By Peter E. Feltman, M.A., CCH Washington News Bureau, contributing author, CCH FOCUS and James Hamilton, J.D., LL.M., Senior Writer Analyst, CCH Federal Securities Law Reporter; Co-Author, CCH Federal Privacy Rules for Financial Institutions and Financial Services Modernization - Gramm-Leach-Bliley Act of 1999 - Law and Explanation; contributing author, CCH FOCUS.
ore Americans file for bankruptcy than graduate college each year,” stated U.S. Chamber of Commerce President and CEO Thomas Donohue.
To address the need for reform, the Senate on March 15, 2001, passed lA similar measure, H.R. 333, was passed by the full House on March 1, 2001, and has received the support of the Administration. Although tBoth the House and Senate versions are similar to a measure approved by Congress last year, which was vetoed by President Clinton.
The measures are designed to discourage the filing of Chapter 7 bankruptcies, where debts are wiped out, and to instead have more filers use Chapter 13, where they will have to repay certain debts. Proponents have three main goals:
The measures would make changes to the Truth in Lending Act to provide more disclosure on the effects of minimum payments, introductory rates, late penalties and the tax consequences of loans secured by homes (such as home equity loans). They would also require electronic credit card solicitations or advertisements to include information issued by the Federal Trade Commission.
Further bill provisions seek to:
An amendment to the House bill, which was approved March 1, 2001, changes the netting provisions to conform them to the Commodity Futures Modernization Act of 2000. Without these changes, explained Financial Services Committee Chairman Michael Oxley, similar kinds of financial contracts and market participants could be treated differently under the banking and bankruptcy laws.
With Title IX, Congress seeks to refine the insolvency laws to avoid systemic risks to the nation’s financial system in the event of a failure of a large bank, hedge fund or securities firm with huge exposures to interest rate and currency swaps and other complex financial instruments. Title IX is based on the work of an interagency working group under the auspices of the President’s Working Group on Financial Markets following a review of current statutory provisions governing the treatment of qualified financial contracts and similar financial contracts upon the insolvency of a counterparty.
Title IX has four basic principles, which are designed to further minimize systemic risk to the banking system and the financial markets.
Banking and business groups strongly support the measures. “Bankruptcy reform is an urgent matter because the system is broken and needs to be fixed,” stated American Bankers Association government relations head Edward L. Yingling.
REFORM MEASURES
To encourage reform, the bills provide a means test that must be passed in order to qualify for Chapter 7. If the filer earns more than the median income in his or her state and can repay the lesser of $10,000 or 25 percent (not to be less than $6,000) of unsecured debt over five years, then Chapter 13 must be used instead of Chapter 7. The debtor can rebut the means test by demonstrating “special” circumstances. Income calculations can include a number of deductions, including: living expense deductions, as allowed by the IRS; private school tuition of up to $1,500 annually; expenses for the care of elderly or ill nondependent family members; and expenses to protect the family from domestic violence. The bill has a safe harbor provision to help low-income debtors avoid Chapter 13 in favor of Chapter 7.
FINANCIAL NETTING
PROVISIONS
Title IX of the House bill includes provisions addressing the netting of derivatives and other financial transactions under federal bankruptcy and banking laws. These provisions would amend the laws governing the insolvency proceedings for a broker-dealer, bank or other financial institution. Strong bi-partisan support has emerged for reform of the treatment of financial contracts in bankruptcy. It is widely believed that the availability of cross-product netting arrangements will enhance market stability, limit counterparty exposure and help preserve market stability when a financial institution fails.