Going for Broke
[Sorry, the video for this story has expired, but you can still read the transcript below. ]
JIM LEHRER: Elizabeth Farnsworth in San Francisco takes it from there.
ELIZABETH FARNSWORTH: The bills Tom Bearden mentioned are back again this year in slightly different form. Last week the House passed its version by a vote of 313-108. The Senate may vote on its bill this week. There are some differences, but under both bills an income, or means test would make it harder to file under chapter 7, which erases debt after liquidation of assets. More people would have to file under chapter 13, which would require more debt repayment. For more, we turn to two professors of law. Todd Zywicki of George Mason University School of Law in Virginia testified before Congress in favor of the House and Senate bills. And Karen Gross of New York Law School is the author of “Failure and Forgiveness: Rebalancing the Bankruptcy System.” Todd Zywicki, besides the Hollywood cases we just heard about, what’s wrong with the current laws? Why is this new legislation necessary in your view?
TODD ZYWICKI: Well, Elizabeth, America has one of the most generous bankruptcy systems in the world currently, and it’s always been one of the most generous, but in the current atmosphere, what we see is 1.4 million bankruptcies, this in a time of 5 percent or less unemployment, rapid economic growth, a roaring stock market, 1.4 million bankruptcies has caused a lot of people to question. That’s more than the entire decade of the Great Depression put together. Now, as I said, we have one of most generous bankruptcy systems in the world, which is good. It encourages risk taking and it provides a safety net for people who fall on hard times, but the problem is that there are too many people who are preying on that generosity or taking advantage of that same generosity, abusing the system, walking away from debts that they can afford to pay. This bill is targeted at those people. It leaves people who truly needs bankruptcy relief completely unaffected. It’s only aimed at those high-income debtors who have a significant ability to repay their debts but choose instead to walk away by filing chapter 7 rather than chapter 13.
ELIZABETH FARNSWORTH: Karen Gross, do you think the system is too generous and new legislation is necessary?
KAREN GROSS: I absolutely do not believe the current system is to too generous. Indeed, Todd misunderstands, I think, what’s been happening in our economy. The growth in our economy has not filtered down. It has stayed at the top. And most debtors are real people with real debts and real problems. And for them, the bankruptcy system is a very important safety net. It would be like saying, if more people suddenly went to the emergency room because they were ill, we ought to shut down emergency rooms. Instead what we ought to do is figure out why so many people currently need to access the bankruptcy system.
ELIZABETH FARNSWORTH: Okay. Mr. Zywicki, your response to that?
TODD ZYWICKI: Well, I agree completely with Professor Gross that most of the people in the bankruptcy system should be in the bankruptcy system. That is who the bankruptcy system is designed for. The problem is that there are an identifiable group of high-income debtors who should not be in the bankruptcy system. I’ll give you an example. Dr. Robert Cornfield of New York. His income plummeted we’ll say from $400,000 to $300,000 a year. He was spending $53,0000 a year on private school tuition for his kids; he was driving a Range Rover; he was spending $1200 a month on food. He filed for bankruptcy. These are not the people — Dr. Robert Cornfield is not at the bottom of the economy. Dr. Robert Cornfield is at the top of the economy. This bill says, “Dr. Cornfield, you have the ability to repay your debts. You should repay what you can pay.” We’re not going to deny you the ability to file bankruptcy. All we’re going to do is say that you should repay your debts as a condition for filing bankruptcy. I don’t see what could possibly be wrong with requiring somebody making $300,000 a year to pay back some of their debts.
ELIZABETH FARNSWORTH: What’s wrong with that, Karen Gross?
KAREN GROSS: Well, let’s start with the fact that the people who favor this legislation always talk about the rich and the famous debtors. But the rich and the famous debtors are a very small proportion of the debtors who access the bankruptcy system. So what they’ve done is created an enormous piece of legislation that’s very expensive that will cost all debtors, including those who need it, a lot of money and time to, capture a very few who may be abusing the system.
ELIZABETH FARNSWORTH: Excuse me for interrupting, but why will it cost them money and time?
KAREN GROSS: Well, first of all there are lots of reasons why it will cost money and time for these people. The new test has lots of hurdles and a number of people go into the system who do not have lawyers. So there’s going to be a number of steps that have to be taken before these individuals can access the system.
ELIZABETH FARNSWORTH: And by the hurdles you mean the means testing, right? Just explain that briefly while we’re here.
