During the course of that time I have been consulted by a number of persons whose personal debts exceeded their ability to pay them, or who faced an uncertain employment future because of the threat of garnishment or creditor pressure upon their employer. Some had gone to local debt-consolidators whose advertising had caught their attention, others sought to deal directly with several creditors to compose or extend their indebtedness, still others had made up their mind to declare themselves as bankrupts. In a half dozen or so cases I felt that an effective and equitable solution to their problem could be achieved through filing a "Wage Earner's Plan" under Chapter XIII, of the Federal Bankruptcy Act, and I counselled these clients to do this.

My purpose in appearing before this subcommittee, thus, is simply to detail and explain a little, the kinds of debtor relief presently available under Chapter XIII and how it operated in certain examples drawn from my own experience. Basically, Chapter XIII was added to the existing bankruptcy laws in 1938 to provide for satisfaction of creditors' claims out of future earnings of a debtor under a Court approved plan of composition or extension of the debts. The debtor must merely show that his principal income is derived from wages, salary or commissions, and the size of his income does not affect eligibility. Upon filing his petition and paying Court costs of $31.00, the Court will issue an order restraining the creditors from interfering with his property or earnings, and directing them to submit proofs of their claims and acceptances of the debtor's proposed plan. The "plan" is simply that part of the petition which states how much the debtor proposes to allocate from his earnings to pay his creditors, the frequency of such payment, and other pertinent information. A first meeting of creditors is called, where the plan will be confirmed if approved by a majority in number and amount of all unsecured creditors whose claims have been proven and allowed. Now this coercion of the minority of disapproving unsecured creditors, as well as the exclusion of secured creditors who reject the plan, is one of the chief advantages of Chapter XIII over an individual attempt on part of the debtor to seek a modification of his indebtedness. The Court will confirm the plan when it appears that it is in the best interests of creditors and is feasible to carry out. It will appoint a trustee to receive payments from the debtor directly or wage deductions from the debtor's employer, and thereafter make disbursements quarterly to each creditor pro-rata, until the plan is completed or ended for other reasons. The trustee is allowed a fee of 5% of monies actually disbursed, plus actual expenses, usually totalling another 2%. However, the debtor invariably saves a good deal more than this, since the accumulation of interest on his unsecured debt stops upon the filing of the plan. This often can be a substantial saving, especially if any of the creditors are lenders operating under small acts permitting interest in excess of 6% per annum.

The following are persons I have represented in Chapter XIII proceedings in Washington, D.C.:

1. Government employee, male, age 50, single, many years with his agency, very anxious over debts totalling $2,900. His personnel officer had received numerous creditor notices, and the employee had unsuccessfully sought help from a debt adjuster. A plan proposing monthly payments of $135 was confirmed, all creditors accepting, and fully carried out over four years, final disbursements being made this spring, with all creditors paid off in full.

2. Government employee, female, age 45, single, a number of years in her agency, but had lost her position at a substantial grade because of heavy indebtedness and some reckless financial dealings. She was in serious trouble over this, completely demoralized, had lost all her records, but was determined to pay back some forty creditors a total indebtedness of $8,000. Her plan, proposing monthly payments of $100 was deemed feasible in part because of her evident good intentions and perseverence. Four years later, this plan is still active, payments were increased to $150 monthly, and as result of relief from her creditors' pressures, the debtor has regained and even advanced above her former position in her agency.

3. Medical technician, now a hotel employee, 24 years old, single, who had written dishonored checks totalling $700 and faced serious consequences. His plan proposed to pay $60 monthly, was accepted by all creditors, and has permitted him to advance in his new employment without fear of garnishment or other penalties. This plan is current.

4. Construction company estimator, age 30, divorced, who had written dishonored checks and owed debts totalling $1850, was subject to penal action and creditor pressure that would disaffect any employer. His plan to pay $100 monthly

was confirmed, is current, and he has reestablished credit and been given greatly increased responsibility in his job.

5. Electrical estimator, age 32, married with child, who owed $1500 falling due at about $150 monthly, which he could not meet. His plan proposed initial payments of $40 a month, which the Referee of the Maryland District ultimately would not approve. However the delay between the plan's filing and denial permitted debtor to improve his situation to a point where he can now himself satisfy his creditors.

6. Government employee, messenger, age 30, married, with three children; debts about $1500. His plan proposed payments of $31 monthly, but failed after several months and was dismissed by the Court, with a small distribution made to creditors.

