Gekas, George W.

Penn State Dickinson Law: IDEAS

Volume 102 Issue 4 Dickinson Law Review - Volume 102, 1997-1998 6-1-1998 Statement to the Dickinson Law Review Bankruptcy Symposium George W. Gekas Follow this and additional works at: https://ideas.dickinsonlaw.psu.edu/dlra Recommended Citation George W. Gekas, Statement to the Dickinson Law Review Bankruptcy Symposium, 102 DICK. L. REV. 859 (1998). Available at: https://ideas.dickinsonlaw.psu.edu/dlra/vol102/iss4/9 This Article is brought to you for free and open access by the Law Reviews at Dickinson Law IDEAS. It has been accepted for inclusion in Dickinson Law Review by an authorized editor of Dickinson Law IDEAS. For more information, please contact lja10@psu.edu. Statement to the Dickinson LawReview Bankruptcy SymposiumCongressman George W. Gekas*As many of you know, this is a homecoming of sorts for me.As an alumnus of Dickinson, I am honored to be addressing youon what I believe will be one of the most crucial pieces of legisla-tion that Congress will address this year: bankruptcy reform. Asyou probably know, I introduced a bill earlier this week that I hopewill stem the epidemic tide of bankruptcy, but I would like to starttoday by examining some of the history and issues that led up tointroduction of the bill.The greatest, and perhaps most dangerous, irony I have comeacross in the past decade is that despite economic growth, lowinflation, low unemployment, and increasing personal income, ournation has seen an alarming increase in the number of bankruptcyfilings-1.3 million in 1997 to be exact. Think about that for asecond. That's more than one family per every hundred in theUnited States. It is also over forty billion dollars of debt that hasbeen erased in a year of strong economic growth. The problem isfurther illustrated by the fact that the number of filings in the '90sis eight times greater per household than the number of filingsmade during the Depression.It hasn't always been this way. The so-called "bankruptcy ofconvenience" is a new phenomenon, borne out of the loss of stigmathe word "bankruptcy" once, but no longer, carried. A sense ofresponsibility-or perhaps more appropriately, a sense of disgraceand embarrassment-used to discourage Americans from declaringbankruptcy. Deals were cut to make sure that creditors would atleast eventually see their money and that debtors paid, rather thanlegally erased, their debts.Think about how undesirable bankruptcy was in Pennsylvaniaduring colonial times. Pennsylvania passed one of the first* George W. Gekas is a member of the United States House of Representativesfrojn the 17th Congressional District of the Commonwealth of Pennsylvania.DICKINSON LAW REVIEWbankruptcy laws in our nation's history. The PennsylvaniaBankruptcy Act of 1785 called for consumers convicted of bank-ruptcy to be nailed to the pillory by the ear and then publiclyflogged. After the flogging, the ear would be cut off. By no meansdo we wish to return to those days.By the Twentieth Century, penalties for bankruptcy hadlessened, but the stigma remained. Harry S. Truman, the thirty-third President of the United States, spent the better part of the1920s in debt due to the collapse of his clothing business in 1922.Truman was both a man and a President of the highest moralcharacter. His tremendous sense of responsibility was reflected inthe motto that sat on his desk in the Oval office: "The buck stopshere." Truman eventually paid off all of his creditors by workingout deals and payment schedules, thereby keeping himself out ofbankruptcy court and ensuring that he lived up to bills he amassed.As an attorney in practice, I can remember negotiating such arepayment arrangement for a client in the late '60s. With just afew phone calls I was able to appease my client's creditors andarrange for payments to be made on a regular basis until myclient's debt could be discharged. While my client's creditors weredemanding their pound of flesh, they knew all too well that a dealwas in their best interests. The creditors would get paid, albeit notimmediately. The other option was for my client to declarebankruptcy which would have erased his debt and left his creditorshigh and dry. Both parties agreed that an arrangement based onresponsibility and good faith was the better alternative.Today's situation is tremendously difficult to comprehendbecause times are good. The only reasonable explanation is thatthe stigma of bankruptcy is all but dead. How do we know? Otherthan