policy and forces behind consumer bankruptcy reform: A classic battle over problem definition, The

I. INTRODUCTION

Each year since 1998, Congress has passed a substantial bankruptcy reform bill1 representing a dramatic shift in the policy behind bankruptcy law from one in favor of debtors to one that favors creditors.2 In the 105th Congress, both the House and Senate passed a bankruptcy reform bill, but the two could not reach final agreement on a conference bill before Congress adjourned.3 In the 106th Congress, the House and Senate passed essentially the same bankruptcy reform bill; however, President Clinton pocket vetoed the bill.4 Once again, in the 107th Congress the House and Senate overwhelmingly passed essentially the same bankruptcy reform bill as was passed in the last two sessions of Congress.5 This time, however, the political landscape had changed.

With the support of President George W. Bush6 and overwhelming bipartisan support for the bill, the bankruptcy reform bill appeared to be in a position to finally become law. The half-decade of heavy lobbying for reform was about to pay off. The House's Bankruptcy Abuse Prevention and the Consumer Protection Act of 2001, and the Senate's version, the Bankruptcy Reform Act of 2001 (collectively referred to as Reform Legislation), appeared to be on track to possibly be the first major legislation signed into law by President Bush.7

The conference committee was set to meet on September 12, 2001 to begin to work out differences between the House and Senate versions of the Reform Legislation; however, the political climate drastically changed with the terrorist attacks on September 11, 2001.8 The conference committee was initially postponed indefinitely, but the conference committee convened on November 14, 2001. The tone of the meeting was combative and although negotiations continued, strong bipartisan support for the Reform Legislation was waning.10 The bill never reached the President.

Nevertheless, the Reform Legislation is still on the agenda, just as it has been for the last several years. The purported fundamental purpose behind the Reform Legislation is to reduce consumer bankruptcy filings.11 High profile business cases such as Enron and Worldcom, coupled with skyrocketing bankruptcy filings, give publicity to the issue. With this publicity, Reform Legislation efforts will likely stay on the agenda. Whether there will be any success in the reform effort is suspect. Substantive reform is continuously sidetracked by contentious extraneous issues, ranging from minimum wage to abortion, which arguably have nothing to do with fundamental reform of the bankruptcy system.

Scholarship in bankruptcy largely focuses on nuances of bankruptcy law, and while there is some scholarship thoughtfully examining bankruptcy from a public policy perspective, such literature is limited in any study of bankruptcy legislation from a public policy perspective emphasizing on the policy process itself. More study in this area is needed. Scholars and practitioners in the legal and public policy arenas, as well as policymakers in the beltway, need to consider bankruptcy reform beyond merely changing the substantive law and remember the context in which the pending Reform Legislation arose. The policy solutions offered for a problem do not arise in a vacuum, and thoughtful public policy decisions need to reflect a consideration of where the particular solution for a problem originated.

This article attempts to shed light on this debate and to provide a context for the pending solution of the perceived bankruptcy problem-the Reform Legislation. First, a brief overview of bankruptcy law, policy, and filing trends is provided. Second, there is an examination of the road to consumer bankruptcy reform from the 1990s to the present. Specifically, there is a review of the nature of the issue, the proposed reform, proponents of reform and their efforts, as well as the opponents of reform and their efforts to combat reform-all with an eye toward learning not so much about substantive bankruptcy policy, but the process behind the reform effort. Finally, I conclude that the policy process and whether there will be substantive consumer bankruptcy reform hinges, not on any thoughtful analysis or concern for improving the bankruptcy system, but rather on taking control over the problem definition and limiting the scope of the definition in such a way as to both win political support and propose a solution acceptable to such support.

II. AN OVERVIEW OF BANKRUPTCY LAW, POLICY, AND FILINGS

A. Development of Bankruptcy Law and Policy

The U.S. Constitution expressly provides Congress with the power to pass bankruptcy laws,12 but it was not until the Bankruptcy Act of 1898 that Congress passed a permanent bankruptcy law.13 Prior to the Bankruptcy Act of 1898, several bankruptcy laws were passed in response to periods of economic distress.14 The Bankruptcy Act of 1898 was important in that it clearly established a policy in favor of granting a discharge, that is forgiveness of debt, to "honest but unfortunate debtors."15 Bankruptcy law was significantly changed with the Bankruptcy Act of 1978 (Bankruptcy Code); however, it did not alter the fundamental policy in favor of debtors. In fact, some argue that it enhanced a policy in favor of debtors.16 The Bankruptcy Code has been amended numerous times since 1978, with significant amendments in 1984, 1986, and 1994.17 Commentators have disagreed over the import of these amendments, as they have been characterized as both pro-creditor and pro-debtor.18 Regardless of how a particular amendment to the Bankruptcy Code is characterized, however, none of the amendments altered the policy of bankruptcy law in favor of debtors.

