Mr. Chairman and distinguished members of this subcommittee, I am honored to have been invited to testify before you regarding an issue of fundamental importance to the American People -- Bankruptcy Reform. This issue is of great concern and vital importance because it goes to the very core of our social and economic fabric. Just as it was an issue which was acutely important to the founders of this country and the framers of the Constitution, it is important today, and should be approached with careful and sober deliberation.

Before I get into my prepared remarks, let me state that currently I am a judge of the United States District Court for the Western district of Tennessee since January 1996. Prior to that time, I served as a judge of the United States Bankruptcy Court for the Western District of Tennessee from 1988 to 1996. During my tenure as a Bankruptcy Judge, I presided over Bankruptcy cases for individuals and businesses, large and small. When I became a Bankruptcy Judge in 1988 there were a total of 3 judges on our court and bankruptcy filings for that fiscal year totaled 11,545. By the end of 1995 we had four judges on the court and our filings totaled 17,736. At the close of 1997, the bankruptcy filings totaled 23,837 (See Exhibit 1). With the growth in bankruptcy filings, it is important to review the system, to evaluate how well its working, and to make charges where needed.

I submit to you, based on my 7 1/2 years experience as a bankruptcy judge, that the system works, that the needs of debtors and creditors are being met, that while there are some instances of abuse, they are the exception rather than the rule and further they should not be tolerated; that there are sufficient mechanisms in the Code to address the problems, and finally that no radical reform is needed! Moreover, I submit that the drastic reform proposed by the current legislation will be highly injurious to the bankruptcy system for the reasons set forth herein.

Prior to 1984 the consumer finance industry was completely unsuccessful in its legislative attempts over the years to enact a threshold eligibility test to determine whether consumer debtors were entitled to relief under the bankruptcy laws. In 1983-1984 creditor groups made another run at a threshold eligibility test for relief under chapter 7, utilizing in large part for support, the controversial findings of a widely- publicized 1982 "Purdue Study" that was funded by the consumer finance industry. The Purdue study found that a significant percentage of chapter 7 debtors had the ability to repay a meaningful portion of their unsecured, nonpriority debts under chapter 13 repayment plans. The study was later revealed, however, to be somewhat flawed and alarmist.

Although the consumer finance industry was not successful in 1984 in obtaining its desired threshold eligibility test for debtor relief under chapter 7, a legislative compromise resulted in the passage and enactment of section 707(b) -- referred to as the substantial abuse section -- which restricted unfettered access to relief under chapter 7. That is, restriction to relief under chapter 7 to avoid misuse of the bankruptcy laws by consumer debtors was accomplished by a judicial process utilizing the "substantial abuse" test of section 707(b). The legislative history underlying section 707(b) is confusing and ambiguous. Cong. Rec. H7489 and H7499 (daily ed. June 29, 1984). Section 109(g) also was enacted in 1984 to further restrict debtor relief in order to control abusive multiple filings by some debtors.

If the court finds a "substantial abuse" as contemplated under section 707(b), the court dismisses the chapter 7 case or the debtor has to voluntarily convert the chapter 7 liquidating case to a repayment case under chapter 13 in the event the debtor seeks to obtain relief under the Bankruptcy Code. As a result, section 707(b) does not directly establish a mandatory or involuntary chapter 13. As a practical matter, section 707(b) does dictate in many cases the individual consumer debtor's choice of relief under the Bankruptcy Code: either chapter 13 relief or no bankruptcy relief at all. Section 707(b), however, does not contain a threshold eligibility test.

In 1997 the consumer finance industry made another run for a threshold eligibility test in chapter 7 cases. See H.R. 2500, the "Responsible Borrower Protection Act;" see also H.R. 3150, the "Bankruptcy Reform Act of 1998;" and compare S. 1301, the "Consumer Bankruptcy Act of 1997." This time around, the creditor groups are once again armed with a self-funded and fundamentally flawed report (i.e., the October 6, 1997 Credit Research Center Report). The defects in this report have been detailed by the United States General Accounting Office, pursuant to a bipartisan request for review.