in the last two decades, we have only seen "spikes" in thenumber of bankruptcy filings during times of recession. Thatmakes sense. During difficult economic times, it is always tougherto make ends meet. But the past six years have been a period ofunparalleled economic growth-as any Wall Street broker would behappy to tell us. So, obviously, the growth in the personalbankruptcy market is not a response to the economy.Nor can we justifiably point an accusing finger at the creditcard industry. The popular myth is that the credit card industry isflooding consumers with credit they cannot afford, thereby causinga surge in filings. However, those accusations are misdirected.Credit card debt accounts for only sixteen percent of all bankruptcy[Vol. 102:41998] STATEMENT OF CONGRESSMAN GEKAS TO SYMPOSIUM 861debt. With some quick calculations, you can see that leaves $33.6billion of some $40 billion in debt still unaccounted for. Thus, it isnot likely, nor is it fair, to blame the credit card industry for therapid increase in bankruptcy filings.The lack of stigma has become a weed infesting the bankrupt-cy landscape. And the seed that sprouted this condition wasCongress, or more correctly, our predecessors in Congress. TheBankruptcy Reform Act of 1978 changed the code dramatically,making the system decidedly pro-debtor. The 1978 reforms wereappropriate for the times, but the times have changed. In thetwenty years prior to 1978, bankruptcy filings rose from onehundred thousand filings per year to two hundred thousand filingsper year. In the twenty years since, filings have gone from 200,000to 1.3 million.In his 1997 Economic Report, President Clinton acknowledgedthat the Bankruptcy Reform Act of 1978 is the primary culprit forthe increased filings of the past two decades. The report states that"recent rises in non-business bankruptcy is probably the result ofchanges in the bankruptcy law and a number of broader socialchanges .... [R]esearchers generally attribute much of theincrease in bankruptcies since the late 1970s to effects of theBankruptcy Reform Act of 1978."The weed has spread as bankruptcy has become viewed moreas a financial planning tool, a government debt forgivenessprogram, and a first choice rather than a last resort. Bankruptcyhas even become fashionable-the Hollywood trend-setters do it.People Magazine recently ran a cover story to illustrate theproblem. Willie Nelson, Burt Reynolds, Kim Basinger, M.C.Hammer, former Baseball Commissioner Bowie Kuhn, ArizonaGovernor Fife Symington, former Philadelphia Eagles owner andPennsylvania trucking magnate Leonard Tose are just a few of thehigh profile filers lending their help, albeit unconsciously, tobankruptcy en vogue. Just last week, Grammy Award winningsinger Toni Braxton, who has sold more than fifteen million recordsin the past five years, declared bankruptcy.It is simply too easy to file. I sent my bankruptcy counsel,Dina Ellis, to Bankruptcy Court a few weeks back and what shereported to me was mind boggling. Lawyers who have never mettheir clients looking like limousine drivers at the airport as they tryto identify their clients and get them in front of the judge. Scoresof cases are decided over the course of a few hours. Courts spendDICKINSON LAW REVIEWan average of one to five minutes deciding each case. Can youimagine? Spend a couple hours filling out some forms and acouple minutes before a judge and you can kiss your debts goodby.Of course, any remnants of the bankruptcy stigma are easilyerased by our daily does of media. Bankruptcy lawyers have takento advertising on TV, radio, and in the papers to tout the benefitsof stiffing your creditors or to explain how to restore your creditimmediately after declaring bankruptcy. The way they make itsound, you would think that you are crazy to responsibly pay yourbills or mortgage. It pays to go into debt.The crux of the problem is that too many consumers arechoosing convenience rather than responsibility for the debts thatthey have accrued and can afford to pay. This is why you and Ishould care about stemming the tidal wave of bankruptcies.When irresponsible spenders who can afford to pay all of theirdebt declare bankruptcy, you and I get stuck with the bill. It is aforty billion dollar bill that we share this year, or four hundreddollars per household. I do not know about you, but four hundreddollars is five weeks' worth of groceries or twenty-plus fill-ups atthe gas pump to me. It has also been estimated that it takes