Bankruptcy Bills Reintroduced

By Peter E. Feltman, M.A., CCH Washington News Bureau, contributing author, CCH FOCUS.

ankruptcy reform legislation was introduced in both the House and the Senate during the week of January 29, 2001. These bills both are identical to the legislation that President Clinton vetoed last December, and proponents hope for quick action. Senate Finance Committee Chairman Charles E. Grassley introduced S. 220 on January 30, and Rep. George W. Gekas introduced H.R. 333 on January 31. Both the Senate and House Judiciary Committees have already held hearings on their respective bankruptcy reform bills and committee action is expected soon.

While proponents want to speed the bills to the floors of the House and Senate quickly, there is opposition both from Democrats who oppose the bills and supporters who want to tailor the bills more toward their liking. Senate Banking Committee Chairman Phil Gramm said on January 22 that he is considering having the Banking Committee put together its own bill, since many of the provisions are banking-related. Gramm was not sure if the Banking Committee would work closely with other Senate Committees, or if the Banking Committee version would be merged with Grassley’s version on the floor of the full Senate, but either way, Gramm’s determination may slow down the bill. While Grassley’s version is identical to the bill President Clinton vetoed, Gramm said that he prefers a bill more toward his liking and less toward the liking of the former President. While Gramm did not go into detail, it is likely that he would prefer a bill with greater industry protection.

In the House, opponents are fighting to insure that the bill is considered in Committee instead of moving directly to the floor. The House does not have the same problem over banking-related provisions that the Senate has, since the Chairman of the House Financial Services Committee is an original co-sponsor of the Gekas bill and thus not as likely as Senator Gramm to demand that his Committee mark up its own version. In a February 1 statement, Financial Services Chairman Michael G. Oxley expressed support for the bill.

The bills would reform existing law, which supporters of the measures believe is needed since currently there is no statutory mandate to require a debtor to repay debts even if he or she has the ability. To this end, they have three major goals: 

(1) to reduce repeat bankruptcy filings; 

(2) to prevent abuses such as running up bills before filing, or using bankruptcy to stall, and 

(3) to improve the administration of bankruptcy cases and provide debtors with alternatives, such as credit counseling.

The bills are designed to deter filers from using Chapter 7 and to instead encourage the filing of Chapter 13, under which debtors will have to pay whatever debts they can afford. To do so, the bill has a means test, where in most cases debtors could not receive a Chapter 7 discharge of debt if their monthly income is at least 25 percent of the debt, or $10,000. The bills do allow for various living expenses to be factored into the decision of how much the debtor can pay. Such expenses include: living standards based on IRS standards; expenses designed to protect the debtor from domestic violence; food and clothing expenses; care of the elderly or a disabled family member; private school tuition of up to $1,500 annually per child; payments made to secured creditors.

A safe harbor for debtors exists, but cannot generally be used unless the debtor’s income is less than the state median income level.

S. 220 and H.R. 333 continue to allow state law homestead exemptions, which critics say are used by debtors who buy expensive houses as a way to protect their assets. Under the legislation, if the debtor purchases his or her principal residence less than two years before the bankruptcy filing, only $100,000 in its equity can be kept. In cases where the home was owned more than two years before the filing, state law applies. Some states, such as Florida and Texas, protect the houses of bankruptcy filers, and critics of this practice believe these state laws should be preempted by Congress.

The measures would make changes to the Truth in Lending Act to provide more disclosure on the effects of minimum payments, introductory rates, the tax consequences of loans secured by homes (such as home equity loans) and late penalties. They would also require electronic credit card solicitations or advertisements to include information issued by the Federal Trade Commission.

President Clinton vetoed the bill via a pocket veto, which occurs when the President fails to sign a bill sent to the White House by Congress, when Congress is out of session. (If Congress is in session, an unsigned bill automatically becomes law, unless the President specifically vetoes it). He outlined his reasons in a December 19, 2000, memo, citing both the homestead provision and the fact that the legislation did not address what the President believes is abuse by abortion clinic blockers, some of whom have avoided civil liability by bankruptcy. The January 31 statement from Senator Grassley’s office indicates the General Accounting Office “found only scant evidence of systemic abuse of the homestead exemption...” and since Senator Gramm and President Bush both hail from Texas, a state with strong homestead protections, it is thought unlikely that state homestead laws will be reduced further than what the current bill calls for.

As with last year, much of the business and banking industry backs these bills. “We need to inject a sense of personal responsibility into the nation’s bankruptcy system for the health of the U.S. economy,” stated U.S. Chamber of Commerce President and CEO Thomas Donohue. “This legislation protects Americans who find themselves in the difficult position of having to file for bankruptcy, while at the same time protecting businesses from having to foot the bill for filing abuses.”