Hearing on Bankruptcy Reform and Financial Services Issues

Prepared Testimony of the Honorable George W. Gekas (R-PA)
Member of Congress

9:30 a.m., Thursday, March 25, 1999

I would like to thank Senator Gramm and the other Senators on the Banking Committee for inviting me to testify on this important issue.

I had hoped the critical banking provisions included in last session's Bankruptcy Reform Conference Report would be included in this year's Senate Bill as well. They provided strong and balanced consumer protections. I would urge the Senate to reconsider its omission of those provisions in this year's Bill.

Bankruptcy reform is of urgent importance. The astronomical rate of increase of consumer bankruptcy filings that we have witnessed over the last few years is startling. Specifically, since the enactment of the bankruptcy code in 1978, consumer bankruptcy filings have increased from little more than 182,000 to 1.4 million in 1998, a 750% increase. Dramatic increases have occurred particularly in the last few years, when filings increased by 29% between 1995 and 1996 and then went up another 20% from 1996 to 1997. The fact that these increases occurred during a time of strong economic growth, wage growth and a high-octane economy, is quite distressing.

I believe that this dramatic increase in the number of consumer bankruptcies demonstrates some fundamental problems with the bankruptcy code. For example, many of the factors that may logically explain such a dramatic increase in the number of bankruptcies ­ divorce, high medical bills or high unemployment, are not present here. In fact, even some of the factors that opponents of bankruptcy reform seek to use to explain this dramatic increase in bankruptcies, such as high debt-to-income ratios, have not increased as dramatically as the increase in bankruptcy filings. Further, most of the increase in these ratios occurred as a result of bigger mortgages, which are now more affordable because of lower interest rates, rather than higher credit card debt.

No, it seems that the cause of the problem may actually lie with the bankruptcy code itself, and the way that it gives high income debtors the ability, and some would even call it the incentive, to shelter their assets and declare bankruptcy, letting them simply walk away from their debts, leaving the rest of us holding the bag.

Last year, the House and Senate took fairly divergent approaches to reforming the bankruptcy system. In the Conference, both sides showed a strong willingness to compromise. In fact, I believe that we in the House demonstrated a remarkable willingness to accede to the Senate's wishes ­ and we were happy to do so! What emerged was a balanced bill that protects low income debtors, retains significant discretion for Bankruptcy Judges, fairly takes a debtor's individual circumstances into account, and, for the first time, requires high-income filers who have an ability to pay back a portion of their debts to do so.

That compromise, which received 300 votes on the Floor of the House last year, has become the basis for the House bankruptcy reform bill this year. This compromise already has amassed the Cosponsorship of 67 Members, 44 Republicans and 23 Democrats, including Leadership from both sides of the aisle.

I hope that we can forge ahead in that spirit on this year's Bankruptcy Reform effort. The Senate has provided great leadership on Bankruptcy Reform, and I hope that this body remains fully committed to a strong bill.

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