▶ 0:18:50Subcommittee will come to order. Without objection, the chair is authorized to declare recess at any time. We welcome everyone to today's hearing on bankruptcy law and potential legislative reforms. I will now recognize myself for an opening statement. Today's hearing will examine the effectiveness of the bankrupt bankruptcy system and help determine if narrowly tailored legislative updates are warranted to ensure that the bankrup bankruptcy system continues to work as intended.
▶ 0:19:20The bankruptcy system in this country is designed to provide debtors with a fresh start. Entrepreneurs and small businesses are the lifeblood of the economy and the calculated risks they take are responsible for so much of the innovation in this country. These risks are often funded by debt. And while many entrepreneurs and small businesses succeed, some of them fail.
▶ 0:19:45Instead of being perpetually saddled with the unsustainable levels of debt, the bankruptcy system allows debtors to enter bankruptcy, reorganize their debts, maybe discharge some of that some of it, and exit bankruptcy in a position to continue to innovate and take additional risks. The same is true for consumers. Some consumers get themselves in an unsustainable financial position and the bankruptcy system throws them a lifeline.
▶ 0:20:12But while bankruptcy can greatly benefit debtors, creditors are also entitled to repayment. Therefore, the bankruptcy system must strike a balance between preserving the rights of creditors to receive repayment and the opportunity for debtors to start fresh. We have proposals uh before this committee that will change how the bankruptcy system works in the future and nearly 30 temporary bankruptcy judgeships will begin expiring in 2026.
▶ 0:20:41And while judges will not be kicked out of their seats, certainly uh new judges cannot be appointed when a judge's term expires. We must determine whether those judgeships remain necessary, and we will hear testimony from two sitting bankruptcy judges to help inform our decision. Also, the pay per case for Chapter 7 trustees has not been increased in over 30 years.
▶ 0:21:05Chapter 7 trustees play a critical role in our bankruptcy system, liquidating a debtor's assets, dis dispersing funds to creditors, and ensuring that the only eligible debtors enter Chapter 7 We also must determine whether to increase the debt limit for subchapter 5 cases. In 2020, shortly after enactment, Congress increased the debt limit for subchapter 5 cases to $7.5 million.
▶ 0:21:32Last July, this increased debt limit expired and reverted to about to around $3 million. We must determine whether we should allow that number to remain or whether the cap should again be raised either temporarily or permanently to ensure small businesses can continue to seek their average for re avenue for reorganization. We must also figure out what, if anything, we should do about student loans in bankruptcy.
▶ 0:21:59And under the Biden Harris administration's, there were thousands of student loans that were forgiven by largely waving the bankruptcy codes undue hardship requirement. As a result, we saw the number of student loans discharged in bankruptcy increased by 330%.
▶ 0:22:15While the cost of education has skyrocketed, something the subcommittee has already begun to examine, American taxpayers should not be on the hook for someone who took out loans to get a potentially useless undergraduate degree from a private university and now cannot pay it back. Finally, we will examine whether our bankruptcy laws, as written, can sufficiently capture the treatment of genetic information in bankruptcy proceedings.
▶ 0:22:40We should have robust debates and if proven necessary, enact narrowly tailored changes to the bankruptcy code to make sure that the system works better for small businesses, consumers, and creditors alike. I want to thank ranking member of the subcommittee, Mr. Nadler, for agreeing to hold a bipartisan hearing today. Uh I think that working together on bankruptcy reform will greatly benefit the American people. I also want to thank the witnesses for appearing here today.
▶ 0:23:09We have assembled a large panel of bankruptcy experts who are well equipped to answer all our questions and I look forward to hearing what each of them has to say today. I want to now recognize the ranking member, Mr. Nadler, for his opening statement. Thank you, Mr. Chairman, and uh thank you for holding this bipartisan hearing. Thank you as well to our distinguished panel of witnesses for contributing their time and expertise to assist the committee in its efforts to streamline and improve our bankruptcy system.
▶ 0:23:39I'm pleased that we have come together in a in a bipartisan fashion today to consider a variety of proposals to make our bankruptcy system more accessible to individuals and businesses in financial distress. These reforms can ensure that the bankruptcy code is more efficient and beneficial for debtors and creditors alike and will help businesses, especially small businesses, restructure in the face of potential financial disaster.
▶ 0:24:03One important issue that our hearings will touch on is increasing the debt limit under sub chapter 5 of chapter 11 of the bankruptcy code. In 2020, eligibility for subchapter 5 bankruptcy treatment was temporarily increased to $7.5 million from approximately $3 million, allowing a significantly greater number of businesses to access relief under this part of the code, which generally provides debtors an efficient and successful restructuring plan.
▶ 0:24:30Unfortunately, this provision was allowed to lapse in June of last year. Data shows that the debt limit increase was a clear success. While it was while it was in effect, subchapter subchapter 5 cases had double the plan confirmation rate and a 20% lower dismissal rate in relation to non- subchapter 5 chapter 11 cases. This means that small businesses were able to keep their doors open and their employees on staff while ensuring that their creditors were fairly compensated.
▶ 0:25:00I hope we can work together to reinstate this important provision. Congress similarly passed a temporary debt limit increase for Chapter 13 filings, allowing for combined unsecured and secured debt of $2.75 million. Chapter 13 bankruptcy is the best path for many filers because it's less expensive and more efficient than pursuing relief under Chapter 11. Unfortunately, al although this provision proved to be successful, it also expired last year and has not been renewed.
▶ 0:25:30Now debtors must meet significantly lower levels of both unsecured and secured debt, leaving many people without access to the courts and needed relief. Resurrecting the higher chapter 13 debt limit would serve individuals and families with regular income who are facing higher housing prices, medical costs, and other debts that present significant financial hardship yet put them over the current debt limit. In addition to facing higher prices, Americans are also facing mountains of student loan debt.
▶ 0:25:59Under the bankruptcy code, however, unlike nearly every other unsecured debt, such as credit cards or auto loans, it is nearly impossible to discharge student loans, leaving millions of Americans deeply in debt with little hope of ever regaining financial security. Nearly 43 million Americans have federal student loan debt, with the total federal student loan portfolio exceeding 1.6 6 billion.
▶ 0:26:24Under current law, educational debt can only be discharged in bankruptcy if the borrower demonstrates that continued repayment of the debt would impose an quote undue hardship on the debtor and the debtor's dependence. In practice, this standard has proven a nearly impossible hurdle to overcome in the courts. There is no reason that this one category of debt should be singled out for special treatment that makes relief under the bankruptcy code virtually impossible.
▶ 0:26:51It is long past time to repeal the current limitation on educational debt and to place it on the same footing as other de similar debt. While the picture of student loan debtors is traditionally of young recent college graduates, the reality is that a significant population of student debt of student loan debtors are older Americans whose wages and social security checks are being garnished toward loans that they will never be able to repay.
▶ 0:27:18Student loan bankruptcy reform, therefore, would benefit a wide swath of Americans, including the most vulnerable borrowers in our society who have no prospect of being able to repay their debts incurred decades ago. Finally, we will consider reforms to compensation of attorneys and trustees in Chapter 7 cases, which would expand access to justice for low-income debtors.
▶ 0:27:40Chapter 7 is a critical lifeline for low-income individuals in the most severe financial distress, offering the most direct and immediate path to a fresh start. It eliminates unsecured debts without the burden of a multi-year repayment plan. And its streamlined structure makes it the only viable option for many households facing wage garnishment, utility shut offs, or eviction. Yet, the current framework makes it exceedingly difficult for those same individuals to access legal counsel.
▶ 0:28:08Chapter 7 debtors with attorneys are nine times more likely to obtain a discharge than those without representation. As a result of a clerical error in the law, however, attorneys representing chapter 7 debtors are generally ineligible for compensation from the bankruptcy estate unless formally retained by the trustee.
▶ 0:28:28Therefore, most debtors seeking a chapter 7 pathway have to pay for the representation upfront and in full despite their being insolvent, which either pushes them to the less efficient chapter 13 or forces them to continue without representation. I hope that our witnesses will help us examine solutions to this problem. A similar access to justice issue arises with respect to trustee compensation.
▶ 0:28:53Under current law, trustees appointed by the courts to administer a chapter 7 bankruptcy are paid just $60 per case. Additional compensation comes only when the case involves liquidation of assets, which happens only rarely in chapter 7 cases. A fee of just $60 is clearly inadequate to compensate trustees for a role that requires them to review filings, conduct meetings with creditors, and identify potential circumstances of abuse or fraud.
▶ 0:29:21This results in experienced trustees not being able to afford to take on no asset cases or being unwilling to invest their time in complex cases that would require their knowledge and expertise. We must work to increase this fee to ensure that debtors have the assistance they need to navigate the complicated world of bankruptcy proceedings. Today's hearing is an opportunity to discuss bipartisan paths forward to increasing access and opportunity provided to Americans under the bankruptcy system.
▶ 0:29:50I thank the chairman for holding this important hearing. I look forward to the testimony from from our distinguished panel of witnesses and I yield back the balance of my time. I now recognize the ranking member of the full committee, Mr. Rasin, for his uh opening statement. Mr. Chairman, thank you very much.
▶ 0:30:12Thanks for holding this bipartisan hearing and thanks to our esteemed witnesses uh who bring to us exceptional insight into one of the most consequential institutions of the American economy. Too often bankruptcy is spoken of in hush tones or buried in the back pages of law journals, but it's not a footnote to the American economy. At its core, it's a critical guardrail for the life and dignity of the American people. Even President Trump has repeatedly used the bankruptcy laws six times uh in Chapter 11 alone.
▶ 0:30:42This is where law meets uh hardship and where financial distress is tempered by both process and principle. More than a simple mechanism for discharging debt, our bankruptcy system uh has moral implications. It affirms that failure should not be fatal and that dignity should not surrender in the face of financial hardship and emergency. As Justice McReynolds observed, its purpose is to relieve the honest debtor from the weight of oppressive indebtedness and permit him to start a fresh.
▶ 0:31:09At the same time, the bankruptcy system must recognize the moral hazard of incentivizing bankruptcy and financial recklessness. Although the framers of the Constitution may not have lingered long over the bankruptcy clause during their debates in Philadelphia, they enshrined it for good reason. As Madison said in Federalist 42, "The power to enact uniform bankruptcy laws, quote, provides for the harmony and proper intercourse among the states.
▶ 0:31:34It is so intimately connected with the regulation of commerce and will prevent so many frauds that the expediency of it seems not likely to be drawn into question. Today, Mr. Chairman, we do not call into question the expediency of a strong bankruptcy system. What we do question is whether that system is currently constituted, fulfills its democratic and economic promise. Does it reach the people it was designed to protect?