B. The Current Bankruptcy System

Under current bankruptcy law, debtors have two primary options under which to file for consumer bankruptcy-either Chapter 7 or Chapter 13.19 Under Chapter 7, debtors generally receive a discharge of most unsecured debts; however, debtors can voluntarily pay certain debts if they wish.20 Certain categories of debts, such as child support, student loans, alimony, and taxes, may not be dischargeable.21 Except for a limited amount of assets that are protected from collection under the law, Chapter 7 debtors must liquidate their assets to pay their debts and, therefore, Chapter 7 bankruptcy is sometimes referred to as liquidations.22 Under Chapter 13, debtors can keep their assets, but they are required to file a plan to repay their debts over a three to five year time period.23 At the end of the plan repayment period, the Chapter 13 debtor will receive a discharge of any remaining debts.24

C. Type and Increase of Filings

Over 95% of all bankruptcy filings cases are consumer cases,25 and about 70% of the consumer cases are filed under Chapter 7.26 This is because the Bankruptcy Code permits debtors to choose between Chapter 7 and Chapter 13, and under Chapter 7 most debtors are not obligated to repay anything.27 Although Chapter 7 cases are referred to as liquidations, the reality is that in 96% of Chapter 7 cases, creditors do not receive anything.28 Therefore, creditors have the greatest losses under Chapter 7.29

There has been a dramatic increase in the number of bankruptcies since 1995. In 1998, bankruptcy filings rose 67% over the filings in 1995 to reach 1.4 million.30 Bankruptcy filings decreased by about 3% in 1999 and about 2% in 2000, bringing the number to approximately 1.2 million filings.31 The filings were on the rise again in 2001.32

This is a staggering number of filings; however, when the numbers are put in context, the rise is more dramatic. From 1958 to the passage of the Bankruptcy Code in 1978, there were three economic recessions.33 Likewise, from 1980 to 1998, there were also three recessions.34 From 1958 to 1978, the filings rose from about 100,000 annually to about 200,000.35 From 1978 to 1998, the yearly filings rose from 200,000 to 1.4 million.36 Regardless of the exact number of filings, with more than a million filings annually and about 100 million households, at least 10% of U.S. households have gone through bankruptcy.37

III. ROAD TO BANKRUPTCY REFORM

A. Nature of the Issue

This great increase in the bankruptcy filings ignited a debate among pro-debtor and pro-creditor groups about whether the Bankruptcy Code needs to be reformed.38 There are a panoply of interests and groups affected by bankruptcy39 that presumably would have an interest in any bankruptcy reform. The interests and groups impacted by bankruptcy include debtors, creditors, elected federal officials, unelected federal officials, lawyers, and others.40 Despite this wide array of groups and interests, the debate is essentially bipolar between debtor and creditor groups. Creditor groups seek reform that would make it more difficult for debtors to discharge debt in bankruptcy, and debtor groups oppose such reform.41 Naturally, each group blames the other for the rise in bankruptcy filings. Debtor-oriented groups blame creditors for the large amount of credit card debt and consider this the cause of the increased filings.42 The pro-creditor groups blame individuals for not being responsible consumers and abusing the bankruptcy system.43

B. The Proposed Reform

The Reform Legislation of the 107th Congress is essentially the same bill passed by the 105th and 106th Congresses. The legislation establishes a needs-based bankruptcy that would limit the number of people who can file under Chapter 7(44) to those with an inability to repay their debts.45 A debtor with a minimum monthly income, based on a particular state's median income, would be required to file under Chapter 13 if the debtor could repay 20% of the debtor's general unsecured debts over a period of five years.46 If the debtor does not meet this test, the debtor would be allowed to file bankruptcy under Chapter 7.47 This type of reform shifts bankruptcy policy, which favors debtors, to one in favor of creditors and essentially rewrites the basic framework of the Bankruptcy Code.48

