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Burden of Proof
Capitol Hill Tightens Grip on Bankruptcy LawAired March 16, 2001 - 12:30 p.m. ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
GRETA VAN SUSTEREN, CO-HOST: Today on BURDEN OF PROOF: From Wall Street to Pennsylvania Avenue, hold on to your pocketbooks. As the economy's roller coaster dips downhill into March madness, Capitol Hill tightens its grip on bankruptcy law.
(BEGIN VIDEO CLIP)
SEN. CHARLES GRASSLEY (R), IOWA: This bill today passed 83 to 15. It, I'll have to admit will not solve all the problems we have, but it's for sure going to make sure that people can't game the bankruptcy anymore and get off scot-free.
SEN. PAUL WELLSTONE (D), MINNESOTA: This bill ended up being hijacked by the credit card industry, and the lobbying force behind this bill was quite unbelievable. And I think history will judge this bill harshly.
(END VIDEO CLIP)
ANNOUNCER: This is BURDEN OF PROOF, with Greta Van Susteren and Roger Cossack.
VAN SUSTEREN: Hello, and welcome to BURDEN OF PROOF..
Yesterday in Washington, the U.S. Senate took a step in making it more difficult for Americans to erase their debts in bankruptcy court. In its sweeping overhaul of existing bankruptcy law, the Senate voted 83 to 15 for the new package. The bill would require consumers to go to credit counseling and pay debts in court-approved payment plans before having their financial responsibilities dissolved.
In the past two years, personal bankruptcy filings have dropped, but overall, the numbers are triple what they were when Ronald Reagan took office 20 years ago. Now U.S. banks are getting nervous amid a slowing economy and brittle stock market. One issue which could cause problems at the White House, a home-exception limit in the bill which would allow home owners to protect just $125,000 in home equity from debtors.
Joining us today from New York is consumer bankruptcy attorney Dennis O'Sullivan. Here in Washington, Travis Plunket of the Consumer Federation of America, Republican Senator Jeff Sessions of Alabama, and Phil Corwin, who lobbied for the new bankruptcy bill.
In the back, Matthew Raynamo (ph), Jeff Nestler (ph) and Mike Lee (ph).
Senator, first to you. So what are the sort of major headlines under this bankruptcy bill the Senate has passed?
SEN. JEFF SESSIONS (R), ALABAMA: The best and most significant thing in the bill is the decision to say that if you make above median income, your income and continuing even in bankruptcy, it exceeded median income in America, the judge could cause you to go into Chapter 13, be protected from lawsuits and creditor harassment, but you would have to pay back a portion of those debts, as low as 25 percent.
So I think what it says is, if you are able to pay part of your debts, you could. I think that's the most significant change in the bill.
VAN SUSTEREN: What approximately is that median range today that it would apply to?
SESSIONS: A family of four, it's $50,000. It would be less for a single family. And the judge has to leave the person with enough income to pay their living expenses if you go into Chapter 13. So when you go into Chapter 13, you're given enough of live off of, and the court directs certain payments to be made towards paying off your debts, including, number one, child support and alimony because this bill raises child support and alimony to the first thing that is to be paid.
VAN SUSTEREN: OK, besides being a senator now, you are a lawyer by education, practiced law. For the benefit of our viewers, tell us the difference between Chapter 7 and Chapter 13.
SESSIONS: In Chapter 7, you simply go in and basically wipe out your debts. You turn over your assets to the court, and the court says, "Well, you can keep your homestead. You can keep your furnishings and a few other things. And we'll sell the rest and pay 10 cents on the dollar, 20 cents on the dollar to all the creditors you owe." And you walk out of there with no debts and no responsibilities.
In Alabama, about 50 percent of the filers choose to file Chapter 13. And in Chapter 13, all the lawsuits and claims against you stop. You list all your creditors. And you go into Chapter 13, and the court allows you to keep enough money to live on, but says you should make payments toward those creditors, whether it will be 25 percent, 50 percent, 100 percent, depending on the income and the amount of those debts.
VAN SUSTEREN: Travis, what's wrong with this bill? You were opposed to it. I mean, what do you object to?
TRAVIS PLUNKET, CONSUMER FEDERATION OF AMERICA: Well, it sounds good. It sounds like the bill's going to screen out all those who deserve to file bankruptcy because they've suffered a financial misfortune and they have a lower income. The devil's in the details. It's a very complex bill. It's actually going to set up a very bureaucratic system that's going to hurt everyone of all incomes who need as financial fresh start. And what the bill doesn't do is important as what the bill does do.