▶ 0:31:57Is it responsive to the existence and power of today's credit industrial complex where profits are systematically rung from the pockets of working families? Across the country, small businesses and working families are shouldering debts that would have once been considered extraordinary, but today reflect the mere cost of staying afloat. Although it remains a remedy of last resort, our bankruptcy system must be equipped to provide relief when economic pressures collapse the margins of household and commercial stability.
▶ 0:32:28A well-calibrated system does not punish misfortune or entrench failure. It provides a lawful path forward when all else fails. The hearing presents a chance to honestly assess the challenges to our bankruptcy system and advance solutions in a bipartisan way. Take subchapter 5 of the bankruptcy code. the streamlined bankruptcy process for small businesses to reorganize and restructure.
▶ 0:32:51For five years, it offered small businesses a path back to viability by providing a simpler pathway to restructure debt, save jobs, and continue serving in the community. Regrettably, that path is now narrowing. Not because the policy failed, but because of because in June of last year, the debt limit set by Congress, the maximum debt small businesses can have and still be eligible for subchapter 5's process lapsed and dropped by 60% from 7.5 million to 3 million.
▶ 0:33:21Despite data in near unanimous agreement among the bankruptcy bar that the $7.5 million debt limit was a success for both small businesses and their creditors, reverting to the old debt limit excludes way too many of the very small businesses sub chapter 5 was designed to support. Without a workable path to reorganize under sub chapter 5, all that remains of these businesses is used equipment and unpaid bills.
▶ 0:33:46This tremendous loss in value is lost not only for business owners, but also for their employees, creditors, and entire communities. I'm heartened by the bipartisan agreement that restoring the $7.5 million debt limit is both sensible and long overdue. The committee should mark up this legislation and send it to the House floor quickly.
▶ 0:34:05And then there is the million strong class of student borrowers whose staggering debt resulting from student loans lingers stubbornly for decades beyond the end of their college education preventing investment in home mortgages or small businesses. Student loan debt is the only type of consumer debt not dischargeable under bankruptcy and this was only made so in 1976.
▶ 0:34:27Although our bankruptcy system was built with robust safeguards, judicial oversight and in some cases stringent means testing, it effectively treats all student borrowers as presumptive abusers unless proven otherwise through an almost mythical standard of undue hardship. This vague and undefined standard has been interpreted by the courts and hardened over decades into a nearly insurmountable burden of proof resulting in non-discharge for greater than 99% of borrowers.
▶ 0:34:56Among the most affected are seniors. As of 2024, nearly three quarters of a million student borrowers are remarkably over the age of 71, collectively holding 28 billion dollar in student debt. Many have spent decades in repayment only to fall into default as interest compounds and the balances balloon. Seniors now represent the fastest growing demographic of student borrowers and they face the highest rates of delinquency and therefore default.
▶ 0:35:24And for many of those older Americans who live on a fixed income, the consequences are severe. Garnished social security checks, skipped medications, and postponed retirements. We've got to fix this. I hope my colleagues will join us in restoring basic fairness to the bankruptcy system by putting student debt on the same footing as virtually every other kind of debt, all of which are dischargeable. But this is not the only place where the system strains under the weight of its design.
▶ 0:35:51Families who exceed the chapter 13 debt limit are legally barred from filing under that chapter, no matter how regular their income or sincere their repayment intentions. Nor can they turn to chapter 12, which is limited to farmers and fishermen, or 15, which is limited to international cases, or sub chapter 5, which requires you to be a small business. Because of 13's expired debt limit, we risk pushing working people into chapter 11.
▶ 0:36:16It's a system that was never meant for someone trying to save their home while paying down medical bills and putting kids through school. And Chapter 7, finally, which should offer the most straightforward form of relief, is weighed down by barriers of its own. Debtors often have to pay their lawyers upfront, even when they can't pay their rent, locking many people out of even applying for bankruptcy relief. and our chapter 7 trustees. The watchd dogss of our system are still doing critical work under a compensation structure that's not been updated in more than three decades.
▶ 0:36:46None of this is new and none of it is unfixable. We have bipartisan legislation, the bankruptcy administration improvement act ready to go that would raise trustee pay and extend the temporary judgeships that keep our courts functioning. In Maryland, we're on track to lose three out of seven temporary bankruptcy judges. That's nearly half our bench and it's happening at the very moment filings are rising.
▶ 0:37:08This is the moment to reaffirm a founding promise that in the US financial hardship must never strip a person of their rights, their dignity, or their future. By my account, Congress has rewritten the code five times in the last two centuries before arriving at the current framework. This is one of the most dynamic areas of our law, and there's no reason we should not act now again to refine it and improve it. We've got the facts and the tools. We have bipartisan agreement on the principal fixes. The road head the road ahead is clear for us. Thank you, Mr. Chairman. I yield back.
▶ 0:37:39Member yields back. Without objection. All of their opening statements will be included in the record. We will now introduce today's witnesses. Professor Douglas Baird. Mr. Baird is the Harry A. Bigalow Distinguished Service Professor of Law at the University of Chicago Law School. He joined the University of Chicago Law School faculty in 1980. served as dean between 1994 and 1999 and has served as a visiting professor at the law school of Stanford, Harvard and Yale.
▶ 0:38:07Professor Baird has authored more than a dozen books on bankruptcy and commercial and debtor credtor law. The Honorable Paul Black. Judge Black has served as United States bankruptcy judge for the Western District of Virginia since 2014. He currently serves as chief judge of that court. Prior to joining the bench, Judge Black was also the co-chair of the bankruptcy and creditor rights practice group at Spilman Thomasson and Battle.
▶ 0:38:35He previously served as chair of the litigation section and the bankruptcy section of the Virginia State Bar Association. The Honorable Michelle Harner. Judge Harner has served as a United States bankruptcy judge for the District of Maryland since 2017.
▶ 0:38:51She previously served as the Francis King Kerry Professor of Law at the University of Maryland Francis King Kerry School of Law where she taught course on bankruptcy and creditors rights also business associations, business planning and corporate finance. Judge Harner has served in various roles with the American Bankruptcy Institute, the Administrative Office of the United States Courts, and as the edi editor-inchief of the American Bankruptcy Law Journal. Professor Melissa Jacobe.
▶ 0:39:22Miss Jacobe is the Graham Kennan Distinguished Professor of Law at the University of North Carolina School of Law, where she teaches commercial and bankruptcy law. From 2021 to 2024, she assisted in the Federal Judicial Center on Educational Programming for Bankruptcy Judges and has been elected to the American Law Institute, the National Bankruptcy Conference, the American College of Bankruptcy, and the American College of Commercial Finance Lawyers. Dr. Edith Hotchkiss.
▶ 0:39:53Dr. H. Hotchkiss is a professor in the Sidner Department of Finance at the Boston College Carroll School of Management. Her research focuses on corporate finance, bankruptcy procedures, restructuring mechanisms for financially distressed firms, and the transparency and efficiency of the corporate bond market. Professor H. Hotchkus previously served as a visiting professor at the New York at New York University and worked as an assistant vice president at Standard andores Corporation.
▶ 0:40:22Miss Megan Murray. Miss Murray is an attorney and a founding shareholder of the Underwood Murray, a law firm focusing on bankruptcy and restructuring insolveny related litigation. Distressed also distressed asset acquisitions and other corporate matters. She has nearly 20 years of experience in corporate re re excuse me reorganizations and currently serves on the board of directors of the American Bankruptcy Institute. We welcome our witnesses and thank them for appearing today.
▶ 0:40:53Uh we will begin by swearing you in. We would you please rise and raise your right hand. Do you swear or affirm under penalty of perjury that the testimony you are about to give is true and correct to the best of your knowledge, information, and belief. So help you God. Let the record reflect that the witnesses have answered in the affirmative. Thank you.
▶ 0:41:18And you can be Please know that your written testimony will be entered into the record in its entirety. Accordingly, we ask that you summarize your testimony in five Professor Baird, uh, you may begin professor, can you hit the mic? Hit the button there. Yeah. Chairman Fitzgerald, uh, ranking member Nodler and other members of the committee.
▶ 0:41:49I'm Douglas Baird, professor of law at the University of Chicago and chair of the National Bankruptcy Conference. My comments today, I wish to emphasize the need to increase the existing debt cap for small businesses seeking to reorganize under subchapter 5. Subchapter 5 has been an unequivocal success in providing a more streamlined and less costly means of revolving resolving financial distress for small businesses.
▶ 0:42:12It has fulfilled the goals of bipartisan legislation enacted in A small business regime like subchapter 5 must distinguish those businesses which are eligible. Some sort of line needs to be drawn between large businesses and small businesses. Um this requires figuring out what we mean by small business and how to establish that line.
▶ 0:42:36Um I think the simplest way to think about a small business is it's that type of business whose continued existence depends upon the current owners remaining in place. These are businesses like a mom-and- pop restaurant whose value cannot be separated from those who own and run it any more than people can be separated from their shadows. A mom-and- pop restaurant without mom and pop is just used kitchen equipment.
▶ 0:43:00Um, what is perhaps less appreciated is the businesses that depend upon their owner managers are often quite substantial. These businesses can carry debt that easily exceeds the $3.5 million subchapter 5 debt cap. Just to give some examples, a decent-sized restaurant or brew pub can easily cost several million dollars just to build and equipped.
▶ 0:43:23An a single unforeseen setback such as a catastrophic storm or an outbreak of foodborne illness can sink the entire enterprise. To give another example, a general contractor often enters into a web of contracts that exposes it to multi-million dollar liabilities if things go wrong in building a large structure. Even a single subcontractor can make a costly mistake, fail, and leave the general contractor responsible for fixing the mess.
▶ 0:43:50The owner of a small manufacturing operation might have a plant with equipment that itself cost multiple millions. When such a manufacturer goes through a run of bad luck, it can face substantial mortgage obligations, environmental and tax liabilities, and unpaid bills from suppliers. Um, another example, personal service films such as firms such as medical practices or small law firms can have substantial debt and reverses that leave them unexpectedly without the revenues that were reasonably anticipated.
▶ 0:44:20Without the ability to reorganize under chapter 5, all these firms will likely face litig liquidation, an outcome that will lead yield little if anything to general creditors, landlords, trade creditors, or employees. Sub chapter 5 is good for debtors, but it's also good for creditors. Many businesses eligible for relief under subchapter 5 are similar to family farms that are permitted to reorganize under chapter 12.
▶ 0:44:48The chapter 12 debt limit is 12.5 million. It's hard to identify a principled reason for the subchapter 5 debt limit to be only a small fraction of the one for chapter 12. Subchapter 5 is a relatively new statute and in any such statutory regime, it may require some adjustment as cases revealed imperfections, uncertainties or abuses in its operation. Nothing in our experience, however, suggests that increasing the debt cap would itself be a source of mischief.