C. Proponents of Reform

1. Major Groups Behind Reform

Logically, pro-creditor groups, consisting of the credit and lending industry, are the leading parties in favor of, and the major force behind, bankruptcy reform generally and the Reform Legislation specifically. Pro-creditor groups have been actively promoting bankruptcy reform since the early 1990s,49 but the credit and lending industry dramatically increased its lobbying efforts in the mid 1990s.50 The great surge of bankruptcies in the 1990s provided the credit industry with ammunition to seek bankruptcy reform that would make it more difficult for people to avoid paying their debts. The surge in bankruptcy cases is generally considered to be the single, most important factor moving bankruptcy reform along.51

Several groups have been particularly active in pushing for bankruptcy reform. Among the most active groups has been the Bankruptcy Issues Council, which consists of major credit card companies and banks issuing credit cards, as well as the American Financial Services Association, a trade association of large consumer lenders.52 The credit and lending industry mobilized and formed a coalition specifically to push bankruptcy reform.53 This nine-member coalition, the National Consumer Bankruptcy Coalition (NCBC), which has been active since the early 1990s,54 consists of major banks and lending institutions, such as MasterCard, Visa, the American Financial Services Association, and the American Bankers Association.55 The NCBC, large, independent lending institutions, like MBNA, and various smaller lending institutions have been the major players behind bankruptcy reform.56

2. Reform Efforts Before the NBRC

The initial heavy hitting lobbying efforts were not before Congress or the Executive Branch. Rather, they were before an independent commission responsible for studying the Bankruptcy Code, the creation of which the major players in the credit and lending industry supported.57 In 1994, the National Bankruptcy Review Commission (NBRC) was appointed by President Clinton pursuant to the Bankruptcy Reform Act of 1994.58 The NBRC was created to study the current operation of the Bankruptcy Code.59 The NBRC conducted hundreds of hearings and considered over two thousand written proposals from a wide array of interests and parties, including consumer advocates and the credit industry.60 The credit and lending industry lobbied the NBRC for reform proposals advantageous to creditors.61 Their lobbyists were present at every hearing and public work session of the NBRC, and regularly contacted the members of the NBRC.62

The NBRC issued a report in 1997(63) wherein it made numerous suggestions for reform; however, the NBRC rejected most of the creditor proposals, including key provisions such as needs-based bankruptcy, in the Reform Legislation.64 The changes proposed by the NBRC likely would not have had any impact on the incidence of consumer bankruptcy filings.65 The timing of the NBRC's report coincided approximately with the dramatic increases in bankruptcy filings. Because the lobbying efforts before the NBRC did not result in a report consistent with the creditor and lending group's position,66 they moved their efforts to shaping public opinion and winning support in Congress.

3. Moving Bankruptcy Reform onto the Agenda

A key component to getting any type of reform on the agenda is to define the issue in such a way as to win political support, both as to the decision makers and the public.67 It is obvious that the credit and lending industry was aware of how important characterizing the issue is because they put forth a great effort towards defining the issue in a way that supported their proposed reform. They characterized bankruptcy in a negative light and portrayed the rising number of bankruptcies as the problem in and of itself.68 The rising number of bankruptcy cases was attributed to purportedly loose bankruptcy laws and a declining stigma associated with filing bankruptcy.69 The credit and lending industry worked to characterize the issue as a problem for everyone and tried to keep the issue from being characterized as a bi-polar conflict between the creditors and debtors.70

Major players in the credit and lending industry paid for various studies in order to have statistical evidence to support its characterization of the issue.71 One approach was to quantify the loan losses from the high rate of personal bankruptcies.72 For example, MasterCard International and Visa USA funded a study by the Wharton Econometric Forecasting Associates Group in which the study found that bankruptcy cost the economy $44 billion in 1997.73

Other creditor-funded studies focused, not on the costs to the economy as a whole, but on whether bankruptcy filers could pay a portion of their debts under the proposed needs-based test.74 In 1998 Ernst and Young estimated that about 15% of Chapter 7 filers could pay about 64% of their general unsecured debt.75 A similar study in 1999, also conducted by Ernst and Young, found that about 10% of Chapter 7 filers could pay about 53% of their general unsecured debt.76 According to the 1998 and 1999 studies, the total amount that could have been repaid was $4 billion and $3 billion respectively.77