The problem we have is that the creditors behind this bill have taken a principle we can all agree on, and that is that those who can afford to pay off their bills shouldn't be allowed to wipe them out in bankruptcy. And what they've done is exploit that principle for their own financial means. There is nothing in this bill that's going to get to the root of the problem. And the problem is the lending practices of many of these creditors.
VAN SUSTEREN: All right, let's talk briefly about that. Phil, the lending practices of credit card companies -- they seem to be willing to extend credit to -- you know, farther than a lot of people can handle.
PHILIP CORWIN, BANKRUPTCY LOBBYIST: Well, you know, first I want to just follow up on what was said and make it clear, because there have been so many erroneous press reports that people above median income won't be able to file bankruptcy or won't be able to file Chapter 13. The credit industry believes that of the approximately 800,000 people a year who file Chapter 7 now, who totally liquidate, that this bill will shift about 10 percent or about 80,000 of those 800,000 into Chapter 13.
The critics of the bill, like CFA, say it's no more than 2 to 3 percent or no more than 25,000 filers. But what's got to be clear is that the vast majority of people filing for Chapter 7 will still be eligible for 7. We're targeting a very small but significant minority who are abusing the system without stopping the vast majority from taking 7.
As to credit underwriting, credit card industry's a highly competitive industry. There are thousands of issuers. The major issuers have very sophisticated systems. The average time between someone getting a credit card and someone going into bankruptcy, when it does occur -- and it only occurs in about 2 percent per year of the entire customer base -- is about three years. So when the credit is extended, it's a good credit.
VAN SUSTEREN: But you know...
CORWIN: Years later, something happens...
VAN SUSTEREN: But you know, I'll tell you...
CORWIN: ... it turns into a bad credit.
VAN SUSTEREN: I think everyone I know, except perhaps my dog, has been solicited for a credit card. I mean, it's -- I mean, it's pretty -- it seems to be -- every time I -- in the mail every day, it seems like, there are, like, offers. You know: You have been prequalified, prescreened.
CORWIN: I have to find that -- I find it very ironic, Greta. In the early '90s, the credit card industry was being attacked by consumer groups, saying there's not competition.
VAN SUSTEREN: Well, that's the early '90s. I'm talking about now...
CORWIN: There's not aggressive marketing. There's not a choice...
VAN SUSTEREN: ... and the problem now.
CORWIN: ... of interest rates and other features. Now there's aggressive marketing. There's a wide variety of choice in the marketplace, and the industry's being criticized for that. But the bottom line is, you get an offer, you're free to toss it in the wastebasket. No one has a gun put to their head and is forced to take a credit card or to use that credit card.
VAN SUSTEREN: Except that people who are about to go into bankruptcy are the ones who are most vulnerable and need the credit most...
CORWIN: Well, I can assure you...
VAN SUSTEREN: ... and so they're going to grab for the bait faster. But let's go to...
CORWIN: I don't know any banks who are -- based on a credit report that shows trouble are extending new credit to people.
VAN SUSTEREN: Dennis, what's wrong with this new bankruptcy bill? I know you're opposed to it.
DENNIS O'SULLIVAN, CONSUMER BANKRUPTCY ATTORNEY: Yes. It -- the gentleman said about 80 percent of the people would still qualify for Chapter 7, and even if that's true, I think the bill puts a burden on people that otherwise -- used to qualify -- would still qualify for Chapter 7, adding a bureaucratic burden on them. And they might shy away from it.
VAN SUSTEREN: But wait a second, Dennis. I mean, let me ask you about one provision which seems rather -- under the Senate bill, if passed, if the president signs, is you have to go to some sort of financial counseling if you go into Chapter 13, and you pay off your debts, which maybe -- doesn't seem, at least when I look at it, like such a bad idea. It allows people to pay off their debts. It holds everything at bay, and you get a little help. You get some advice.
O'SULLIVAN: Well, I -- if 80 percent of the people are still going to qualify for Chapter 7, are they going to be able to file under the new legislation the same way as under the old legislation, or are they going to have to go to a credit counsel? And I believe that they are going to have to. And I think this -- this bill is just to discourage and sway them away from bankruptcy in -- you know, generally.