▶ 0:45:17We believe that increasing the cap gives more small businesses for which it was intended a viable and highly reliable remedy. Now I should also say there are other areas of bankruptcy and bankruptcy adjacent reform where I think incremental reform is is possible uh and would also enjoy broad support. Um these reforms include potentially um changes to rules governing um state insurance insolvenies.
▶ 0:45:48They also include technical corrections to chapter 15. I think there are also possibilities to have a reorganization regime that allows um a class of funded debt to be restructured without interfering with other classes. But again, these are all opportunities and um the National Bankruptcy Conference stands ready as always to help you here with these kinds of valuable incremental reforms that will improve our bankruptcy laws. Thank you very much. Thank you, Professor Bear.
▶ 0:46:18Judge Black, you may begin. Chairman Fitzgerald, Ranking Member Nadler, members of the subcommittee, I'm Paul Black, United States Bankruptcy Judge for the Western District of Virginia. I want thank you for the opportunity to speak today. I went on the bench in January of 2014 and many many of my cases are chapter 13 repayment plans where debtors are trying to maintain their home or subchapter 5 cases where small business debtors are trying to save their businesses and keep their employees on the job.
▶ 0:46:46Part of my district is in Appalachia and many of the debtors who appear before me have very limited income, including those on nothing but some form of social security. In the cases I see, where could Congress make an impact with new bankruptcy legislation? First, the subchapter 5 debt limit. I I will state for the record today that that the Small Business Reorganization Act is one of the best pieces of legislation in the bankruptcy world in many years. Congress did a good thing.
▶ 0:47:11When when the SB went into effect in February of 2020, the debt limit was approximately $2.7 million. The pandemic hit and it was increased to 7.5 million. The debt limit increase had a sunset and was extended through June 21st of 2024 when it reverted to its original limit adjusted for inflation.
▶ 0:47:30What a small business may be in southwest Virginia where I live may be very different than what a small business may be in Denver or Chicago or New York where the cost of living, property values, real estate taxes, and debt loads may be significantly higher. The $7.5 million debt limit was effective and appropriate. Businesses with debt up to this level simply struggle to afford the Chapter 11 process without the SB.
▶ 0:47:53The increased debt limit brings opportunity for small businesses to take advantage of the less costly and streamlined provisions of the bankruptcy code, enabling the debtors to more quickly get a plan confirmed and exit the court system. Also maintain entrepreneurial value and keep employees on the job. The participation of the subchapter 5 trustees has proven very effective in getting these cases to a consensual confirmation. Were these small business cases forced to go the route of a regular chapter 11 case with its attendant increased costs and procedural steps?
▶ 0:48:21Many would likely just fold the tent and go home. They just can't afford it. The SB works and it works at the increased debt level. So, I encourage Congress to make the $7.5 million debt limit which was so effective in operation a permanent addition to the bankruptcy code. Second, the bifurcation of fees in chapter 7 cases. This to me is an access to justice issue. The prosay dattor filing rate varies across the country. Some districts are significantly higher than others.
▶ 0:48:49One constant however is in that prosay cases which are ones which are filed without the assistance of council they often struggle. They also top the clerk's office staff which when we are in difficult budget times and the clerk's offices are being asked to do more with less. Why is this a problem? Chapter 7 debtors often have difficulty coming up with a lump sum attorney's fee necessary to pay counsel to file a liquidating chapter 7 bankruptcy case. In a chapter 13 plan, debtors can and often do pay their fees over time.
▶ 0:49:18Some debtors simply should not be in those cases for no other reason than to pay their attorney's fees. The Supreme Court has held that a chapter 7 attorney's fee cannot attorneys fees cannot be treated as an administrative expense, meaning that the DTOR's attorney cannot be prioritized ahead of other creditors. Further, several circuits have held that a pre-etition agreement to pay attorney's fees is subject to the automatic stay and any fees still owed post filing is subject to discharge.
▶ 0:49:41What would help chapter 7 debtors uh to more readily obtain counsel as opposed to filing without counsel or going into an unnecessary chapter 13 plan? Allow them to bifurcate their fees and pay some portion before filing and some portion afterwards. I've set forth in my written statement proposed ways to do that. We want to encourage council to take these stasis by allowing them to get paid with court oversight to prevent overreaching which would benefit the entire system. Third, chapter 7 trustees fees.
▶ 0:50:08The last no asset fee increase for a chapter 7 trustees received was in 1994 from $45 to $60. The responsibilities of trustees has increased substantially over this period, especially since the adoption of BAPSA in 2005. Pending before the h house is HR 3867. the Bankruptcy Administration Improvement Act of 2025, which has bipartisan support to date. It has a Senate counterpart also with bipartisan support.
▶ 0:50:35This bill would raise the no asset fee for trustees to $120 in such cases. The Chapter 7 trustees are the boots on the ground that make the system work. The bill has a funding mechanism built in to pay for these fees by raising the fees in certain chapter 11 cases by 03%. and would also extend certain temporary judgeships already in place around the country, including some that have looming expirations. I'm also concerned about the aging of the chapter 7 trustee panels around the c country.
▶ 0:51:03A common concern I hear from many of the colleagues at the bench at national meetings. We need to encourage younger bankruptcy practitioners to be willing to serve on these panels, but it needs to be financially viable for them to do so. Thank you for your time and I welcome your questions on the matters Thank you, Judge Black. Judge her, Chairman Fitzgerald, Ranking Member Nadler, members of the subcommittee. Good morning.
▶ 0:51:29My name is Michelle and I am a United States bankruptcy judge for the District of Maryland. I am honored to be here this morning to share information and data with you concerning the US bankruptcy system. I'm in a unique position to do that because I've been a partner at the law firm of Jones Day representing both debtors and creditors in bankruptcy. I've been a law professor at two different law schools and I am now a bankruptcy judge.
▶ 0:51:57I should say I am here in my individual capacity and I do not speak for the United States Judicial Council, the Administrative Office of the United States Courts or any other individual With my aotted time, I would like to do three things. First, I want to talk about subchapter 5, next chapter 13 cases, and finally, student loan debt.
▶ 0:52:21Before doing so, however, I want to underscore the basic fact that every year, hundreds of thousands of whether as an individual debtor, a business debtor, or a creditor, use the United States Bankruptcy Code that this Congress has enacted to address issues stemming from financial distress. It's not perfect.
▶ 0:52:50We probably could do things better, but during our conversation today, I do not want us to lose sight of the fact that the bankruptcy code helps everyday On that point, in 2024, over 500,000 bankruptcy cases were filed and the recent study shows that one out of every 11 Americans will at some point turn to the bankruptcy system for help.
▶ 0:53:16With respect to sub chapter 5, since its effective date in 2020, over 10,000 cases have been filed. Subchapter 5 helps smaller companies reorganize and pay their creditors quicker. The data shows that subchapter 5 debtors confirm plans in over 50% of the cases.
▶ 0:53:41And of those plans, over 60% are consensual, meaning that they met the requisite creditor support. The process is quicker, cheaper, and more effective. Unfortunately, at the moment, the data also shows that the current level of the debt cap, which gauges eligibility for subchapter 5, is excluding numbers of smaller companies.
▶ 0:54:11and they cannot use the subchapter to keep their business or to repay their creditors. With respect to chapter 13, in 2024, there were over Chapter 13 cases filed. Chapter 13 allows individuals to repay their creditors under a 3 to fiveyear plan.
▶ 0:54:33The national data shows that chapter 13 debtors complete their repayment plans in 40 to 50% of the cases. And I know from talking to my colleagues, many districts have much higher completion But similar to subchapter 5, the current debt cap in chapter 13, which again is the eligibility gate for chapter 13, is set at a level and bifurcated in a way that excludes many
▶ 0:55:04individuals, approximately 2,000 every year from using chapter 13. In addition, those individuals also might be foreclosed from chapter 7 because of the means test. Finally, with respect to student loan, the outstanding amount of student loan debt and the defaults they're under continue to rise. Yet, individuals cannot use the bankruptcy system to address student loan debt.
▶ 0:55:31Moreover, student loan debt may actually keep an individual out of the bankruptcy system. For example, the student loan debt of an indivi individual may be so high that the debtor doesn't qualify under the debt cap for chapter 13. So that chapter 13 would be debtor can't file, can't repay the creditors.
▶ 0:55:53A path to addressing student loan debt in bankruptcy actually as a result might help not only debtors but all of the debtors other creditors. That kind of path would serve the dual objectives of the bankruptcy code. The bankruptcy code strives to provide the honest but unfortunate debtor a fresh start and pay as much as possible to all the creditors.
▶ 0:56:20Thank you and I look forward to your Thank you, Judge Hardner. Professor Good morning. We're here because the Constitution empowers Congress expressly to enact uh uniform laws of bankruptcy which coordinate responses to financial distress and thus the responsibility to update those laws when the need is required.
▶ 0:56:47My written statement discusses several issues that are of interest to this subcommittee, including support for the Bankruptcy Administration's improvement act of 2025 and including a brief discussion of the 23 andMe bankruptcy, which is of interest to some of you. Right now, I will focus on two issues. The first is to continue the discussion of small business bankruptcy.
▶ 0:57:16The law that's been discussed by my fellow witnesses is of relatively recent vintage, but it reflects decades of development and thought, and as implemented, that law truly is the bankruptcy system at its best.
▶ 0:57:32I used to describe this subchapter 5 as having fewer creditor requirements and I did have some concerns, but that framing turned out to be misleading because subchapter 5 swaps some types of requirements that would be less effective in this context with those that work more effectively in this context, such as a trustee.
▶ 0:57:57uh restoring eligibility to the rate it's been most of the time this law has been in effect would make this law accessible especially in highcost areas uh to the benefit of workers, creditors and of course the small businesses Let me return then to the thorny issue of student loans. Bankruptcy law has treated student loans differently from other kinds of debts since the 1970s.
▶ 0:58:28But that statement in and of itself is misleading because the details of that law have changed dramatically through uncoordinated incremental movements. There used to be three paths to relief from student loans and now there's just one. And as you've already heard, uh it doesn't work well at all. the path is broken.
▶ 0:58:50In addition, the scope of student loans that get special protection has broadened well beyond the initial rationale for having this exception to discharge. Highlighting some other issues that are relevant to reform in this area.
▶ 0:59:08Please remember that since 2005, all personal bankruptcy filers are subject to additional layers of widespread undue hardship we could find among all bankruptcy filers essentially if measured in an appropriate way. We also must consider the demography. We're not just talking about an issue for of youth with decades of potential income in in their futures.