At this point I wish to give credit to the enlightened approach of the Honorable John A. Bresnahan, the Referee in Washington, D.C., and to Roger M. Whelan, the standing trustee, in interpreting the legislative intent of Chapter XIII as being one of getting moneys from the debtor to the creditor as quickly and efficiently as possible, and then encouraging the debtor to bring problems arising during the period of the plan promptly and candidly to the attention of the Court.

The committee may wonder what might happen if there should be a sudden growth or rapid increase in the number of filings of such petitions. One jurisdiction confronted with this problem, the Southern District of Ohio (which includes Cincinnati), had over 2000 active plans, receiving between 20 to 25 new filings a week and was disbursing to creditors about $70,000 per month in 1964. It was realized that manual bookkeeping was no longer satisfactory, and some mechanization appeared to be called for. A changeover to data processing was made and felt by the trustee to be the answer to his problems in trying to keep efficient and accurate records of his operation and incidentally, permitted a 20 reduction in the total figure for trustee's fee and handling costs in that district.' Kansas City, Kansas, is another jurisdiction that has successfully dealt with the challenge of a great rise in filings due to community and local bar acceptance of the Chapter XIII remedy, by turning to automatic data processing. In 1965, 1,362 cases were closed in Kansas District Court, according to its standing trustee, with almost $2,000,000 paid to creditors."

Although discussions appear from time to time, I feel that not enough members of the bar or the community are aware of the remedies available for debtors' relief under the provisions of Chapter XIII. Particularly where the debtor's separation is aggravated by dishonored checks outstanding, or high interest small loans in default, does Chapter XIII afford remedies not available to the debtor acting on his own or through a representative. Based on the average cost to an average debtor of about 1% of his indebtedness, it must be borne in mind that also in the average case, this would be largely offset by the lapse of interest falling due after the filing date.

Therefore from both the point of view of effecting cooperation by creditors and economy to the debtor, Chapter XIII proceedings have much to recommend them. Mr. SISK. Do we have Mr. B. H. Feldman in the room representing the Budget Counselors, Inc.?

Without objection, the statement of Mr. Feldman on behalf of Budget Counselors, Inc., will be made a part of the record.

(The statement follows:)

1 Article. "A Wage Earner's Plan That Works," by William R. Schumacher, (trustee in Southern District of Ohio), p. 64, Vol. 19, No. 2, Spring 1965, Quarterly Report, Personal Finance Law.

2 Article by Claude L. Rice. ibid., page 69, Vol. 20, No. 2, Spring 1966. This article. by the standing trustee in the Kansas City District, contains a statistical breakdown of how plans closed during 1965 progressed after filing, showing 610 completed, average period 47 months, creditors 99-100% paid; 564 dismissed before completion average period 31 months, with creditors 20-52% paid off (depending on their class); 188 converted into bankruptcy adjudications, an average of 25 months after filing, with creditors receiving 47-73% of claimed amount. A total of almost $2.000.000 was disbursed to creditors, or about $1.500 average per case, with about $275 paid additionally by the average debtor for his attorney's fee, Court costs, trustee's fees and costs, constituting an average of one-sixth of his total payment.

See Quarterly Report, Personal Finance Law. 115 Broadway, New York, N.Y., which keeps abreast of developments in this field, including recent legislative proposals, and court opinions. See also: "Relief for the Wage Earning Debtor: Chapter XIII or Private Debt Adjustment?", Northwestern University Law Review, Vol. 55, July-August, 1960, No. 3.; U.S. Supreme Court opinion in Perry v. Commerce Loan Co., 15 L. Ed. 827 (1965).

STATEMENT OF B. H. FELDMAN, PRESIDENT, BUDGET COUNSELORS, INC.

My name is B. H. Feldman, and I am President of Budget Counselors, Inc. in Washington, D.C. I requested this opportunity to submit a statement to this Subcommittee in order to express my views on the bill relating to the debt management business which you introduced, just as I had requested the opportunity to testify on a similar bill introduced in the House in 1958. I said then and I say now that there is a definite need for our type of service.

This industry performs a definite service to the debtor and the community. Unfortunately, there are many that do not know how to control their finances. I know that I am qualified to counsel these individuals because for many years I was in the consumer finance and small loan business. Therefore, I am fully acquainted with the facts.