VAN SUSTEREN: All right, we're going to take a quick break. We'll be right back. More on this discussion of this Senate bankruptcy bill.
Stay with us. (BEGIN LEGAL BRIEF)
Forensic tests have confirmed that human remains found in a shallow grave in Texas are those of Madalyn Murray O'Hair and two of her relatives. O'Hair, most well-known for her atheist beliefs, disappeared more than five years ago.
(END LEGAL BRIEF)
(BEGIN VIDEO CLIP)
ROBERT MANNING, AUTHOR, "CREDIT CARD NATION": What we're seeing here is that this bill is fundamentally unbalanced because there's no restraints, there's no way to rein in the credit card industry from loaning levels of money to people that they know they can't possibly repay. And that's really the fundamental difference between the shift from installment lending now to offering people money through credit cards.
(END VIDEO CLIP)
VAN SUSTEREN: Thanks to new legislation from the U.S. Senate, consumers could be facing more difficulty in seeking financial relief in bankruptcy court. The House and Senate passed similar bills, which were backed by the banking industry. During the 2000 campaigns, banks and credit card companies contributed more than $37 million to congressional campaigns of both parties.
Let's got to the phone. We have Charles Trapp standing by.
Charles, you -- you have taken advantage of the bankruptcy laws before, and you are opposed to this new bill, is that correct?
CHARLES TRAPP, FILED FOR CHAPTER 7 BANKRUPTCY: That's correct.
VAN SUSTEREN: Why?
TRAPP: Well, basically because under this new legislation, we would have been considered to be bankruptcy abusers and put through a lot more expense and time and energy that we could ill afford to attain the relief that we did attain under the old legislation.
VAN SUSTEREN: OK, explain to me a little bit more why you would be called "bankruptcy abusers." I don't understand.
TRAPP: Well, basically, the means test that they have attached to this. Also, we -- my wife had quit work prior to us filing bankruptcy, and they go back six months, as far as a means test is concerned. Her income at that time would have been charged against us, things like that.
VAN SUSTEREN: All right, Senator, let me ask you a question about this -- the bankruptcy law, is that if I had to file bankruptcy today and I was -- if I were able to do 7, and then six months from now, some huge medical bill landed on my plate, some family member -- which again, is sort of strangling me financially -- I wouldn't be able to file bankruptcy because I'd have to wait seven years. How -- does your bill address that particular problem, when someone is faced with some catastrophe within a short time?
SESSIONS: I'm not familiar with how that's addressed. I don't believe we change current law on that, as far as how it's done. But the fact that you can file in 13 can allow you to be protected from harassment of creditors. Of course, if you really don't have any money, you've already bankrupted, most -- you know, presumably, you won't have that many people owing you, other than the medical bill.
VAN SUSTEREN: Why not...
PLUNKET: I'd like to say...
VAN SUSTEREN: Go ahead.
PLUNKET: ... something on that situation related to Mr. Trapp. People in Mr. Trapp's situation would be forbidden from going to 13 after filing Chapter 7 for -- for a five-year period. The situation he mentioned is a Catch-22, and we should mention that Mr. Trapp had over $120,000 in medical bills to take care of their daughter, who had a very serious illness. So they weren't abusers.
And the Catch-22 is that under the bill, like I said, the devil's in the details. They're going to look at the family income for six months, but Charlie's wife lost her job two months before they declared bankruptcy. They don't have that income, but he would be presumed to be an abuser under the law because of that one little technical detail.
VAN SUSTEREN: Charles, you wanted to get back in on this?
VAN SUSTEREN: Did you have another comment to make?
TRAPP: Well, I just would like to say that I do deeply resent that some creditors and politicians have misrepresented my family's situation to the American public by claiming that this bill wouldn't adversely affect families like ours. And there are thousands of families like ours all across the country that -- that have to look to relief like this because of, you know, such unfortunate situations.
VAN SUSTEREN: Senator, let me ask you a question...
SESSIONS: Well, let me just say that on his...
VAN SUSTEREN: Is there a safe...
SESSIONS: He could file for bankruptcy. If his income was above median income, he couldn't -- he would have to pay some of those debts back, but he would be protected from lawsuits and claims by creditors. If he made below income because his wife wasn't working, he could file just as he would today. VAN SUSTEREN: Senator, here's the thing that...
SESSIONS: I don't think that's a burden.