▶ 0:59:38a big proportion of older student loan debtors in the United States continues to grow and that really affects the kinds of tools you would want to think about in developing further a rational student loan policy in bankruptcy. In the 1990s, I worked on bankruptcy policy with former representative Caldwell Butler. He's a Republican from Rowan Oak, Virginia. And the law around student loans was more forgiving then it was now.
▶ 1:00:07And yet, Congressman Butler advocated for full repeal of the special treatment of student loans. He thought the general bankruptcy requirements were sufficient to ensure legitimate use. I recognize that one may not be willing to go that far.
▶ 1:00:25uh although I think that is a a an important option on the table, but there truly is a menu of narrowly tailored and sensible middle ground proposals that I hope could get bipartisan support from this subcommittee. Thank you. Thank you, Professor Jacobe. Dr. Hodkus, you're next. Thank you. I am very honored to have the opportunity to speak with you today. Um I am an economist.
▶ 1:00:55Um and I'm here mostly to talk with you about the empirical research that we've been doing related to sub five. Um I'll add that sub5 falls squarely in the realm of research that I've been doing for more than 30 years looking at the overall efficiency of the US bankruptcy code as as well as as globally.
▶ 1:01:12Um now we've completed a study where we have um with a lot of help gone in and looked at nearly all of the outcomes for business sub5 cases for firms um I should say chapter 11 cases for firms under 15 million in total liabilities and documented the outcomes and uh tried to give a better understanding of a couple of things.
▶ 1:01:34First of all, it gives us an understanding of how uh great an extent of a problem do we have because we also compare sub five cases to uh traditional chapter 11s. We can look at whether chapter 11 sorry sub5 has achieved its goals so far and also I can speak a bit to the 7 and a half um million threshold and some of the um safeguards that might be in place that help uh prevent future abuse of that threshold.
▶ 1:02:01Um so first to to give you an extent of the the magnitude of the problem we would have absent sub five and I'm not going to um inundate you with facts uh but I just want to share a couple of factoids with you. First of all um in the period before the enactment of sub five so 2010 to 2019 70% of small businesses with less than seven and a half million in total liabilities went directly into chapter 7 liquidation.
▶ 1:02:28So, not even attempting to reorganizing to um look at the ones that do attempt a chapter 11 reorganization, only onethird of those are successful in confirming a plan. And that's probably overstating their success rates because very often those plans are liquidating plans. And then lastly, um the vast majority of firms we know from the US census uh simply shut down their doors out of court and don't even bother to enter the bankruptcy system.
▶ 1:02:55So this raises the natural question of why is a traditional chapter uh so unfriendly to small businesses and why sub five is necessary. Um there's a couple of simple explanations for that. One is that chapter 11 is very expensive, very time consuming. Sub five uh addresses that issue by reducing certain requirements for expensive disclosures, sets uh timelines, etc.
▶ 1:03:19Um, many small businesses, as Professor Baird has already mentioned, wouldn't continue to exist with that that small business owner remaining in place. And lastly, for small firms, it's often very difficult to get agreement from creditors, particularly when that creditor might be a single bank. And in these instances, the role of the sub five trustee becomes particularly important. So, this has led, not surprisingly, to the introduction of sub five as a simplified procedure for small businesses.
▶ 1:03:46I should say not unlike what's been done in uh I believe it's uh 11 other countries in the last 10 years have also introduced similar types of fasttrack simplified procedures for small businesses. So I want to very quickly summarize the the findings of our work um basically what we find u is that sub5 more than doubles the probability of confirming a plan of reorganization.
▶ 1:04:10We find there is no evidence of any harm to unsecured creditor recoveries in those sub five cases and that we interpret as saying that the unsecured creditors can also share in the gains from preserving viable businesses. And lastly, we look at the post-emergence survival rates of these businesses because the concern might be that sub5 is helping a lot more firms reorganize, but these these companies are just going to fail anyway. and we find no evidence of excessive continuation.
▶ 1:04:39And I'll note here that the sub5's role in coming up with the plan and its feasibilities is particularly important to the process. Um, lastly, I want to speak to the issue of the threshold and how our evidence might speak to that. Um, we don't find any evidence in what's happened so far of what we call bunching below this threshold, meaning firms manipulating to uh find themselves just below the the eligibility requirement.
▶ 1:05:06And um we we will um kind of in my last couple seconds here, I do want to note that it is a valid concern for larger firms potentially to manipulate uh liabilities to use this threshold. The FSX FSS Alex Jones case is probably the most egregious example of that. But there are safeguards within the process that I think uh reduce the likelihood of that happening.
▶ 1:05:29Particularly the judicial discretion so that when there are other claims as the predominant liability, those are not allowed to use subchapter 5. Thank you very much. Thank you, doctor. Uh Miss Murray, you're now recognized for five minutes. Uh thank you chair uh chairman Fitzgerald and subcommittee ranking member Nadler and committee members for having me here today to talk about the important issues of subchapter 5 in our bankruptcy code.
▶ 1:05:56I've been a member of American Bankruptcy Institute a nonpartisan organization since 2009 and I currently serve on its board of directors. During my legal career, like Judge Herner, I have a s significant experience on both the creditor and debtor side of bankruptcy cases. I've filed corporate reorganizations for both large and small corporate debtors, and I also have experience experience representing large and small creditors and fiduciaries whose job it is to maximize value for the benefit of the estate.
▶ 1:06:25Last year, I was selected by ABI president to co-chair a task force to study the effectiveness of subchapter 5 with judge her. My views today are not necessarily that of ABI or its board, but they've certainly been informed by the work we did on the task force. My views are also informed by my own Chapter 11 is a powerful tool that preserves jobs and is strategically used to reorganize businesses while simultaneously maximizing value to creditors and owners.
▶ 1:06:55Our country is built on entrepreneurialism and small businesses as previously noted today are its lifeblood. As we've discussed in our task force report, however, not all dreams are viable and 50% of small businesses statistically fail within the first five years. Subchapter 5 was enacted to address challenges in the bankruptcy process and to help small businesses survive economic turmoil.
▶ 1:07:22Subchapter 5, as discussed today, appears to be working well, especially in in Florida, which is the leading filer of subchapter 5 since its Confirmation rates of subchapter 5 cases nationally are slightly over 50%. According to the United States trust trustee program, is compared to chapter 11 cases, which historically have had much lower success.
▶ 1:07:48To be eligible to file a subchapter 5 case, a business debtor must at least have liquidated non-contingent secured and unsecured debts of roughly 3.4 million. The 3 million 3.1 million cap was just increased slightly over the last 60 days. As we know, this debt limit reverted from 7.5 million approximately a year ago. The subchapter 5 cases that I've been involved with are distinct from my traditional chapter 11 cases.
▶ 1:08:16A good bellweather of a small business is the size of the loans that the SBA provides to small business owners. For example, the seven SBA 7A loans made by participating lenders provide smaller businesses with access to capital loans to start their companies. The maximum size of these loans is $5 million. SBA504 loans have a maximum $5.5 million and are made to acquire assets, capital assets, machinery, equipment.
▶ 1:08:46Uh, and both the 504 and the 7A programs provide attractive, probably more attractive borrowing terms than your traditional Most businesses all small businesses also at least have one other form of debt, including idol loans, bank loans, maybe debt consolidation loans, and most likely friends and family.
▶ 1:09:06The combination of SBA loans of up to 3.4 million together with a secondary source of capital demonstrate why the current $3.4 million limit is just too low for small businesses. The addition of trade debt on top of that due to inflation really pushes small businesses over the limit. Yes, there are a few high-profile cases that have raised concerns of abuse. However, the checks and balances in our system from judges to trustees to creditors minimize abuse or unintended consequences.
▶ 1:09:36I'm also aware that unsecured creditors have concerns with increasing the sub5 limits. And it is undisputed that subchapter 5 shifts the dynamic for unsecured creditors due due to the requirements at confirmation. In my experience, however, bankruptcy courts recognize this balance of power and take it seriously. debtors seeking protection under subchapter 5 must follow strict guidelines and deadlines.
▶ 1:10:05One judge has appropriately noted that the SB provides qualifying debtors with the opportunity to use this new powerful tool to reorganize and save its business, but it must do so quickly. In addition to shortened deadlines, creditors have other protections, including the best interest of creditors test, feasibility requirements, and others. In Florida, where I practice, sub five trustees also utilize their professional skills to ensure DTOR's operations match their plan projections.
▶ 1:10:34AST aspirational plans without support are not likely to be confirmed. I'm here today prepared to discuss the leverage that creditor creditors have in subchapter 5 cases, which I think is sufficient to support an increase in the debt limits. Sub chapter 5 was enacted to give small businesses a fresh start and appears to be working. Increasing the debt limits back to 7.5 million would give more Main Street businesses a reasonable opportunity to reorganize in difficult circumstances.
▶ 1:11:04Thank you for your time and I welcome your questions. Thank you, Miss Murray. Uh we'll now proceed under the five-minute rule with questions. I'm going to recognize myself for the first set of questions. Professor Baird, as you mentioned in your opening statement, the Federal Priority Act allows receivers in state insurance in solveny cases uh to be held personally liable if the receiver disperses funds without repaying the federal government first.
▶ 1:11:31Um bankruptcy cases are specifically exempt from the Federal Priority Act, but the bankruptcy code has the procedural protections to ensure the government is repaid. But I guess what we're seeing is the same is not true of insurance insolveny cases which are largely handled under state law.
▶ 1:11:50Uh if we're considering legislation to limit liability for state insurance receivers, what types of procedural safeguards should be in place so that the government does not get skipped over um or you know becoming the first in line when attempting to collect on its The thing to remember here is that it the absence of the kinds of rules we have in bankruptcy for state insurance insolvenies is not a deliberate congressional decision
▶ 1:12:20but rather is an artifact of the way the law has evolved over time. Um the the federal priority act was established first in 1797 and in bankruptcy we've realized that we need to have procedures. Having procedures in for state insurance and solicy would make sense. What you need to make sure of is the government is notified of the state insurance um receiverhip um and knows about the procedure.
▶ 1:12:46But it's also reasonable that once the government is notified that it has a certain clock that starts to tick because unless you have clear procedures, you're not going to be in a world in which receivers will feel confident that they can dispense assets and not expose themselves to personal liability. So again, um the easiest to answer your question directly, the easiest thing to do is is simply ensure that um there is proper notification to the government and that the technical rules um are are satisfied.