I believe that as long as the business community overloads these poor people there must and should be someone to help them stand on their two feet and try to help them meet their obligations within their income instead of having them go from one loan company to another. In a number of cases, some of these people have gone to as many as six loan companies and four banking institutions and are forever "robbing Peter to pay Paul". As you know, interest, service charges and other hidden charges are added to these accounts. Therefore, the debtor gets further in debt. This finally leads to harassment, litigation and/or repossession. In my opinion, the debtor can not borrow his way out of debt.

I fight for the debtor. I analyze all of his debts (and in many cases, he is not even aware of the total), and analyze his income and expenses to determine how much he needs to meet his current expenses and how much he can use to liquidate his past indebtedness. I also counsel him as to how to manage his finances in the future. The debtor is apprised of the various interest and service charges included in his total debt. We then try to liquidate this type of debt as quickly as possible by a payment that the debtor can afford.

I have operated this business since 1955 and take pride in my many accomplishments on behalf of the debtor. I have letters from both customers and their creditors to substantiate this. The majority of the creditors not only don't object to my services, but are happy to cooperate because they now feel that the debtor realizes his obligations and has taken his first step to accomplish this. In contacting the creditor, we verify the balance, include a payment, and submit a proposed schedule of future payments. The creditors know of my reputation for fast and courteous service. The debtor also is advised as to his status periodically. We specialize in helping Government and Military personnel stationed in the local area and all over the world. The many individuals who are transferred from place to place are in particular need of a service such as ours. The local debtors we help also need this service.

No doubt there have been abuses in our industry just as there have been abuses in other unregulated businesses. This should not justify outlawing my business. In the small loan industry and the savings and loan industry, there were many abuses and adverse publicity before they were regulated. But these industries were regulated and not prohibited. The most recent area trouble was in the Maryland savings and loan industry. If the Maryland companies had been regulated earlier, the many losses to the public would not have occurred. The same necessity for public trust and regulation applies to our business as well.

I think that much of the adverse publicity and opposition to debt counseling comes from the public not knowing the facts, and is created by creditor interests which are themselves adverse to the public interest.

I don't oppose the so-called non-profit organizations, but these associations don't reach enough of the public. If they are formed, they should not be exclusive. They lack the necessary funds to advertise to the public that they exist and to pay competent people to advise the debtor and take an interest in his problems. If these associations are creditor oriented, as they always seem to be, the possible abuses are even greater than the problems we now have. Beside the costs necessary to administer this type of association, which will be added to the businessmen's sale prices to the public, specific cases can be mishandled by passing on pertinent information to some of the creditors backing the organization.

I have an article, which appeared in the Washington Evening Star on May 7, 1958, stating that the hearing on that date before a House subcommittee, scheduled for 30 minutes broke up two hours later, and my integrity was unquestioned by the subcommittee. Rather than outlawing our business, the lawmakers were questioning the constitutionality of the legislation proposed to bar businesses 84-181-67-11

such as mine. I can recall at that hearing in 1958 that a representative of the Washington Board of Trade described us as "interlopers", only one of the many names we have been called before and since then. When this person was asked by the Subcommittee to identify himsel, he stated he was a manager of a loan company. In reply to his criticism of our business, Congressman Multer asked him whether it was right that he keep these people in debt and wrong for me to try to help them get out of debt. The gentleman did not reply and took his seat.

In fact, there have been attempts to legislate "truth about lending." I submit to you that the same people who would support the elimination of my business also have been against "truth about lending" legislation.

I ask you to review the alternatives to my service. Bankruptcy, high interest rates, higher prices charged by the community to cover the losses incurred and repossession of the debtors' assets. None of these are beneficial.

In 1957, we were visited by the License Bureau of Washington. After going over our operations throughly, they left completely satisfied and firmly convinced that we were performing a most worthwhile service.

I again ask you, as I have asked many times in the past, to regulate the industry, but don't outlaw us. You will find that the community will benefit, and my twelve years of hard work will not have been in vain.

Thank you.

Mr. SISK. Is Mr. John Immer, of the Federation of Citizens Associations of the District of Columbia, in the room?

(No response.)

Its report will be included in the record at this point. (The report referred to follows:)

FEDERATION OF CITIZENS ASSOCIATIONS OF THE DISTRICT OF COLUMBIA-REPORT OF THE LAW AND LEGISLATION COMMITTEE

This Bill, introduced by Mr. Diggs, would regulate the business of debt adjusting in the District of Columbia other than as an incident to the practice of law. Debt adjusting, also known as budget counseling, budget planning, budget service, credit advising, etc., involves the collection of regular periodic payments from a debtor, usually faced with obligations which he cannot meet, with the express purpose of arranging with the contracting party's creditors to take less money or accept smaller or less frequent payments. For such services the debt adjustor charges some percentage of the payments received by him, such fee being deducted before creditors share in the payment.