The most recent sought-for threshold eligibility test for relief under chapter 7 by the creditor groups is cloaked with a buzzword phrase -- "needs-based" bankruptcy system, whereby a consumer debtor ostensibly would be limited to the relief under the Bankruptcy Code that was actually "needed" under the circumstances. The needs-based system suggests to the public and members of the Congress that a flexible "tailor-made" non-judicial formula would be applied on a case-by-case basis to measure the exact amount of relief that was "needed" by a particular debtor. Actually there are only three options: no relief, relief under chapter 7, or relief under chapter 13.

To determine the debtor's ability to repay and, therefore, which chapter for relief is "needed," the creditor groups further advocate a "means-testing" concept to accompany the needs-based bankruptcy system. This means-testing concept establishes a rigid, non-judicial statutory formula that is defined and strongly supported by the self-interested creditor groups. If enacted, this proposal would entirely replace and remove the independent and impartial court from the deliberative part of the eligibility process under section 109(b) in chapter 7 cases.⁽¹⁾ Although determining eligibility for relief under chapter 7 of the Bankruptcy Code is a statutorily imposed duty of the court, the creditor groups propose to relegate this critical function to a non-judicial officer (e.g., a clerk, panel trustee, United States trustee or bankruptcy administrator, or other government bureaucrat) at the instance of creditor groups.

In essence here, one party to a court procedure seemingly is attempting to write the rules governing access to the court by another party. The very nature of this controversial, non-judicial formula, perhaps simple at first blush, will, among other things, definitely increase the workload of the court and make bankruptcy more intimidating and expensive for deserving debtors. It should be emphasized that the great preponderance of consumer bankruptcy cases do not involve high-profile celebrities and high-income debtors. Many statutory safeguards currently exist to protect creditors from dishonest and manipulative debtors and also to uphold the integrity of the bankruptcy system. See, for example, 11 U.S.C. §§ 727(a)(1) through (10), 523(a)(1) through (18), 1324-1325, 109(g), 707(a) and (b), 1307(c), and 18 U.S.C. § 152.

I am mindful that the "needs-based" system advocated in H.R. 2500 and H.R. 3150 has the powerful backing of well-funded creditor groups and also certain members of the Congress. This concept essentially provides, as articulated by the creditor groups, that if an individual consumer debtor has the ability to repay unsecured, nonpriority debts and could thereby make meaningful payments under a chapter 13 plan, relief under chapter 7 should be denied. As noted, if such a debtor has the ability to pay and seeks relief under the Bankruptcy Code, the debtor would have to do so under chapter 13 or, simply stated, no relief would be available under the Bankruptcy Code as the chapter 7 case will be dismissed for lack of eligibility under section 109(b) based on H.R. 2500 and H.R. 3150 or dismissed as a substantial abuse under section 707(b) based on S. 1301. I submit that would potentially lend to some unprincipled results which are anachronistic to fundamental bankruptcy law.

It may be said that a de facto needs-based system under the federal bankruptcy laws already exists, but without the rigid, non-judicial "means-testing" formula proffered by the self-interested creditor groups. See, for example, In re Green, 934 F.2d 568, 572-573 (4^th Cir. 1991), which adopted a totality of the circumstances test as the proper analysis for determining whether a chapter 7 case should be dismissed for a "substantial abuse" under section 707(b) and stated that the bankruptcy court should apply the five following factors:

(1) whether the bankruptcy petition was filed because of sudden illness, calamity, disability, or unemployment;

(2) whether the debtor incurred cash advances and made consumer purchases far in excess of his ability to repay;

(3) whether the debtor's proposed family budget is excessive or unreasonable;

(4) whether the debtor's schedules and statement of current income and expenses reasonably and accurately reflect the true financial condition; and

(5) whether the petition was filed in good faith.

Compare In re Krohn, 886 F.2d 123, 126 (6^th Cir. 1989); also compare In re Walton, 866 F.2d 981, 985 (8^th Cir. 1989); In re Kelly, 841 F.2d 908, 915 (9^th Cir. 1988).