▶ 1:13:16But this shouldn't be a terrible terribly difficult problem. Thank you, Judge Hardner. Um I'm going to skip around a little bit, but um you discussed undue hardship test in your opening statement and I wanted to focus a little bit on the student loans. Uh so it's been noted that relatively few student loans are discharged in bankruptcy. uh during your time on the bench, has there been any times when debtors satisfied the undue hardship test such as that that you've ordered uh discharge under the student loans?
▶ 1:13:47So, it's a great quest question, chairman. Um I will say I do not see many student loan cases and that's it could be in part. I don't have any empirical data to back me up here, but I will say procedurally it's difficult for a debtor. They have to commence an adversary proceeding. They have to file a complaint and then they have to meet what we call the Brener standard, at least in my circuit, the fourth circuit, which incorporates the undue hardship standard you just referenced.
▶ 1:14:15I have had one opportunity where I had a 67year-old woman who had incurred over $500,000 of student loan debt in the hopes of becoming a business executive. she was trying to repay um she was never going to be able to repay that entire amount.
▶ 1:14:35Doing the analysis based on the facts that she representing herself as a pro-say debtor put into evidence, I was able to grant a partial discharge of some of her student loan debt which was not appealed by the student loan lender.
▶ 1:14:52But I could not find under the Brund standard, even in that situation with an older individual who had only limited time left to work to try to repay her debt, the ability to grant a full Thank you, Judge Black. There have been some claims that medium-sized, well- capitalized businesses or small subsidiaries of larger businesses have been using sub chapter 5 to circumvent the creditor protections associated with general chapter 11 cases.
▶ 1:15:22Have you seen any type of behavior that would uh in your courtroom that would suggest that this is actually happening? No, I really I really haven't in my court. Um you know, I've had um you know, some cases that may look right out of the gate, like a single asset real estate case that probably shouldn't be there.
▶ 1:15:46Uh but I have not seen any type of uh you manipulation of of of insider debt or anything of that nature in in the Western District of Virginia that would uh present itself in the cases that I see. Um I think the cases that have been presented to me um have all been well suited for sub chapter 5.
▶ 1:16:05And uh again, as uh Judge Her and some of the other witnesses have pointed out, if there are cases that come before us, we have the ability uh to do u uh to prevent shenanigans, for the lack of of a better description. Uh we've got the ability to appoint a creditors committee. um the uh u u you know different avenues are available for the subchapter 5 trustee to have a different uh allocation of powers to investigate the debtor's business.
▶ 1:16:34So in the cases where I am in southwest Virginia I'm not seeing that. Thank you. I'd yield back and recognize the ranking member Nadler for his five Thank you Mr. Chairman. As I noted in my opening statement, student loans are the only kind of unsecured debt that consumers cannot discharge in our current bankruptcy system.
▶ 1:16:56Although we generally imagine a young person when we consider tackling the issue of student loan debt, this issue affects people of all ages and increasingly it's our senior citizens with loans going back many decades who are shouldering this non-dischargeable debt. Thanks to changes in the bankruptcy laws passed in 2005, to which I led the opposition, we now have a system in which debtors who are presumed to be too insolvent to pay medical or credit card debt must remain on the hook for their student loans.
▶ 1:17:24The legal hurdle to prove quote undue hardship in order to discharge student loan debt means that disabled veterans, senior citizens, and low-income individuals, among others, are on the hook for decades for debt that they will never realistically be able to repay. And to make matters worse, right now student loan debtors are subject to wage garnishment and garnishment of their social security benefits for these debts that they can never discharge.
▶ 1:17:49Professor Jacobe, is there any logical reason why only student debt should not be dischargeable in bankruptcy? The traditional argument for special treatment of student loans in bankruptcy related to protection of the public fisk to preserve money for educational opportunities to others.
▶ 1:18:11There also were unsubstantiated concerns early in the history of developing the 1978 bankruptcy code about individuals who might not deserve bankruptcy relief running from graduation right to the bankruptcy court which of course is not for a variety of reasons is not even possible under the current system that we have. So uh I the first that that latter instance I discount completely.
▶ 1:18:41There are plenty of checks and balances for that. The first one it does raise broader matters of education policy but in that case I the rest of the law needs to be written very very differently to retailor it to to that objective. Thank you. And Professor Jacobe, what's the impact of saddling millions of Americans with non-dischargeable student loan debt?
▶ 1:19:04And do you believe that Congress should act to ensure that debtors can discharge their student I believe that this part of the bankruptcy code is well overdue for reform. I think this section of the bankruptcy code 523A88 is indeed broken and that none of you none of the members of this esteemed subcommittee would write it this way if you were to do it today. So I hope you do act. And should we make a distinction between private and public loans? Yes.
▶ 1:19:36To your original point about where student loans fall in the general uh range of unsecured debts, there is no reason to distinguish a loan for food or medical care from a made by a private for-profit lender from a loan that someone might use while they are a student in their education. uh those are loans that are part of our marketplace and can manage manage the risk very Thank you.
▶ 1:20:04And finally, Professor Jacobe, the undue hardship standard was added to address presumed or feared abuse of our bankruptcy standard. Is this a realistic fear? It is not a realistic fear and undue hardship used to be used in a way narrower way because there were other paths including older student loans to discharge without even overcoming that hurdle. So that's two reasons why undue hardship does not work today in our system.
▶ 1:20:33And why is it different from what it used to be? It used to be that if a loan had been uh under repayment for five years and then seven years that it could be discharged in bankruptcy independent of any questions of undue hardship. Only a more recent loan would somebody have to file a lawsuit and prevail on the argument that it was an undue hardship which might explain the impossibly high standards that courts adopted then that they still use to this day.
▶ 1:21:03And that was changed when? Well, it's been done incrementally in pieces. I believe the the seven-year would have um disappeared in 1998, but I would need to check to make sure because it's changed so many times. Okay. Thank you. I yield back. Gentleman yields back. Gentleman from Virginia is now recognized for five Well, thank you, Mr. Chairman. I want to thank you for holding this hearing to provide an overview of US bankruptcy law and explore avenues for potential reform.
▶ 1:21:31I also want to welcome Judge Black from Western Virginia, includes the sixth district. Judge Black's been a consistent leader in our part of Virginia, and I appreciate having his expertise here today. So, I'll start with you, Judge. What benefits have you seen from the Small Business Reorganization Act, which was signed into law in 2019. I was proud to be the lead patron of that. Um, what benefits have you seen for both debtors and creditors since the enactment of subchapter 5? And do you think those benefits would extend?
▶ 1:21:59Uh what do you think the impact would be if that $7.5 million cap were made permanent? Thank Thank you. uh with the uh increase of the debt limit, it would make more uh small businesses eligible um not only in Southwest Virginia but across the country because as I mentioned earlier, what you know what may be a small business in Southwest Virginia may may not uh you know equate to what may be a small business in Los Angeles or or elsewhere u where they have higher debt loads.
▶ 1:22:29But the other thing is what I have seen in small business cases before me and I've probably had 30 to 35 of those so far is the speed with which they're able to get to confirmation and the less fighting and less wheel spinning. Um you know I've I've seen some cases if they were in a in a traditional chapter 11 they'd be on their third or fourth amended disclosure statement and you know we'd be six or eight months into the case and it's just not it's just not progressing.
▶ 1:22:55Um the uh uh presence of the subchapter 5 trustee uh is helping keep the debtors and the creditors eye on the ball. A lot of these cases are two-party disputes. Um and if you can bring those parties together and try to eliminate some of the u um the fighting that often goes on in chapter 11 cases, uh it keeps the um it keeps the case moving forward. And again, you've got to file a plan within 90 days after after the petition date absent some unusual circumstances.
▶ 1:23:23So, u really when these cases are filed, DTOR's council has to be thinking about the plan before they file the case. And so, it tends to move a lot faster. We have a higher confirmation rate. And um for all of those reasons, I think it's been a great benefit. It's much less expensive. Chapter 11, uh with a traditional case, it's hard to put, you know, Bob's backhoe into the same um reorganization scheme of Circuit City or General Motors.
▶ 1:23:49Um it you know the absolute priority rule u the absence of that and the ability to get a case to confirmation quickly is um is a real benefit to small businesses. Nobody wants to be in bankruptcy if they can Thank you. I hope the committee can move forward on that issue. I want to shift gears a little bit. Our bankruptcy laws were not written with the biotech and consumer DNA era in mind.
▶ 1:24:10Uh which is why I'm I'm proud to join with uh the gentle lady from California, Congresswoman Lofrren, and and uh others in this my Senate colleagues in introducing uh the Don't Sell My DNA Act, which would explicitly amend the bankruptcy code to add genetic information to the definition of personally identifiable information, require written affirmative consent from individuals before their genetic data can be sold or transferred, and mandate the secured deletion of unsold genetic data.
▶ 1:24:35Uh the bill responds directly to the recent bankruptcy filings by 23 and me and recognizes the genetic data unlike a phone number or email address is uniquely identifying and permanent even without a name attached. So professor Jacobe if I could ask how does the bankruptcy system currently treat mass privacy related claims particularly those involving genetic data in terms of classification priority and valuation and are breach victims essentially treated as unsecured TOR creditors? Let me address your last question first.
▶ 1:25:05Yes, breach victims, those who experienced the major cyber security breach of 23 andme are treated as general creditors. And then the 23 andMe bankruptcy which uh the central feature of which was selling the company to a third party although a related third party as it turns out.
▶ 1:25:25Uh the the breach claimants will have to turn to any proceeds uh left in the pot after higher priority creditors get paid. In terms of the broader question that you asked, I'm I will welcome further further specific questions, but I uh I would say generally there's a real issue there needs it needs to be made more clear that applicable non-bankruptcy law must apply here in the bankruptcy
▶ 1:25:55context, but also should apply outside of the bankruptcy context. Those should be the the same protections in both places. Given how difficult reputational and identity related damages are to quantify, should Congress or the courts can reconsider how to account for these harms in bankruptcy proceedings, especially in light of the long-term consequences for consumers? Yes. And I think there is broader thinking to be done outside of bankruptcy in terms of some broader federal level protection.
▶ 1:26:26Thank you. Yield back. Gentleman yields back. Uh, ranking member Raskin is now recognized for five minutes. And thank you, Mr. Chair. I've got a question for all the witnesses. Um, do you think that the subchapter 5 debt limit should be restored to 7.5 million from the current 3 million? Um, and answer with yes or no if you can. Miss Dr.
▶ 1:26:49Hodkus, Professor Jacobe, Judge Hunter, Judge Black, And Professor Beard, Wonderful. Um, I wonder if you can answer with the same uh admirable concision about whether you think student loan debt should be dischargeable. Miss Murray, I'm actually I actually going to decline to answer that one just because it's not part of my f my practice. Dr. Hodkas, as a as an economist, I'll also not answer that.