While there are several of these debt adjusting companies which apparently operate a legitimate business, many have quickly sprung up and as quickly disappeared, usually with some of their clients' money. This type of outfit preys upon people who can least afford to take the loss.

It has been proposed to outlaw these debt adjustors, but although this may be an expensive way to get one's debts paid, there are many people, mostly those with limited intelligence or very little education or both, who need help in order to extricate themselves from financial ruin, loss of jobs, and the misery this entails. Therefore, your Law and Legislation Committee believes that a Bill fairly regulating such business would be better than an attempt to abolish it, and that H.R. 829 is such a Bill.

The following resoluion is therefore recommended:

Be it resolved by the Federation of Citizens Associations of the District of Columbia in meeting assembled this 8th day of June 1967, That it endorses H.R. 8929 and urges prompt passage thereof, and that copies of this resolution be sent to the D. C. Board of Commissioners and the House and Senate Committees on the District of Columbia.

Approved unanimously by the Federal on June 8, 1967.

JAMES A. WILLEY,

Chairman, Law and Legislation Committee.
JOHN R. IMMER, President.
Mrs. EDWARD B. MORRIS,

Secretary.

Mr. SISK. That concludes the list of witnesses.

Are there others in the room who desire to be heard on this subject at this time?

(No response.)

Mr. SISK. If not, without objection, we have for the record a series of letters and comments, first one from the American Federation of Labor and Congress of Industrial Organizations.

Without objection, their statement will be made a part of the record. (The statement follows:)

STATEMENT OF F. H. MCGUIGAN, LEGISLATIVE REPRESENTATIVE, AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS

I am a Legislative Representative of the AFL-CIO. This statement is submitted on behalf of the AFL-CIO and the Greater Washington Central Labor Council. Both organizations whole heartedly support H.R. 9806 introduced by Congressman Broyhill which if enacted will prohibit the business of debt adjusting in the District of Columbia except as an incident to the lawful practice of law or as an activity engaged in by a non-profit corporation or association.

The "debt adjustment" or "debt pooling" commercial enterprises have proved in many cases to be an abusive scheme whereby the debtor has been deceived and overcharged.

The debt adjuster has frequently imposed a heavy economic burden on the already overloaded debtor. Frequently the debtor receives no effective relief because his property is seized or his salary attached notwithstanding the adjuster's announced plan to pro-rate his income among his creditors.

We are opposed to H.R. 8929 because even the best intentioned and most extensively regulated pro-rater is not in a position to render effective relief without the consent of the creditors. We are told that consent of the creditors to accept payments from commercial debt pooling firms in the District of Columbia is rarely obtained.

Moreover, budget planning, advice and guidance is available through the consumer counselling programs of the AFL-CIO Community Services Activities and other non-profit agencies and, in addition, overburdened debtors may obtain loans to consolidate debts thru credit unions and other credit agencies together with free budget counselling and advice.

Because the debt adjustment racket has hit especially hard at the working people of the country it has been a matter of particular concern to the AFL-CIO. At it's meeting in February 1961 the federation's Executive Council declared flatly "the debt adjusting business regulated or unregulated, is not economically or socially desirable as a commercial activity and should be eliminated.

As a result of the alarms sounded by labor and other organizations statutes outlawing the debt pooling business have passed in 21 states. They include, Arkansas, Delaware, Florida, George, Kansas, Maine, Massachusetts, Missouri, New Jersey, New Mexico, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Virginia, West Virginia, Texas and Wyoming. Baltimore city has also prohibited it.

Some states have regulated this business. However, most observers agree regulation is not sufficient and that the best course is to prohibit outright a practice that seldom gives the promised relief and often victimizes the suffering debtor.

We suggest that every member of this committee read "Debtor Beware" (copy attached) the 1967 reprint of a series of articles that appeared in the Washington Star which expose the "debt-consolidating" firms in the Washington

area.

We further pledge our support to see that commercial debt pooling firms are outlawed in the District of Columbia.

Mr. SISK. Without objection, a letter from Credit Management Company of Des Moines, Iowa, signed by Mr. John Robb, Executive Manager, will be made a part of the record.

(The letter follows:)