Today's hearing marks the eighth bankruptcy-related hearing I've chaired in the 105th Congress. Last April, we held our first hearing on bankruptcy issues on the causes of personal bankruptcies. When the Bankruptcy Review Commission submitted its report to Congress in October of 1997, this subcommittee held a hearing where we considered various bankruptcy issues in depth. In December, I chaired a hearing on international trade and bankruptcies. As a result of that hearing, I have proposed several important changes to the bankruptcy code which will make our bankruptcy laws more accommodating to international bankruptcies. These proposals can be found in Title III of S.1914.
During today's hearing, we will hear testimony regarding several other titles of S.1914. Our first panel of witnesses will address Title IV of S.1914, which establishes special fast-track bankruptcy procedures for businesses in Chapter 11 which have less than $5 million in debt. These provisions are drawn from the near-unanimous recommendation of the National Bankruptcy Review Commission. Also, the concept of fast-track procedures for small debtors continues the bi-partisan efforts of Senator Howell Heflin, who chaired this subcommittee for many years.
In the 102nd Congress, I served as ranking member of this subcommittee when Congress passed the Bankruptcy Reform Act of 1994. The Senate-passed version of that bill contained a new Chapter 10 of the bankruptcy code, which would have established fast-track procedures similar to provisions contained in my bill. The 1994 legislation passed the Senate on a roll call vote of 97 to zero, with three senators absent. Importantly, every member of the Judiciary Committee voted in favor the 1994 bill. I hope to have a similar level of support when S.1914 comes up this summer. The essence of fast-track procedures is simple. Those businesses which have no realistic chance of reorganizing should be identified quickly and routed to Chapter 7. As the National Bankruptcy Review Commission correctly observed, under current law, these debtors live under the protections of Chapter 11 for years as business assets slowly waste away. At the end of the day, when the business does convert to Chapter 7, there isn't anything to pay out to the unsecured creditors of that business. In my view, one reason for this is that bankruptcy lawyers have learned to game the system. As we all know, lawyers fees in bankruptcy get paid off the top, before any other creditors. When a business in Chapter 11 has no more assets to pay lawyers, that business is then converted to Chapter 7, where creditors receive nothing because lawyers fees have eaten up the remaining assets. In other words, do we want to preserve the status quo, or do we want to make sure that creditors which extend credit in good faith receive at least something?
Importantly, the National Federation of Independent Business, which represents small businesses across the country, supports these new fast-track procedures. Small business creditors are often left out in the cold since they cannot afford attorneys to represent them in bankruptcy. Our second and third panels will examine Title II of S.1914. This title updates and improves provisions of the bankruptcy code designed to ensure liquidity in financial markets. In general, when a business declares bankruptcy, other businesses which are creditors are very limited in their ability to terminate financial contracts or to offset their gains and losses. These limitations make sense most of the time. But since 1978, Congress has recognized the need to provide exceptions to these limitations for the stock market, the commodities market and other financial markets where the need for market liquidity is vitally important.
In Title II of S.1914, I have adopted — with some modifications — recommendations of the president's working group on financial markets. The administration has correctly noted that the financial markets have really become much more sophisticated and that the bankruptcy code needs to be modernized to accommodate new market realities. Title II also contains a provision not recommended by the President's working group, which I believe will play an important role in keeping home mortgage rates low and keeping credit open and flowing to small businesses. This provision will protect market-developed procedures for converting mortgages and other receivables into securities which are sold to investors. This secondary market is an important risk management tool, which allows lenders to keep interest rates low and to make more credit available to small businesses. In practical terms, this means more Americans can realize the American dream of buying a home. And more entrepreneurs will have access to capital so that they can contribute to the economy and generate jobs.
Finally our last panel will discuss the tax provisions of S.1914, which are based on recommendations of the Review Commission, as well as general provisions found in Title VI of the S.1914. The subcommittee will examine Title I of S.1914, which establishes new procedures for health care bankruptcies in a separate hearing, planned for June 1. With that, I would like to turn to Senator Durbin for an opening statement.