▶ 1:27:17Okay, Professor Jacobe, this section of the bankruptcy code should be at least reformed if not Judge Her. So, I will echo Professor Jacob's comment. The section needs to be revisited and we need to rethink how we treat student loans and bankruptcy. Gotcha. Judge Black, I agree that the uh the code section needs needs to needs work.
▶ 1:27:39It's it's I'm not it's so expensive to come in and litigate a student loan case that we're just not seeing these cases being filed because they know they're probably not going to win. They're so hard to win and they're so hard to litigate and it really shouldn't be that way. It just seems like an insurmountable climb for it is a very difficult climb. Yeah, Professor Bird. Yes, I I agree.
▶ 1:27:59I think the there's a balance between debtors and creditors, but in the case of student debt, we're at one end of the end of the extreme and the idea that essentially no student debt can be discharged. I think can't be can't be the right solution to the Gotcha. Judge Harter, let me come to you because you're a Maryland lender. I got a couple questions for you, but sticking with the student loan debt for a second.
▶ 1:28:21Um, seems to me the the whole basis for bankruptcy law is that we're willing to indulge the potential moral hazard of people acting in financially proflegate ways because we want to incentivize businesses to invest and innovate and experiment and grow. why shouldn't that logic apply to people going to college?
▶ 1:28:51In other words, um maybe there's some slight moral hazard that somebody will use their college student loans for reckless or proflegate purposes, but overwhelmingly most people are going to use them in a responsible way. And we want to incentivize people to go to college and to invest in their own education. So, does that logic correctly undermine the categorical exclusion of educational debt from the bankruptcy process?
▶ 1:29:22So, ranking member Rascin, that's a great question, and I'll answer it by telling you that my years of studying the bankruptcy code show the consistent theme that the code's meant to balance the rights of debtors and creditors. And what the code wants at the end of the day is for the debtor, whether it's a business or an individual, to be able to return to the community as a productive contributing member. That benefits everyone.
▶ 1:29:50That fresh start is so important not only to the business, but also to the individual. So as Congress is thinking about policy and it is Congress's choice on the policy, those guiding principles underlying the code, balancing the rights of debtors and creditors and providing an opportunity for the individual to become a productive constructive member, I think would be a helpful guide.
▶ 1:30:13And so I I think it it suggests similar treatment in thinking about sub chapter 5 or chapter 13. And we got rid of um debtor's prison a long time ago, which I think everybody pretty much believes in or most everybody. I don't want to speak for everyone, but um but a staggering insurmountable debt is a kind of financial prison as well.
▶ 1:30:43Obviously, it doesn't have the harshness of actually being behind bars, but it can be extremely confining and constraining for a person's life potential, right? So, um, again, ranking member Raskin, I think that's an insightful comment. I think the data, if you look at it closely, suggests that many people will die with student loan debt. They just cannot pay it back in their lifetime. And I want to underscore something that Professor Jacobe said.
▶ 1:31:07The bankruptcy code includes checks and balances and at least I'll speak for myself. I do not want to see anyone abuse the bankruptcy system whether it's a debtor or a creditor. Right. I want to preserve that system to help the people that deserve that fresh start and to make sure we can get as much money to creditors as we can through it. Great. And very quickly, we're about to lose half of the judgeships on the bankruptcy court in Maryland.
▶ 1:31:35What will that mean for us if we lose three or four temporary bankruptcy judges? So, as you noted in Maryland, we have three temporary seats. The preservation of the temporary seats, I think, simply comes down to maintaining flexibility and and stability in the system. If those seats are needed, they can be filled to make sure we're providing the services needed in our community. And if they're not needed, they won't be filled, but they're there just in case.
▶ 1:32:01So stability and providing that kind of reassurance to the community I think is Thank you. I yield back, Mr. Chairman. Ranking member yields back. Um we have conflicting hearings going on as you can probably tell. Um so we're going to go to gentleman from California at this point. Mr. Gray. Thank you, Mr. Chairman, ranking member for this hearing. And I want to thank the witnesses for being here today.
▶ 1:32:28I concur that sub chapter 5, sub chapter 13 raising limits is important, but I also want to focus on on student debt. 43 million Americans owe 1.6 trillion in debt. Veterans, other Americans, older many of our delinquent default, meaning many are going to fall out of the workforce. They're going to work for cash.
▶ 1:32:57They're just not going to be as productive as they could be would they have a fresh start. Currently, under the undue hardship standard of the Bruner test, uh followed by most courts, almost impossible to discharge this debt.
▶ 1:33:15And that's why I'm introducing legislation, the Student Loan Bankruptcy Improvement Act, that modifies a law to require only hardship, meaning eliminating the undue hardship.
▶ 1:33:30I believe this strikes a balance creating a more equitable and reasonable test keeping the safeguards like the means test elevated test for the bankruptcy process and doesn't really endanger the availability of student loans. Want to note that several members of this committee, Mr. Johnson, Mr. Schuwell, Miss Ross, Miss Lofrg have joined to co-author my legislation.
▶ 1:34:00This legislation is also being supported by the Consumer Federation of America, Association of College Admissions Counseling, National Association of Student Loan Lawyers, Century Foundation, and the National Law Center. Question.
▶ 1:34:18My first question will be for Judge Her, Professor Bay, Professor Would you agree that by striking undue from the test strikes a fair balance in protecting the integrity of the bankruptcy and helping student loan borrowers move ahead? Judge Harner. Thank you, Representative Korea for that question.
▶ 1:34:44So I can't provide any advisory opinions but what I can say is right now the Brunner test which you have up so nicely behind you and the standard were required to follow in the courts this undue hardship all of the case law focuses on that term. The definition is of the term undue hardship.
▶ 1:35:06So if legislation removes the word undo from that term, courts will have to rethink the standard. There will have to be a new definition. So it will student loan treatment in bankruptcy. I can't predict exactly how, but what I can say is I think courts would see it as a signal to rethink how student loan debts are treated.
▶ 1:35:35and it may provide the path that you were speaking of bear I think it's an excellent approach. It's it's a surgical way to correct the problem of Bruner. Um Bruner was a mistake. Uh but Bruner now binds all bankruptcy judges. Judge Harner and Judge Black don't have any choice. They're bound by circuit precedence. This was it was a mistake to um to have the Bruner test which emerged as Professor Jacobe said under different circumstances.
▶ 1:36:04And this particular surgical approach which essentially enables judges to press the reset button and reconsider how to strike the balance I think is an excellent idea. Professor Jacobe, the reset reference is exactly what I was thinking as well. Uh circuit courts have said in their opinions that they have no reason to back away from the very harsh interpretation of undue hardship because Congress has kept that part the same even as it's changed the other pieces.
▶ 1:36:32This would send the message to circuit courts and invite other courts to use a more appropriate to everybody here. Um, quick question in my 40 seconds left. Eliminating undo, would that essentially tilt the system in favor of the debtors? Professor Beard? Uh, no. The the balance is so out of whack that this is just moving. Judge Um, I don't think it would.
▶ 1:37:02I think it would uh provide the courts with a little more flexibility in how to address these issues and um it's a flexibility that we don't really have right now given the uh Judge Harner. I agree with Judge Black. It would give Professor Jacobe. Yes. And we have to remember this isn't just debtor versus creditor. It's what debts get paid when other ones do not. Dr. Hoskus, any thoughts?
▶ 1:37:26I can as an economist it seems um it's it you've reached an all or nothing solution and in the moment it's nothing so I can't speak to the specific tweaks in the law Miss Murray. Thank you representative. It's not part of my practice so I'm going to decline to answer this one. Thank you very much again for the witnesses. I'm out of time. Appreciate your thoughtful comments. Gentleman yields back. Uh we now recognize a gentleman from California, Mr. Isa for five minutes.
▶ 1:37:55I think we're going to pick up where we left off. Uh, Judge Her u or actually Professor J. Jacobe uh when the private sector was doing college loans, the laws were in in place to give them a assurance that there that they would not easily find themselves with no money as a result of bankruptcy.
▶ 1:38:22And that allowed for a a given level of return on investment, but most importantly a return of capital over We took it away from them. We put it in the government's hands. Since that time, the government has taken massive hundred billion dollar plus losses.
▶ 1:38:44As we're looking at a change that li under the Biden administration liberalizes dramatically the ability not to pay it, how do we reconcile the fact that there was a mandate from Congress that it break even? Do we increase the interest rate uh or do we continue uh people who get a college education and then don't want to pay for it?
▶ 1:39:09I'd first observe that the existence of protection in bankruptcy is not what causes someone to pay or not pay. I think we're finding that many people are unable to pay either way. Well, but but let me challenge that. The the balance of undo and the and the ability to discharge, there's no question at all in any bankruptcy, the judge, any judge has the ability to set up a schedule.
▶ 1:39:38if you have the ability to pay or a deferral until you do. So, I'm going to challenge that and say even if you can't discharge it now, you don't have to pay it now if you're unable to. Ultimately, it's the question is should you eventually pay it? And we have had members of Congress making $174,000, by the way, who have never paid back their college loans. Is that fair?
▶ 1:40:07With respect, uh, Congressman, skip the respect. I'm a congressman. I can take it. Great. Uh, still with respect, I must I I need to tweak the premise because judges almost never see the underlying details of these cases. There's a complicated procedure. In addition to all of the disclosures for a financially distressed family makes in bankruptcy, they have to do a separate process for it ever to get before a judge.
▶ 1:40:37A judge does not have the opportunity under the law of this land to do what you're saying. Congress has a balancing act. Do we turn this back over to the private sector and allow them to dramatically increase the cost of student loans so that it it it pays for itself based on the events on the ground? or do we continue simply writing multi-billion dollar per year hundred billion dollars and more per year taxpayer money to pay for for people's education?
▶ 1:41:07Are we effectively turning the loan program into a PEL grant? And the answer of course is if we don't make a change, we are. So, is any is there anybody that disputes the fact that Congress does not want this to be a subsidized program, but it has become a subsidized program? So, back to the bankruptcy.
▶ 1:41:28If Congress's intent was that you not be able to bankrupt out from underneath it, is the current balance uh in this undue harm, is it in fact out of whack based on the fundamental? Professor Bar, you look like you want to answer the fundamental question which was Congress said this isn't something you bankrupt from underneath because it's too it's it's too important. And the you know it's and we're not talking about people who had strokes the day they graduated from college.
▶ 1:41:57We're talking about people who didn't get a job or who have decided to do something that doesn't pay enough and so they they use the bankruptcy court to discharge and then at a later time make the money from their education often. professor. Oh, I I think it's important to distinguish um between the student loan problem, which is enormous, and the bankruptcy problem and the particular types of people who enter into enter into bankruptcy.
