Senator Sessions, thank you for chairing this hearing on bankruptcy reform, which we all consider to be unfinished business from the 106th Congress. As you know, the issue of bankruptcy reform is familiar to all of us here in the Senate. For the past 4 or so years, we've debated the fundamental rights of both borrowers and creditors, for the greater good of individuals, society, and the economy. We've looked at this issue at great length and in excruciating detail. The Judiciary Subcommittee on Administrative Oversight and the Courts held, I believe, nine hearings over the past two Congresses, and heard testimony from almost 90 witnesses on all aspects of bankruptcy. We debated bankruptcy reform extensively on the floor in both the 105th and 106th Congresses, and last December we passed a bipartisan, compromise bill by a vote of 70 to 28. That piece of legislation received overwhelming support of Senators on both sides of the aisle.
Unfortunately, President Clinton pocket-vetoed that good legislation, and we here in the Senate did not have the opportunity to override it. We had the votes to do so. That was too bad, because we need bankruptcy reform. But I'm hopeful that we'll be able to move swiftly in this Congress and get the job done. That is why Senators Hatch, Sessions and Johnson joined me in reintroducing the exact same conference report that was approved by the Senate with overwhelming bipartisan support. I know many other members on both sides of the aisle support this bill and want to see it passed into law.
I repeat, this bill is unfinished business. This is not new stuff. We are not covering new ground. In fact, we don't even need to be in Committee. But in the interest of addressing Senator Leahy's concerns that new Senators on the Committee have a chance to familiarize themselves with this issue, we're holding this hearing today with the hope of proceeding quickly to this bill on the floor.
The current bankruptcy system needs to be reformed. Presently, when individuals file for bankruptcy under Chapter 7, a court proceeding takes place, and their debts are simply erased. We must realize that every time a debt is wiped away through bankruptcy, someone loses money. When someone loses money in this way, he or she has to decide to either assume the loss as a cost of business, or raise prices for other customers to make up that loss.
When bankruptcy losses are infrequent, lenders can just swallow the loss. But when they are frequent, lenders need to raise prices to other consumers to offset their losses. These higher prices translate into higher interest rates for future borrowers. You'll recall that former Treasury Secretary Larry Summers - a liberal Democrat - testified before the Senate Finance Committee that bankruptcies tend to drive up interest rates. With the possibility of the economy slowing down, we need to fix a bankruptcy system that inflates interest rates and threatens to make a slowdown even worse. Bankruptcy reform will help the economy.
So, the result of the bankruptcy crisis is that hardworking, law abiding Americans have to pay higher prices for goods and services. S. 220 would make it harder for individuals who can repay their debts from filing bankruptcy under Chapter 7, thus lessening the upward pressure on interest rates and higher prices. It's only fair to require people who can repay their debts to pull their own weight. But under current bankruptcy law, one can get full debt cancellation in Chapter 7 with no questions asked. Our bill asks the question of whether repayment is possible by an individual, and if it is, then he or she will be channeled into Chapter 13 of the Bankruptcy Code, which requires people to repay a portion of their debt as a pre-condition for limited debt cancellation.
Let me be clear, people who don't have the ability to repay their debt can still use the bankruptcy system as they would have before. S. 220 specifically provides that people of limited income can still file under Chapter 7. But the bill makes it so that people who have higher incomes and who can repay their debts, their free ride is over.
Personal responsibility has been one of the main themes of the bankruptcy reform bill. I say this because since 1993, in the midst of prosperity and with a booming economy, the numbers of Americans who declared bankruptcy has increased over 100 percent. While no one knows all the reasons underlying the bankruptcy crisis, the data shows that bankruptcies increased dramatically during the same time frame when unemployment was low and real wages were at an all-time high. I believe that the bankruptcy crisis is a moral crisis. We need to stop people from looking at bankruptcy as a convenient financial planning tool where honest Americans will have to foot the bill.
So, it is clear to me that our lax bankruptcy system must bear some of the blame for the bankruptcy crisis. A system where people are not even asked whether they can pay off their debts obviously contributes to the fraying of the moral fiber of our nation. Why should people pay their bills when the system allows you to walk away with no questions asked? Why should people honor their obligations when they can take the easy way out through bankruptcy? I think the system needs to be reformed because this is fundamentally unfair. Our bankruptcy reform bill will promote personal responsibility among borrowers and create a deterrence for those hoping to cheat the system.
Our bill does more than just provide for a flexible means-test that gives judges discretion to consider the individual circumstances of each debtor to determine whether they truly belong in Chapter 7. It also contains tough new consumer protections, like new procedures to prevent companies from using threats to coerce debtors into paying debts which could be wiped away once they are in bankruptcy. The bill requires the Justice Department to concentrate law enforcement resources on enforcing consumer protection laws against abusive debt collection practices. The bill contains significant new disclosures for consumers by mandating that credit card companies provide key information about how much they owe and how long it will take to pay off their credit card debt by only making a minimum payment. Consumers will also be given a toll-free number to call where they can get information about how long it will take to pay off their own credit card balances if they make only the minimum payments. This will educate consumers and improve consumers' understanding of their financial situation. And credit card companies that offer credit cards over the Internet will be required for the first time to fully comply with the Truth in Lending Act.
Moreover, our bill makes changes which will help particularly vulnerable segments of our society. Child support claimants are given the highest priority when the assets of a bankruptcy estate are distributed to creditors. Bankruptcy trustees and creditors of bankrupts will be required to give information about the location of deadbeat parents who owe child support.
I also want to touch on another important section of the bill. S. 220 makes Chapter 12 of the Bankruptcy Code permanent. This means that America's family farms are guaranteed the ability to reorganize. But the bill goes further. It makes improvements to Chapter 12 so it will be more accessible and helpful for farmers. For example, the definition of the family farmer is widened so more farmers can qualify for Chapter 12 bankruptcy protection. S. 220 also reduces the priority of capital gains tax liabilities for farm assets sold as a part of a reorganization plan, which will allow cash-strapped farmers to sell livestock, grain, and other farm assets to generate cash flow when liquidity is essential to maintaining a family farm operation. These reforms will make Chapter 12 even more effective in protecting America's family farms during difficult times. I think it's a crying shame that the opponents of bankruptcy reform have prevented Chapter 12 from being reauthorized and modernized. It was an outrage that President Clinton pocket-vetoed the bankruptcy bill and denied the farmers in my state of Iowa and across the country the bankruptcy protections they really need.
Over the last ten years our economy has enjoyed unprecedented success. But as we have seen, economic stagnation can occur just as quickly as an upswing. On a macro-economic level, enacting bankruptcy reform will help stimulate the economy by lessening upward pressure on interest rates. So, by passing meaningful bankruptcy reform, we can help our economy and simultaneously contribute to rebuilding our nation's moral foundations. I look forward to hearing from our witnesses this morning.