A third aspect of the statistical ammunition of the credit and lending industry was evidence showing that there has been a decline in the stigma attached to filing for bankruptcy.78 The credit and lending industry latched onto several reports or studies that suggested a reduction in the stigma attached to bankruptcy. For example, a 1996 industry report issued by Gerard Klauer Marrison & Co. blamed increases in the bankruptcy filings, in part, on a diminishing stigma of bankruptcy.79 Several studies, such as a Visa-MasterCard study in 1996 and a study by several economists in 1998, also claimed that the stigma attached to bankruptcy has declined.80 These studies, as well as others, provided the statistical evidence to support the characterization of the issue by the credit and lending industry.

With the raw number of bankruptcy filings and statistical evidence in hand, the credit and lending industry ran a public relations campaign to get its message out to the public.81 The industry took its arguments straight to the people and ran advertisements in major newspapers.82 Bankruptcy was portrayed to the public as an abused system used by wealthy people to avoid paying their debts at the expense of everyone else.83 For example, an advertisement in the Washington Post in June of 1998 called for reform and characterized the issue as follows: "'Today's record number of personal bankruptcies costs every American family $400 a year.'"84 Other advertisements were more overt. Some advertisements had themes that characterized bankruptcy filers as the 1990s equivalent of the "welfare queens" of the Reagan years.85 Other advertisements and public relations efforts characterized bankruptcy filers as the rich and famous. For example, one newspaper advertisement had a tanned couple laying on a boat named "Scot-Free, Beverly Hills."86

Bankruptcy reform was ranked as one of the top twenty-five most lobbied issue areas in 1999 by the Center For Responsive Politics (CFRP). The credit and lending industry did its part to contribute to this statistic and turned to heavy hitting Washington lobbyists such as former Vice Presidential candidate, Senator, and Treasury Secretary Lloyd Bentsen.87 They also turned to the Republican National Committee's former chairman Haley Barbour.88 More than $5 million was spent by the credit and lending industry on lobbying efforts specifically targeted towards getting the Reform Legislation through Congress.89

Beyond spending considerable sums of money on lobbying efforts, the credit and lending industry contributed large sums of money to the national committees and to individual campaigns.90 For example, on the same day that the House overwhelmingly passed the Reform Legislation, MBNA contributed $200,000 to the National Republican Senatorial Committee.91 Senator Robert Torricelli received $150,000 from MBNA in 1999 and was a strong supporter of the Senate version of the Reform Legislation.92 Other strong supporters of the Reform Legislation, such as Representatives Bill McCollum and George Gekas, each received large contributions from the credit and lending industry.93

The aggregate contributions are staggering. During the 1999-2000 election cycle, campaign contributions from the finance and credit card companies totaled $9.2 million, which was an increase from $1.9 million in 1992.94 MBNA itself donated $3.5 million during that election cycle.95 Commercial banks donated approximately another $29 million during the 1999-2000 election cycle, and credit unions donated approximately another $2.1 million.96 The NCBC itself made over $5 million in contributions during the same election cycle.97

The large campaign contributions of the credit and lending industries did not begin in the 1999-2000 election cycle, but rather has been going on since the mid 1980s. From 1987 to 1998, the credit industry contributed more than $58 million in campaign contributions.98 Political action committees contributed approximately $50 million to congressional candidates, and the balance was in soft money donations.99

The lobbying efforts and campaign contributions were successful as to winning the support of Congress. Several members of the House, such as Representative George Gekas, worked hard on behalf of the industry to get the Reform Act through the House.100 Representative Gekas has sponsored and been a strong advocate of all three bankruptcy reform bills introduced in the 105th, 106th, and 107th Congresses.101 Not only did Representative Gekas move the bankruptcy reform through the House each session of Congress, he and other members such as Representative Bill McCollum became point men repeating the industry statistics regarding the high number of filings, characterizing the cost of bankruptcy as a hidden tax, and suggesting a lack of stigma in filing bankruptcy.102