VAN SUSTEREN: Here's the thing that disturbs me about the whole -- the whole bill is that 13 is a chance to reorganize and get your life back on track, hold your creditors off, but you still -- even having successfully completed Chapter 13, you still have the stigma of having filed bankruptcy, as though almost as if you'd filed 7 and not met your obligations. Why doesn't the Senate -- why don't you provide something so that you don't have that stigma, all -- once you've made good on all your debts?
SESSIONS: Well, we -- you know, we don't want to have stigma for anything? I mean...
VAN SUSTEREN: But you do by virtue of this.
VAN SUSTEREN: I mean, this person has made good...
SESSIONS: ... it always has been this way.
VAN SUSTEREN: Well, that...
SESSIONS: But in my home...
VAN SUSTEREN: That's not a good answer, either!
SESSIONS: OK, well, we're not changing it, number one. Number two...
VAN SUSTEREN: Why not change it?
SESSIONS: ... fifty percent...
VAN SUSTEREN: Why not change it?
SESSIONS: Well, perhaps. I just want to say this. Fifty percent of the people in Alabama who file bankruptcy file Chapter 13.
VAN SUSTEREN: But they still have the stigma. That's the problem...
VAN SUSTEREN: ... is having filed bankruptcy. If they've made good on their debt...
SESSIONS: What do you want to call it?
VAN SUSTEREN: ... because of 13 -- what?
SESSIONS: Personal reorganization might be a better name than bankruptcy. VAN SUSTEREN: But I mean -- let me ask...
CORWIN: It's just a fact, and it goes on a credit record, and the credit record -- the credit history that the credit bureaus maintain is supposed to be an accurate record of an individual's credit history. Bankruptcy's a very significant effect on lenders if they're not going to make loans to people who they're not going to pay back, who may go in bankruptcy, need to know what the accurate credit history.
VAN SUSTEREN: But couldn't Congress do something...
CORWIN: But creditors look at a 13...
VAN SUSTEREN: ... to protect those people, though, Phil? I mean, couldn't Congress enact something so lenders didn't hold it against you in the future, once you'd made good under 13?
CORWIN: Well, I don't think Congress is going to get into dictating underwriting standards for consumer credit. That's a very competitive market, and different institutions have different standards, and they do charge different interest rates, depending on what their -- what amount of risk they're willing to tolerate. I don't think you want government dictating that.
I think one of the key things that was mentioned by...
PLUNKET: I think a lot of...
PLUNKET: ... would want government to dictate that some credit card companies shouldn't be attempting to loan money to college students who have no income, who are not having their parents co-sign the loan...
PLUNKET: ... and who are getting into significant debt trouble in school. School administrators are now saying that this is one of the biggest problems affecting their students, keeping their students at the university. And more and more young people are declaring bankruptcy. I think that's the problem with this bill. It lacks balance. It focuses only on the debtors and not on the lenders.
VAN SUSTEREN: All right, we're...
VAN SUSTEREN: We're going to take a break. We'll be right back with more. Don't go away.
A New Jersey man could face up to five years in prison if convicted on burglary charges.
What did he steal?
Answer coming up.
What did he steal?
Fifty-eight cents. Charges were filed because authorities say Michael Moore entered a parked car with the intention of stealing something greater.
VAN SUSTEREN: Welcome back to BURDEN OF PROOF. We're talking about the bankruptcy which passed the U.S. Senate yesterday.
Dennis O'Sullivan, what's your major gripe with this bill?
O'SULLIVAN: The lack of focus on the credit card industry, which I think creates this problem. I don't think we have a bankruptcy problem in the United States, I think we have a credit card problem in the United States.
VAN SUSTEREN: Let me ask Phil that. Phil, I'll tell you, the one thing that...
VAN SUSTEREN: ... that stands out in my mind -- when I see that the credit card industry has been so successful in contributing to campaigns -- on both sides of the aisle, I admit it -- and the consumers, the little guy, basically is never in a position to do that, at least I don't think so, I get very suspicious.
CORWIN: Well, you know, the people opposed to this bill -- you had many members of the bankruptcy judges and the bankruptcy bar opposed. You had very strong opponents of the bill, Senator Wellstone. We didn't agree with his point of view, but he certainly articulated very clearly the reasons for those who opposed the bill. They just lost on the merits. I mean, you didn't get votes for this bill from people like Tom Daschle, Hillary Clinton and Pat Leahy because it was an unbalanced bill. This bill went through a process that made it fair.