fifteenresponsible borrowers to cover the cost of one bankruptcy ofconvenience.When consumers file for bankruptcy, retailers pass on the costsin the form of higher prices, layoffs, and/or buying less fromsuppliers. Lenders redistribute bankruptcy debt by charging youand me higher interest rates and insurance premiums.Now, my colleagues, I have a decision to make: plow newground or let the weeds grow. Mr. McCollum, Mr. Boucher, Mr.Moran and I have decided to plow. The bill we introduced here isa conglomeration of ideas, strategies, and solutions that, whenenacted, will put an end to the abuse, protect the downtrodden, andkeep you and I from footing the bill for someone else's irresponsi-bility.The genesis of this reform was the Bankruptcy Reform Act of1994 and its major tenet: the formation of the National BankruptcyReview Commission. The Commission was charged with the dutyof studying the Bankruptcy Code and submitting a report in twoyears suggesting proposed reforms. Last October, the Commissionreleased its report and recommendations to Congress. To put itlightly, the report was disappointing-even by several commission-ers' own admissions, for it failed to identify the source of the[Vol. 102:41998] STATEMENT OF CONGRESSMAN GEKAS TO SYMPOSIUM 863problem of increased consumer bankruptcies or offer adequatesolutions. However, in its defense, it did provide a starting point.Our bill is comprehensive-tackling both consumer andbusiness bankruptcy. Let me highlight some of the fine points ofour bill:* Our bill emphasizes responsibility and cuts down on abuse byimplementing a needs-based system. Our plan mirrorsprevious legislation introduced by Congressmen McCollum andBoucher.• A unique portion of our legislation is what I call the "Debtor'sBill of Rights," which outlines protection for those wholegitimately require bankruptcy's safety net and would savethem from becoming victims of the "bankruptcy mills."* There is also language included in the bill that provides apilot program for consumer education to help debtors bettermanage their finances.* We have addressed the exemption issue, making it moredifficult for those who are dodging their debts to hide theirwealth in exempted assets.* Our bill also permanently extends Chapter 12 bankruptcy toprotect family farmers under the Code.What you see before you is a tremendous accomplishment. Itre-establishes the link between bankruptcy and the ability to payone's debts. Yet, it still preserves the foundation of bankrupt-cy-providing a safety net to support those who suffer a major lifecrisis.To paraphrase my former colleague and former TreasurySecretary Lloyd Bentsen: while there is nothing wrong in legiti-mately admitting financial defeat by filing bankruptcy when itbecomes impossible to repay one's debts, we must make an effortto restore the justifiable sense of embarrassment Americans oncefelt asking their neighbors to shoulder their burden.Another concern is that the current system-which breedsfinancial irresponsibility-is not the cure-all imagined by those wholive beyond their means. By allowing people to escape from theirfinancial obligations, we are doing those individuals a disservice bynot encouraging them to manage their finances and control theirdebt. The end result is a citizenry caught in a never-ending cycleof debt. With bankruptcy filings expected to reach historic levelsthis year, I have grave concerns for the stability-economic andemotional-of the American family.864 DICKINSON LAW REVIEW [Vol. 102:4The time is now, while our economy is robust, to reform.Waiting until the dawn of the next recession or economic downturnwill allow this outbreak of bankruptcy to turn into an uncontrolla-ble epidemic. Historically, bankruptcy was intended as a last resortpursued only under the most dire of situations. We are committedto ensuring that the code will help those in dire circumstances getback onto their feet while protecting responsible consumers whoare unfairly bearing the costs.Your assignment, should you choose to accept it, is to help topromote these reforms. That means contacting your hometowncongressperson and senators and encouraging them to work withme to pass this vital legislation this year. It also means that I wantto hear from you. This bill is a work in progress, and furtherreforms may be necessary. I have already had dialogues withinterested citizens and members of Congress, and I want to addyour voice to the debate.

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