Likewise, influential members of the Senate, such as Senators Robert Torricelli and Orin Hatch, joined in and repeated the credit and lending industry position.103 Senator Charles Grassley, who has sponsored the legislation in the Senate for the 105th, 106th, and 107th sessions of Congress,104 went so far as to admit that he hoped the bill would make bankruptcy more embarrassing.105

Even with success at selling bankruptcy reform to the 105th and 106th Congresses, the credit and lending industry was not successful in winning President Clinton's support for the proposed reforms.106 Although the 105th Congress never sent a bankruptcy reform bill to President Clinton, he threatened to veto it if it did.107 Then, towards the end of President Clinton's second term in late 2000, he pocket vetoed the reform bill sent to him by the 106th Congress because he felt that the bill was not balanced between creditor and debtor concerns.108 However, with the election of President George W. Bush, it seemed that bankruptcy reform was imminent.

The credit and lending industry had a pro-business President, whom they largely supported during his election campaign. As outlined above, the credit and lending industry contributed millions of dollars in the 1999-2000 election cycle, and President Bush was a large beneficiary of such contributions.109 For example, MBNA, a member of the NCBC and one of the largest credit card issuers in the world, was President Bush's top corporate contributor.110 Additionally, MBNA pledged $100,000 for inaugural events, and the chairman of MBNA's bank unit was an important fundraiser who hosted a $1,000 a plate dinner for President Bush.111 These contributions, as well as the lobbying efforts in general, were apparently successful as to President Bush because he generally supports the pending Reform Legislation.112

D. Opponents of Reform

1. Major Parties Opposing Reform

Individual debtors would logically be against the Reform Legislation or its prior versions; however, there are millions of debtors with interests so diverse that they are not an effective lobbying force.113 Organizing such a group, coupled with the stigma often attached to debtors, is riddled with collective action problems.114 Just as with prior bankruptcy reform legislation,115 the legislative history in recent reform proposals is devoid of any representation of individual debtors. Rather, consumer groups are the primary advocates of the pro-debtor position.116

Numerous groups have opposed the proposed reform. The most prevalent group opposing the creditor and lending industry's reform appears to be the Consumer Federation of America (CFA), a large organization with over 50 million members which focuses on advocating proconsumer issues.117 Other groups, such as the Public Citizen, the Consumer's Union, National Consumer Law Center, and the AFL-CIO, as well as a host of other more specialized groups, including the National Women's Law Center and the National Partnership for Women and Families, have opposed the proposed reform.118 The academic community has also largely opposed the proposed reform,119 as have several nonpartisan players in the bankruptcy community, including the American Bankruptcy Institute and the National Conference of Bankruptcy Judges.120

2. Efforts to Block Reform

The pro-debtor groups, just as the credit and lending industry, attempted to define the issue in a way favorable to their position. Rather than focusing on the raw number of bankruptcy filings as the cause of the problem, pro-debtor advocates suggest that the number of bankruptcies is the result of the underlying problem.121 Specifically, they argue that bankruptcy is the result of a host of problems of unfortunate individuals and that the consumer credit and lending industry and its purported abuses caused the increase in bankruptcy filings.122

Just like the creditor and lender groups, the pro-debtor groups have backed studies to provide statistical evidence supporting their views on the issue. For example, Recent Trends in Bank Credit Card Marketing and Indebtedness, a report issued by the CFA, argues that the reason for large increases in bankruptcy filings is rising consumer debt caused by the credit and lending industry's lax credit standards and aggressive marketing efforts.123 The report suggests that the credit and lending industry is careless in lending, and the industry itself is the underlying source of the increase in consumer bankruptcy filings.124

Other studies have been conducted to counter the credit and lending industry assertion that more bankruptcy filers can pay their debts. For example, to counter the Ernst and Young study which indicated that a substantial number of debtors could repay discharged debts, a similar study was conducted by law professors Marianne Culhane and Michaela White with funding by the American Bankruptcy Institute.125 For a random selection of cases filed in 1995, Culhane and White found that less than 4% of the debtors could repay a significant portion of their debts, resulting in a repayment of only about $900 million.126

