 
                              Gastonia, NC

    Prepared Statement of David C. Jones, President, Association of 
            Independent Consumer Credit Counseling Agencies