But I -- I do -- I know you're concerned about stigma, and I think one of the best things in this bill is the fact that under current law, it's a real tragedy. There was extensive testimony before the commission in numerous locations around the country, the bankruptcy reform commission, that people were being put into bankruptcy not even aware they'd been put in. They'd gone to -- answered an ad. They had trouble, saw an ad for federal debt relief, and didn't even realize they were filing for bankruptcy or what the consequences are.
Also, one of the great tragedies, that people go through bankruptcy and where they've mismanaged their money, they come out with no better skills than before they went in.
VAN SUSTEREN: And hopefully, the counseling...
CORWIN: And this...
VAN SUSTEREN: ... the financial counseling that actually...
CORWIN: That's right.
VAN SUSTEREN: ... is Senator Sessions's provision, will help that. Let me -- let me go -- let me just...
CORWIN: The provision that requires credit counseling up front and some financial education to get the discharge is one of the best things this bill does.
VAN SUSTEREN: Senator Sessions, before we run out of time, let me just change subjects. In the -- in your new bill, you have this exemption, homestead exemption, for $125,000. When this makes its trip down Pennsylvania Avenue to the White House, will President Bush be happy with that $125,000 homestead exemption?
SESSIONS: Well, the Texans and the Floridians and the Kansas -- Kansians? -- all objected because have it in their Constitution you have an unlimited on a homestead. I don't think President Bush will think about it seriously, vetoing this bill over that. I'm not sure what his personal view is on it. The question would be would it destabilize the agreement that the majority in the House over this issue. I firmly believe that the $125,000 limit is appropriate. It was a Kohl-Sessions amendment that originally passed. Then when we worked a compromise earlier to try to pass the bill, we reached a halfway limit on the homestead, not as much. But the Senate voted, and we voted with 60 votes -- or the Senate did. I voted with the compromise I agreed to earlier.
VAN SUSTEREN: Travis...
SESSIONS: But 60 votes would eliminate the -- I mean, maintain this cap.
VAN SUSTEREN: Travis?
PLUNKET: This has been a major symbol of the lack of fairness in the bill. And I applaud Senator Sessions for his hard work on this. What it means is that very affluent individuals in these handful of states aren't going to be able to declare bankruptcy...
VAN SUSTEREN: And keep their rich houses.
PLUNKET: ... and keep... VAN SUSTEREN: Keep their mansions, right.
PLUNKET: ... their multi-million-dollar homes. I just hope that the senator and the others on the conference committee are going to fight to keep that in the bill because it's a major inequity right now in the legislation, and I'm very happy...
VAN SUSTEREN: (INAUDIBLE) the biggest indicator -- I mean, I actually -- looking at the bill, I think whether or not that provision of $125,000 is the biggest indicator of fairness. If that's taken out of the bill, what this looks like is that all rich people got together and came up with a fix. The fix is in. If you keep that $125,000 mansion exemption, I actually think that's a good indicator, Senator.
SESSIONS: Well, I would say I agree with you that it needs to be limited. Most states have far -- have limits less than $100,000. It's state-by-state law now. So we are preempting state law by saying whatever your state law is, it cannot exceed $125,000, which I believe is correct. And I hope it stays in the bill.
VAN SUSTEREN: Does it mean in existing -- before your bill goes to he White House and gets signed, but at the moment, if I were rich and if I were going to go file bankruptcy, if I take, you know, $5 million, go down and buy a $5 million house in Texas or a $5 million house in Florida, if I declare bankruptcy, I get to keep my house?
SESSIONS: Almost. You have to -- you have to defend against charge of bankruptcy fraud and a planned fraud attempt, but you can move from Alabama, which has a low exemption, to Florida, from my home 50 miles, buy a house on the beach and file bankruptcy, and you may well be able to keep a $1 million, $2 million mansion.
VAN SUSTEREN: All right, well, that's what I'm going to keep my eye on...
SESSIONS: And our bill...
VAN SUSTEREN: ... when this- on your bill. But that's all the time...
SESSIONS: We improved that substantially, and the vote yesterday was even more improvement.
VAN SUSTEREN: I got to stop right there. I'm sorry. That's all the time we have for today. Thanks to our guests, and thank you for watching.
Join us again Monday for another edition of BURDEN OF PROOF. We'll see you then.
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