Sections 707(b) (substantial abuse) and 109(b) (eligibility for relief) are quickly becoming major battlegrounds in the Congress. In reality, the creditor groups once again seek a threshold eligibility test in chapter 7 under the guise of a "needs-based" bankruptcy system combined with a "means-testing" concept; however, this time around they also want to take the court out of the process to determine eligibility for relief and instead replace the court's independent and impartial rulings with a rigid, creditor- defined administrative or non-judicial formula -- the so-called "means-test" -- to determine whether chapter 7 or 13 is available to the debtor and concomitantly how much the debtor can repay over a five year period under a chapter 13 plan. Additionally, in 1997 and 1998 the cries of the creditor groups are much louder, extreme, and more sophisticated; they are better funded; and they are exceptionally well organized with high powered lobbyists (e.g., Lloyd M. Bensten, Haley Barbour, and Lloyd Cutler) and have launched massive and extensive public relations and media campaigns.

Notwithstanding the self-serving position of the creditor groups, there are no real compelling reasons in 1998 to "rush to legislate" consumer bankruptcy reform. Balance, patience, careful deliberation, and independent thinking are vital. Careful consideration of the needs and concerns of both debtors and creditors are warranted. The proposed needs-based bankruptcy system to determine whether relief should be granted under chapter 7 or 13, with its accompanying non-judicial "means-testing" concept or formula to determine a debtor's ability to pay, should be rejected at this time by the Congress in favor of more thoughtful, equitable, and balanced consumer bankruptcy legislation.

Instead, certain "fine-tuning" amendments to existing section 707(b) will suffice that will maintain the carefully created statutory balance between the interests of debtors and creditors. For example, section 707(b) could, and should, be amended (i.e., "fine-tuned") by:

striking the requirement that debtor abuse be "substantial" before the court may dismiss a chapter 7 case (a "zero tolerance" standard should be adopted);

inserting "ability to pay" as a statutory factor that the court must consider along with the totality of other relevant factors (e.g., the five Green factors enumerated above, among others);

eliminating the distinction between a debtor's consumer and business debts; (i.e., 707(b) does not apply to business debts)

striking the phrase "but not at the request or suggestion of any party in interest;"

broadening the standing requirement to include panel trustees and also any creditor in a particular case that has made written demand upon the United States trustee or bankruptcy administrator to file such a motion and the United States trustee or bankruptcy administrator thereafter declines in writing to do so; or alternatively allowing a creditor after written denial by the U.S. trustee, to obtain review of such denial by virtue of Bankruptcy Rule 2020.

allowing recovery of actual damages, including costs and attorneys' fees, and, in appropriate circumstances, punitive damages if creditors file section 707(b) motions with little or no basis in fact or law; and

providing that a section 707(b) motion shall not be dismissed or withdrawn at the creditor's instance without a court order and notice as the court may direct.

Section 707(b) must be considered in combination with section 521(1), which requires a debtor to file a schedule of current income (Schedule I) and expenditures (Schedule J). After a line-item review of these schedules, currently the court, on its own motion, or on a motion by the United States trustee or bankruptcy administrator determines whether the debtor has excess income to pay off the debts or "has padded" his/her expenses to support "freewheeling spending" and a life of luxury.

The Bankruptcy Code strikes an equitable balance between the competing and countervailing needs and interests of all parties involved. With this "needs-based" and "means-testing" proposal, creditor groups are attempting to disturb this delicate statutory balance. The Congress recognized the equitable balancing of such needs and interests in 1984 when it passed sections 707(b) and 109(g) to avoid abusive practices by some consumer debtors. S. Rep. No. 65, 98^th Cong., 1st Sess. 43 (1983) (Senate Report accompanying section 445, Omnibus Bankruptcy Improvements Act of 1983). Although the legislative history underlying section 707(b) reveals that this limited standing requirement precludes "creditors from making bankruptcy too expensive for the debtors by filing harassing motions alleging substantial abuse," 130 Cong. Rec. S7624-S7625 (daily ed. June 19, 1984), there is no compelling reason why creditors should not be allowed to file motions under section 707(b) provided that they have made demand in writing on the United States trustee or bankruptcy administrator and the United States trustee or bankruptcy administrator thereafter declines in writing to do so. The enlarged standing under section 707(b) could assist the courts since when raised sua sponte, the court becomes both an advocate and a judge in those cases where the United States trustee or bankruptcy administrator has failed to properly act.