Unlike the credit and lending industry, there is no indication that the pro-debtor groups conducted any substantial coordinated effort, as seen with the NCBC, to retain influential lobbyists or make large campaign contributions to advance their position. Groups like the CFA have waged battles in public opinion, but the coordinated effort over a period of years like that of the credit and lending industry is just not present. The most prevalent place that the pro-debtor groups are seen in the bankruptcy policy process is in the committee and subcommittee hearings. Generally, these groups were well represented at the hearings on the various reform proposals in the 105th, 106th, and 107th Congresses; however, so were the credit and lending industries. For example, at a hearing before the Senate Judiciary Subcommittee on Administrative Oversight and the Courts, groups against the proposed reform, such as the CFA, National Association of Consumer Bankruptcy Attorneys, and the United Auto Workers, had representatives testify.127 At the same hearing, however, proponents of reform, including the National Association of Federal Credit Unions and the National Retail Federation, testified as well.128

Despite the apparent lack of money and influence in the process, the pro-debtor groups have been successful in keeping the proposed reform from becoming law. Although the credit and lending industry was successful in characterizing the problem in a way that seemed acceptable to Congress, as long as President Clinton was an ally of the pro-debtor groups on this issue, reform legislation could be stopped. The "multiple veto points" in the policy-making process129 worked to the advantage of those opposing bankruptcy reform.

IV. CONCLUSION

The bankruptcy reform effort over the last ten years is a good example of the difficulty in getting a change in public policy, even when the groups behind the reform are well funded and organized. As Kingdon pointed out, the political stream must coincide with the policy stream and problem stream so that a window of opportunity opens for reform to occur.130 The credit and lending industry defined the problem and the solution-the Reform Legislation-in such a way so that they could win public support and political support in Congress. However, without the political support of the White House, all three streams were not together, and, therefore, a window of opportunity never opened.

When it did appear that the window of opportunity had opened with the election of President Bush, the political stream diverged again with the terrorist attacks of September 11th. Now, although there is a willing President, bipartisan support for bankruptcy reform has lessened. Despite the efforts of the proponents of bankruptcy reform, it appears that reform depends in large part on issues and matters outside of their control. Even with the immediate effects of September 11th behind the proponents of reform, extraneous issues, such as abortion and minimum wage, have been raised, and the definition of the problem has been blurred. With the loss of control over the problem definition, political support wanes, and a solution to solve the problem cannot be reached. Ultimately, the chance of the pending Reform Legislation becoming law depends on a certain degree of luck.

The bankruptcy reform effort also tends to discount the position adopted by some scholars, such as Thomas Dye, that the formulation and execution of public policy is a pure top-down process controlled by the elites.131 Because bankruptcy reform has been pushed by the typical elites, under the top-down model bankruptcy reform should already have occurred. The top-down model fails because it does not consider the impact of consumer groups and academics working from the bottom up. In the same regard, however, the bottom-up policy-making model is also an incomplete depiction of the policy-making process. The policy-making process, at least based on this review of bankruptcy reform, appears to be a top-down and bottom-up process at work simultaneously. The elites clearly have the advantage, but the bottom-up players certainly have performed a role. Though scholars and consumer groups have not controlled the policy-making process, they have blocked bankruptcy reform so far by using what influence they do have to successfully define the problem beyond the raw filing numbers offered by the elites.

Policy-makers in the beltway should not adopt any bankruptcy reform, whether it be the current version of the Reform Legislation or others in future legislative sessions, without analyzing the genesis of the proposed reform. In policy debates there is a tendency to separate the policy solution from the policy problem. Doing so can be politically wise and can place reforms on the agenda, but this may not lead to substantive reform that really addresses the underlying policy problem. Failing to clearly link the solution to the problem confuses the policy analysis. The rhetoric behind the debate may lead to a solution that has little to do with the underlying problem. Bankruptcy reform should not be adopted unless there is a clear showing that it will improve the bankruptcy system and enhance the well-entrenched policy goals of the Bankruptcy Code. Carefully examining the connection between the problem definition and the problem solution can add a fresh perspective and, hopefully, lead to more informed legislative reforms in consumer bankruptcy.

ROBERT J. LANDRY, III*

* Assistant U.S. Bankruptcy Administrator, Northern District of Alabama. B.S., University of North Alabama; M.P.A., Jacksonville State University; J.D., magna cum laude, The University of Alabama School of Law. The views and opinions expressed herein are those of the author and not necessarily those of the U.S. Bankruptcy Administrator.

Copyright University of Memphis Spring 2003
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