▶ 1:42:24I think unfortunately many of the debtors we're talking about in bankruptcy, the the money is uncollectible in the sense that interest actually builds up faster than they're able to pay it off given given these numbers. It's it's a difficult it's a difficult problem. Let let me close with one quick question. The IRS does not allow discharge in bankruptcy effectively, right?
▶ 1:42:47Therefore, why is it that if we consider this similar, we can't have a abatement and other process as we do in in in the IRS, but ultimately have the principle remain until discharged or agreed in some program. Anyone have an answer on that, Judge? Professor, I'd like to answer that.
▶ 1:43:08There was a time when an individual who completed a payment plan through a chapter 13 at the end of that would have some relief at the end. Congress eliminated that and I don't think they gave that as much deliberation as you might today. Uh so there is room uh for looking historically at the different levers uh and different pieces one can adjust in this system to move more in that direction.
▶ 1:43:36What we have now doesn't do any of those things that you're talking to be continued. Thank you, chairman. Gentleman's time is expired. He yields back. Uh, ranking member Rascin is recognized for unanimous consent Thank you, Mr. Chairman. Uh, the first is May 2025 article titled Older Americans at Risk as Government Restart Social Security Garnishment on Student Loan Debt. Uh, that's from PBS.
▶ 1:44:01and then uh a chapter from a report from the American Bankruptcy Institute's Commission on Consumer Bankruptcy entitled Effectuating the Fresh Start about Student Loan Overend indebtedness. Same request from Mr. Korea. Thank you, Mr. Chairman. I have unanimous consent to introduce the following. A letter from National Consumer Law Center dated July 11th of this year in support of the Student Loan Bankruptcy Improvement Act.
▶ 1:44:24letter from the National Association for Consumer Bankruptcy Attorneys J July 11th in support of the Student Loan Bankruptcy Improvement Act. Um, Senator Dybar Marina, one in three student loan borrowers risk default is delinquency rates sore. Another one, US Department of Education to begin federal student loan collections. Other actions to help borrowers get back into repayment.
▶ 1:44:51And finally, credit scores declined for millions as US student loan collections restart. Associated Press of this year. Without objection, uh the gentleoman from Vermont is now recognized for 5 Thank you, Mr. Chair, and thank you to all the witnesses for taking time to come here today. And I'm really glad that we're here in a bipartisan hearing on an important and often overlooked subject under our subcommittee's jurisdiction.
▶ 1:45:17But before I get to the questions for the witnesses on bankruptcy, there is one thing that I feel like I must mention because it is harming consumers right now, and that's the Trump administration's assault on the Consumer Financial Protection Bureau. We're here to talk about legal protections for Americans who are in financial crisis. Bankruptcy can help people rebuild from crisis, and the CFPB helps prevent the crisis in the first place.
▶ 1:45:43It's one of the few government entities whose entire mission is to protect Americans from companies that rip them off like banks, payday lenders, securities firms, for-profit colleges. And we cannot have a serious discussion about debt and bankruptcy if no one is enforcing consumer protections against the scams that drain Americans bank accounts. So for nearly six months now, CFPB staff have been locked out by the Trump administration.
▶ 1:46:12They literally cannot do their jobs. 1,500 people are barred from doing their job of protecting and standing up for American consumers except for the people who are working to drop enforcements and to cut financial protections. Trump is dismantling the agency before our very eyes and Republicans are letting him do it. So, I will move on to questions for the witnesses. But it's it's maddening.
▶ 1:46:40We can't forget that many personal bankruptcies can be prevented. Okay, we can talk about the law, but they can be prevented and we can have a role in preventing it, but only if government is there to protect Americans from financial exploitation.
▶ 1:46:59That said, turning to the witnesses, I am deeply concerned that the recently passed Republican tax bill has taken a sledgehammer to many of the programs that help Americans before bankruptcy becomes their only option. Judge Harner, thank you for coming here today. Would it be fair to say that economic hardship increases the rates of bankruptcies?
▶ 1:47:27So, um, Representative Balent, thank you for that question. I'm just reflecting on the data I've seen because I'm trying to make sure my answers correspond to studies and datas I'm familiar with. And I think what the charts would show you is anytime there's economic hardship, we see a spike in filings. Makes it makes sense, right?
▶ 1:47:47I mean, this is uh you you put the squeeze on Americans and they face more financial constraints and perhaps leading to personal and um familial crisis. Um in your experience, Judge Her did courts see an increase in individual and business bankruptcies resulting from the COVID pandemic? We did not. You did not. We did not. We Why do you think that is?
▶ 1:48:13I I will say I I think we expected to see one, but there were a number of factors that took place during that time that helped both businesses and individuals deal with the economic shock of COVID. So things like the moratorum on foreclosures, the moratorium on evictions and and other relief that was provided I think is the reason we actually saw a decline in I really appreciate that.
▶ 1:48:41that um I was in the state legislature when this happened and certainly a lot of the infusion of money and protections at the federal level and things that we put in place at the state level helped. So I really appreciate that. Uh would you say that the bankruptcy court system is equipped to handle more bankruptcy cases right now? Is there a c is there a caveat?
▶ 1:49:07I well I was just reflecting on my comment to ranking member Rascin and the resources of the courts and things like ensuring that the temporary judgeships are extended speak to that. So yes we we are equipped we will do our jobs for the American people but having support is always appreciated. Appreciate that. Uh we have no doubt that you will will do your jobs and that you are dedicated committed people.
▶ 1:49:34Um, in the time remaining, what is the most important policy recommendation regarding subchapter 5 from your From my perspective, it it's just to continue to recognize the subchapter is quicker, more effective, and is helping both companies and creditors. And that we should reflect on the right pool of companies that could utilize that subchapter.
▶ 1:50:01And the data shows that companies between the current debt cap of three million and 7.5 actually were using it even more effectively than the current pool of companies. Really appreciate it. I see that I'm out of time. I yield back. Gentlewoman yields back. Now recognize a gentleman from North Carolina for 5 Thank you, Mr. Chairman, and uh thanks to all of you on the panel for uh sharing with us your thoughts. I been in and out to other hearings this morning, but enjoyed reading all of your uh written testimonies.
▶ 1:50:30I did have just a couple of questions that I wanted to kind of toss out. Um, and I'll I'll go to Judge Paul Black uh for this first one. When a debtor files for chapter 7 bankruptcy, he's assigned a trustee to oversee the case. And these trustees, as we know, are attorneys, accountants, or other professionals who ensure that the debtor pays what they can. And currently, if I understand correctly, these trustees are only paid $60 per case.
▶ 1:50:58Judge Black, can you speak to the impact that these fees have on the recruitment of future Chapter 7 Um, yes, Congressman. Um, you know, asset cases are are what uh the Chapter 7 trustees hope to get, you know, at some point to be able to administer assets and pay uh pay some portion of what they collect to the uh to the to the creditors that have filed claims in the case.
▶ 1:51:27But the reality is that the you know a large majority of if not a significant majority of the cases are um are what we call no asset cases. So the uh the trustees are going to get $60 for the work that they do in and then they've got work to do like evaluating means test and reviewing tax returns and they've got a lot of other you know paperwork that they have to do in conducting the 341 meeting of creditors. Um, and it's it's quite a bit of work, but if they all they all they're getting is $60.
▶ 1:51:55We're worried about uh recruiting some uh younger attorneys to come into this practice area. It's been fixed at $60 since 1994. In 1994, they got a $15 raise from $45 to $60 for no asset case. In the meantime, inflation, the cost of doing business, just to keep the lights on, you know, it's become an expensive process. We we want to get uh younger folks that are, you know, young people to consider joining these panels.
▶ 1:52:23Um u we have an aging chapter 7 trustee bar across the country and we need to get some young folks to come into this practice area. It's going to be hard for them to do that if they can't keep the lights on while they're waiting for an asset case. So would you encourage or recommend to us today that that Congress increase the percase payments to Chapter 7 trustees and and what value do you think that could provide to the to that Um I think yeah yes I would uh encourage you to do that.
▶ 1:52:52Uh Judge Allen Stout from Louisville, Kentucky came for this committee in 2018 you know was encouraging uh Congress to do the same thing at that time and it just uh it it just hasn't changed. And in the meantime, you know, the the bar is getting older. Um we're getting uh fewer folks willing to you to get on these panels and um you know, it we we think that it would be a real benefit to the system to encourage people to join the panels in that regard. Okay. Well, thank you.
▶ 1:53:21Um, also, Judge Black, as of now, there are 29 temporary bankruptcy judgeships across the United States. And two of those 29 temporary judgeships are located in my home state of North Carolina. And as we all know, these temporary judgeships are set to expire beginning in January of 2026. Can you speak, Judge Black, to the effects of allowing these temporary judgeships to expire? And should Congress extend these judgeships or perhaps just make them permanent?
▶ 1:53:52Well, um there there's there there are some uh JC the JC Judicial Conference of the United States I believe have has some uh recommendations on what should be permanent and what should not be permanent. And I would probably defer to them on the uh on the permanent aspect of it. But on the temporary judgeships, it's a whole lot better to have them and not and and not need them than to need them and not have them.
▶ 1:54:19So, um I would very much like to see um you the judgeships extended um for that very reason. And I wanted to go over to the congresswoman's from Vermont's comment about about um when they, you know, when things are needed. I mean, people file bankruptcy when they're right? you know, when in during the pandemic, following up on what Judge Harner said, um you know, there was a moratorium on foreclosures. There was a moratorium on evictions in a lot of places.
▶ 1:54:47The other thing that I saw in my court was medical debt. The hospitals really weren't garnishing wages and nothing puts people into bankruptcy faster than a wage garnishment. So when we have those types of things backing off um you know the the filings come down but if you see things like that come back to the surface the filings could go go up and we are in a rising filing environment right now.
▶ 1:55:11So yes I would like to see those those bank ships uh bankruptcy judgeships extended obviously Congress have to decide whether to make them permanent or not and there are other factors that go into that that I'm not qualified to speak to. Thank you. Well thank you for your input and Mr. Chairman, I yield back. Gentleman yields back. Gentleman from Illinois is now recognized for five Uh thank you, Chairman Fitzgerald. And thanks to all the witnesses here today. Uh bankruptcy, as you all are aware, is a very uh complex uh area of law.
▶ 1:55:41Uh and Congress should address these issues in a nuanced way that protects the rights of creditors but doesn't improperly favor them at the expense of working families, small businesses, or municipalities. And that's why I strongly support bipartisan efforts to extend the debt the debt limits of subchapter 5 and chapter 13 cases which would provide much needed relief to small businesses and working families in financial distress.