Harassing or other non-meritorious section 707(b) motions and overreaching by certain creditors to extract reaffirmation agreements should be strongly discouraged. The abusive, aggressive, and improper reaffirmation practices used by Sears, Roebuck and Co. (and others) to persuade debtors to pay discharged obligations are now widely known. Abuse by creditors (or debtors) should not be tolerated. See H.R. 3146, the "Consumers Lenders and Borrowers Bankruptcy Accountability Act of 1998," introduced on February 3, 1998. According to the introductory statements made on February 3, 1998, by Rep. Nadler (D-NY), sponsor of H.R. 3146, the bill is aimed "at reforming the bankruptcy system by targeting both debtors and creditors whose irresponsible and sometimes dishonest behavior has undermined public confidence in the fairness of the bankruptcy system and has cheated honest debtors and creditors."

House Report No. 3146 attempts to balance the competing interests of both debtors and creditors. It would:

• prohibit wealthy borrowers from shielding assets by buying expensive homes which can be fully protected from creditors under an unlimited homestead exemption available in certain states;

• provide a carefully targeted mechanism to prevent debtors who can afford to pay from escaping their debts in bankruptcy;

• increase incentives for debtors to voluntarily pursue a chapter 13 payment plan;

• educate debtors to improve their understanding of alternatives to bankruptcy;

• discourage lenders from making new loans to consumers who are already overloaded with debt;

• make lenders that provide credit to compulsive gamblers in casinos responsible for their conduct;

• encourage lenders to work with financially strapped consumers who are making their best effort to arrange a payment schedule; and

• penalize creditors that violate the limits which bankruptcy places on coercive collection practices.

Indeed, ways to fairly advance and improve the actual and perceived integrity, accountability, and the efficiency of the bankruptcy system free of abuse should be the goal, while maintaining an equitable balance of the competing and countervailing interests of both debtors and creditors. There has been no demonstration that a "major overhaul" of the consumer bankruptcy laws and system is needed. Instead, with fine-tuning amendments to section 707(b), as suggested above, the Congress will continue to delicately balance the needs, responsibilities, and interests of both debtors and creditors and also further the actual and perceived public confidence in the bankruptcy system.

Conclusion

I applaud Congress for its efforts to make sure that we have the best bankruptcy system possible. Further I applaud Congress for its willingness to undertake reform where needed, but I hope that Congress will be equally willing to exercise restraint, and refrain from imposing radical reform on a system that is working remarkably well. Yes some change is needed, but the reform needed is only "fine-tuning!" Radical reform is not warranted as is demonstrated by the GAO Report and other data generated by the system.

Is there abuse in the system? Yes. There is some abuse. There are debtors who misuse and manipulate the system and file bankruptcy for improper purposes, just as there are creditors who abuse the system. Yes, there are certain high profile debtors, certain celebrity debtors or debtor athletes who have used the system for unintended purposes and make a mockery of the system. Such examples are outrageous! But these examples are a miniscule part of the total system; they are microscopic in comparison with the millions of debtors who have used the system for its intended purposes --- to get a breathing spell, to get a fresh start, to preserve assets and in the process preserve integrity, dignity and hope!

The system, with a little fine-tuning, can deal with those issues of which Congress is concerned, but we can ill afford to formulate policies or to legislate based on extremes or aberrations.

If the current legislation is passed, the weight and cost of that legislation will be born disproportionately by the poorest of the poor, the people who are most deserving or relief, the people who can ill afford to have courthouse doors closed to them. Additionally, if passed, the legislation will drastically drive up to cost of filing and administering bankruptcy, will overburden the courts which will have to hold hearings and litigate the myriad of issues raised by he litigation, and ultimately require more judges.

I strongly urge Congress to carefully and fully consider more independent data in evaluating the impact of the legislation on the system.

I again state the system is not broken, it works reasonably well. It only needs a "tune-up" and not an "engine-overhaul."

Thank you for permitting me to testify. I ask that my entire statement be admitted for the written record.

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1. When the proposed provisions of the "needs-based" system are read in tandem with the "means-testing" concept, they became the functional equivalent of the threshold eligibility test for bankruptcy relief that has historically eluded the consumer finance industry.