KAREN GROSS: Well, the means testing is a test, and it’s drafted differently in different versions of the legislation. But it’s a threshold requirement that debtors have to meet before they can go into the bankruptcy system. And the Congressional Budget Office has recently done an economic study, which demonstrates that this effort will be very expensive for all debtors, not just the ones we’re trying to capture. It seems to me the new legislation is much like using a cannon to kill a gnat. Are there some people, a small number, who are abusing the system, yes. But what we’re doing is we’re hurting the vast majority of very good people, needy people, in the effort to deal with a very, very small number of debtors who are bad actors.
ELIZABETH FARNSWORTH: Mr. Zywicki, before we go any further, explain a little about how this works. How much discussion would a judge have, for example, under this income or means testing?
TODD ZYWICKI: Well, Elizabeth, the way it works is, and I think that Professor Gross may not have told the full story, there’s three requirements to meet the means testing, as she said. There’s a little bit of variation. But the primary requirement is that means testing simply doesn’t apply to anybody who makes less than the national medium income, which, for example, is $51,000 for family of four.
ELIZABETH FARNSWORTH: So if you don’t make that much, you would not be forced to go into chapter 13.
TODD ZYWICKI: Exactly. 80 percent of those who file bankruptcy will be dropped out right at that point. Then you have to show that you have an ability to repay a certain percentage of your debts under the current draft of the House bill, say $6,000 over the next five years. And then you also — but there’s also relief in case you have some sort of extenuating circumstances that say, “look, I don’t have the ability to repay this. I’ve got medical expenses or I’ve got a relative I need to take care of,” something like that. Now, everybody agrees pretty much everybody, I’m not sure if Professor Gross agrees, but everybody agrees that if you have the ability to repay your debts, a substantial portion of your debts without significant hardship you should be required to do so.
ELIZABETH FARNSWORTH: And just explain how that would work so we understand that.
TODD ZYWICKI: Well, under current law, it’s completely open to the discretion of the judge, and the current system in an attempt to police that is complete chaos and complete confusion. The CBO study that Professor Gross refers to does not take account of that. Under this new law, what they do is they give essentially a guide to the judge and to the trustee on the front. And they say, “look, here is a guide of expenses that a person living in this region of the country should be able to use for food, for clothing, for housing, all these sorts of things.” In addition to that, they would be allowed to keep their car, keep their mortgage. They’d be allowed to keep all of what the setup piece referred to as secured debts. And that would be part of their budget also. So essentially once you add up all of that, subtract it from what the person’s ongoing income is, and then determine is there a sufficient amount left over for somebody to be able to repay a certain amount of their debts. So essentially what it does is takes the current system which is chaos, confusion, judges willy-nilly making decisions and gives the judges some guide but not a straitjacket, because the person can still at the end show look, Your Honor, this — I have extenuating circumstances here.
ELIZABETH FARNSWORTH: Ms. Gross, who will this legislation — it still has to pass the Senate and go into the Conference Committee and then be signed by the President. If it does pass, if it is signed, who will it help and hurt the most in your view.
KAREN GROSS: In my view, and can I just back up for one second. I just want to say that the new legislation takes away a lot of discretion from the judges. In my mind, that’s not a good thing. I trust bankruptcy judges to make thoughtful and reasoned decision. But as to who this bill will hurt, it will hurt women, it will hurt children, it will hurt the elderly and it will hurt minorities.
ELIZABETH FARNSWORTH: Because?
KAREN GROSS: It will hurt them — just hearing Todd describe the system shows you how complicated it is. And to the extent the bill does provide some protections for women and children, it’s women in children in non-intact families. So women and children who are accessing the system as debtors will have a harder time, because somebody is going to review all of these cases. And even if they are in the system, if they get through all of those hurdles, there are a number of other provisions in the course of these bills that do not help, despite what people say, will not help consumers, will not help women, and will not help children. And everybody focuses on the means tests, and they forget that there are hundreds of other provisions that are very detrimental. If we only look at them and unravel them as they happen in practice.
ELIZABETH FARNSWORTH: And very briefly, we don’t have much time, who do you think this legislation would help the most?
KAREN GROSS: I think that without question it helps creditors. I think the unsecured creditors think it will help them the most. I think though that the real winners in all of this will be the secured creditors.
ELIZABETH FARNSWORTH: You mean, the mortgage, people that hold the mortgages, the people that sold the cars.
KAREN GROSS: That’s right. I think people who took an interest in the debtors collateral will ultimately be the real winners in this. And credit card companies will be partial winners, not as big a winner as they think they’ll be, and the losers will be the people that the system was designed to help. That’s very sad.
ELIZABETH FARNSWORTH: All right. Well, that’s all the time we have. Thank you both very much.
KAREN GROSS: My pleasure.