▶ 1:56:11It's also why I believe that excluding student loans from the bankruptcy code has unfairly benefited private student lenders and made life harder for millions of Americans, especially vulnerable borrowers like seniors, disabled veterans, and lowincome individuals. And it's why I'm deeply concerned about the ongoing bankruptcy proceedings involving the Puerto Rico Electric Power Authority, known as Brea.
▶ 1:56:40Throughout my time in Congress, I've advocated for the Puerto Rican people as they face a vicious cycle of corruption, mismanagement, privatization, and exploitation, and of course, a series of natural disasters. The cycle comes as Puerto Rico remains excluded from the bankruptcy code.
▶ 1:57:00The PREPA bankruptcy process enters now its ninth year and the Puerto Rican people pay some of the highest electricity rates while receiving the lowest quality of service in the country. Despite the dire economic and energy situation, PREPA's creditors are trying to strip PREPA and the Puerto Rican people of resources that they don't have.
▶ 1:57:25Rather than accept fiscal reality and resolve the case, the creditors went to court and won a ruling giving them a claim over all of PREPA's past, present, and future net revenues. And now they want immediate payment, even though the value of their secured interest in these revenues is disputed.
▶ 1:57:47And even though most of the money in PREPA's bank accounts is federal grant money and creditors cannot touch. So what these creditors are really asking for PREPA to jack up electricity prices and force the people of Puerto Rico to pay these private companies. All while the island's electricity rates are over 50% higher than the national average.
▶ 1:58:15It continues to suffer crippling blackouts and the median income is less than half of that in Mississippi, the poorest state in the US. This situation, of course, has set up a false choice between the maximum protection of private property rights and the decimation of a public good rather than a reorganization and a fresh start. Professor Jacobe, I thank you for being here today.
▶ 1:58:43And let me ask you first, what were the implications of excluding Puerto Rico from the bankruptcy code? And second, how could public bankruptcy law better manage cases involving public utilities and federal grant dollars?
▶ 1:59:00About 10 years ago, Congress had a choice to make when it realized and everyone realized that Puerto Rico's instrumentalities needed some sort of access to debt relief, but were The most straightforward way to have done that would have been to expand eligibility for Chapter 9, municipal bankruptcy, to instrumentalities in Puerto Rico.
▶ 1:59:24that would not have included Puerto Rico's uh some of Puerto Rico's debt, but it would include instrumentalities such as PREPA. Uh that law is fairly expansive relative to its history, but any and yet it has a somewhat clear track record and would not have involved an oversight board. So the Promesa is a much more extensive set of of rules.
▶ 1:59:51Uh, and this is this case is really the first time it's been tested using all of the different um components of Puerto Rico's debt. Uh, thank you for that. Uh, this should not be a Democratic issue or a Republican issue. We should all stand with Puerto Rican people and urge a fair and speedy resolution to the PREPA bankruptcy that does not require them to pay even higher electricity rates than they pay already.
▶ 2:00:20Uh, thank you and I yield back, Mr. Gentleman yields back. Raiking member Nadler is recognized for a uni uh UC Thank you. I ask unanimous consent to enter into the record a statement from the community service society of New York, which calls for an end to the double standard and bankruptcy law that makes student loans, both federal and private, functionally non-dischargeable. Without objection, I'd also ask unanimous consent that the uh following statements be entered to the record.
▶ 2:00:49Statement from the Commercial Law League of America. Statement from the Defense Credit Union Council. Statement from Public Citizen. And letter from the National Association of Insurance Commissioners dated July 15, 2025. Also a letter from the National Association of Chapter 13 Trustees dated July 14, 2025. Uh we will now recognize the gentleoman from California for five minutes.
▶ 2:01:19Uh thank you, Mr. Chairman, and thanks for this hearing. I was reminded that I first worked on bankruptcy legislation in this committee room in 1974 when I was a staffer and that effort was uh arduous uh and very bipartisan and I think bankruptcy law is one of those areas that does benefit from bipartisan uh efforts and I'm encouraged that we are looking at some bipartisan efforts to
▶ 2:01:50make some tweaks uh to this bill. Uh based on all of your testimony and your comments, it seems to me that there is consensus on the uh cap on chapter 13. And I'm hopeful uh that we can address that in a bipartisan way. It will help our constituents across the United States. And I think uh the members of the committee have made that clear. I want to address, you know, another issue.
▶ 2:02:20Under current law, a company can file for Chapter 11 in virtually any district where it has an affiliate, even if that affiliate is really nothing more than a newly created shell.
▶ 2:02:33Uh if you take take a look at the Purdue Pharma case, the company behind the opioid crisis, uh it was able to steer its bankruptcy case into a friendlier court in White Plains, New York, simply by changing the mailing address of a subsidiary without moving any real operations to game the system.
▶ 2:02:53I'd like to ask unanimous consent to put into the record a Reuters article that dis discusses a company uh in San Diego that opened a post office box in Texas hours before it filed for bankruptcy in order to have its case heard in Texas.
▶ 2:03:13uh it had no um it had no employees, it had no operations, no real presence, but it met um the requirements of the act. Uh the Department of Justice was late in objecting. So that was a problem. But I think these this legal theory theater uh exploits a loophole and erodess trust in the bankruptcy system and sidelines the people most affected.
▶ 2:03:42uh people who uh work employees uh retirees, small business creditors, local communities are disadvantaged. So, let me just ask a simple yes or no from each of the witnesses. Do you believe that this kind of form shopping where a company creates or moves a shell affiliate just to file for bankruptcy in a handpicked court undermines the credibility of the bankruptcy system? Do you think that's a yes or a no?
▶ 2:04:19I'm respectively going to abstain because it's more of a policy matter that I will trust to Congress. I'm going to concur with Judge Jacobe. I mean, Judge Hartner, sorry. No, this this is a very difficult policy question where where you should exercise your judgment. Well, I'm going to be reintroducing the Bankruptcy Venue Reform Act to close this loophole and to restore fairness by requiring companies to file where they actually do business.
▶ 2:04:50And I am hoping that we can have a bipartisan effort uh to close this loophole. Uh whether the small businesses are in Minnesota or California being disadvantaged, it's our constituents that are getting the short end of the stick. And I'm hoping that we can uh pursue this uh in a bipartisan way. And I just want to comment on the genetic uh uh data issue. Uh Mr. Klein mentioned the bill he and I are working on together. I do think that's very important.
▶ 2:05:21uh and it's you know when when the code was written nobody the idea that you would have DNA information in a company was not anything that anybody was thinking about and that we might need to protect.
▶ 2:05:35So I think it's there should be broad consensus that that will uh make sense and once again I think uh you know having worked on uh legislation first as a staffer and then as a member of this committee I remember when chairman Hyde uh pursued I didn't agree with everything he that was a little more partisan effort than than the 74 effort but we can make progress on this and you know in the constitution it it it assigns us this role
▶ 2:06:05Article 1 section 8.4 gives to Congress the responsibility for uniform bankruptcy acts and I'm looking forward to discharging that obligation. And with that, Mr. Chairman, I yield back. Gentlewoman yields back. We'll now recognize the gentleman from Georgia for 5 minutes. Thank you, Mr. Chairman. And uh thank you to all our witnesses for being here today. Uh, chapter 7 trustees are paid out of the debtor's filing fee.
▶ 2:06:36Is that correct? Uh, Professor Jacobe. Well, anyone on the panel? I I I uh I looked Well, well, it it is a fact. Please take judicial notice of that fact. I'll take professes notice. I'm sorry. I had a moment there. That's okay.
▶ 2:06:55So they get paid out of the the DTOR's filing fee and Chapter 7 trustees have not received a raise since But yet in 1994 the filing fee was $130 and today 2025 the filing fee for Chapter 17 DATA is $338. where did the money go? What?
▶ 2:07:24How did the chapter 7 trustees get cut out? Anybody have any idea? Well, it's a big oversight. It's something that we need to to cure. I'm here basically to uh I'm concerned mostly about this issue of student loan debt. Americans. Um, you know, um, um, Marvin Gay wrote this song, Trouble Man, and he said, "There's three things, that's for sure.
▶ 2:07:55Taxes, death, and trouble. But for our young people growing up today, I think if he were around today, he would add a fourth thing that uh, you're going to incur, and that is student loan debt. And it is nondischargeable. And we have Americans holding about $1.8 trillion in student loan debt.
▶ 2:08:18That is half almost half of the debt that was added uh to the federal debt by Republicans when they passed this big ugly bill. So $4 trillion in debt, but we got Americans that 4 trillion is for the entire The 1.7 trillion is just for a select number of individuals who can't get out from under that
▶ 2:08:48crushing debt. The fact that the student loan debt is nondischargeable in bankruptcy leaves people more vulnerable to other kinds of debt like medical expenses and it makes it more difficult for them to buy a home or a car or even start a family. Uh, Professor Jacobe, it's true that prior to 1976, all student loans were dischargeable through bankruptcy just like any other type of debt. Correct.
▶ 2:09:16And uh thereafter the law was changed so as to allow student loan debt to be dischargeable if the data bears the expense of commencing an adversary proceeding with a chapter 7 or 13 case uh within a seven or 13 and bear the burden of proving undue hardship. Correct. And originally there were other paths to getting relief in addition to bringing that lawsuit.
▶ 2:09:45Judge her, I believe you answered the question earlier about the number of times you have actually granted a uh hardship discharge in a seven or 13 case. And uh Judge Black, same situation with you. Uh yes, sir.
▶ 2:10:05And uh the 67year-old woman who did get a partial uh uh discharge of of her debt, was she thrust into chapter 7 or 13 protection uh because her social security check was being garnished? So representative, that's a great question and I honestly don't recall that particular fact.
▶ 2:10:33Well, it was probably due to some collection activity that forced her into bankruptcy. That's a shame that a 67 year old woman maybe went to Trump University, I don't know, $500,000 in debt, student loan debt. That's a lot of money. But listen, the big ugly m bill has only made the problem worse.
▶ 2:10:55It reduces the number of repayment plan options and it also eliminates grad plus loans which help people finance higher education degrees and caps federal loans for graduate degrees. This will push more people into the private loan market with its predatory interest rates and the big ugly bill eliminates the deferment provisions for borrow borrowers facing economic hardship.
▶ 2:11:23So, thanks to the big ugly bill, if you fall behind on your bills because you lose your job, you can no longer defer your student loan payments, we've got to change the law set so that student loans are dischargeable in bankruptcy, just like every other consumer debt. And with that, I yield back. Gentlemen yields back. That concludes today's hearing. We thank our witnesses for appearing before the subcommittee today.
▶ 2:11:50Without objection, all members will have five legislative days to submit additional written questions for the witnesses or additional materials for the record. Without objection, this hearing is adjourned.