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Bankruptcy Reform
by David W. Langley, Esq. , Fort Lauderdale, FL

Note: this 2003 article is out-dated.
See our 2006 article about the new bankruptcy law

Conferees Reach Agreement on Homestead Provision in Bankruptcy Reform Bill

Senate and House bankruptcy conferees met on April 23rd and moved one step closer to sending their report to President Bush by reaching an agreement on the hotly debated homestead exemption provision in the reform bill. It was their first-ever agreement in more than five years of debate on changes to that section of the U.S. Bankruptcy Code.

Under existing law, debtors in Florida, Texas, Kansas, Iowa and South Dakota can shield an unlimited amount of home equity from creditors by filing for bankruptcy protection. Under the new agreement, which was a combination of amendments between Sen. Herb Kohl (D-Wis.) and Rep. Sensenbrenner, in order to be eligible for a state’s unlimited homestead exemption, an individual must own a residence in the state for at least 40 months before declaring bankruptcy. If unable to meet the residency requirement, the debtor would be allowed to take only a $125,000 homestead exemption. The new language applies only in states whose homestead cap already exceeds $125,000, such as Florida. The deal would bar individuals convicted of felonies or securities crimes in the past 10 years from having access to the unlimited homestead exemption. The bankruptcy court also would have to find a link between the debtor’s crime and the declaration of bankruptcy.

The sole issue standing between the legislation and its enactment concerns the question of whether perpetrators of abortion clinic violence should be able to discharge judgments against them in bankruptcy. The difference between a “blockade” and a “peaceful protest” is the issue holding back an agreement on the bankruptcy overhaul legislation. Conference Committee Chairman James Sensenbrenner (R-Wis.) said the key to finally resolving the dispute would be defining the specific acts that the protest-related provision would cover. Rep. Henry Hyde (R-Ill.) insisted that protesters should be allowed to discharge their protest-related debts if they were fined for inadvertently stepping across lines designed to keep them a certain distance from an abortion clinic. “There are blockades and then there are blockades,” he said. Schumer agreed that peaceful protestors should not be barred from having their debts discharged, but said he would insist on language barring people from discharging debts related to fines levied for purposeful blockading of clinics.

Sensenbrenner directed Hyde and Schumer to get together to work out the language differences. No meetings are scheduled for Bankruptcy conferees. While staff negotiations have been ongoing, sources noted that those negotiations probably have run their course, making the issue a "member-level" matter, reported CongressDaily. Sen. Charles Schumer (D-N.Y.) said he intended to meet privately with Rep. Henry Hyde (R-Ill.) to see if they can forge an agreement.

Both the House and Senate passed bankruptcy reform bills in early 2001, but the two versions differed significantly. Attempts to appoint a conference committee to iron out the differences in the House and Senate versions, and to begin the Conference delayed passage of the legislation for months.

The reform legislation, which has run a rocky course for several years, reached another stalemate and was placed on the Congressional backburner in the wake of the terrorist attacks on New York City and Washington, D.C. The formal meeting of House and Senate conferees had been scheduled for September 12th.

Note: The bills passed by the House and Senate have not been signed into law. Both houses must adopt the same bill before it can submitted to the President. Both versions of the legislation have an effective date of 180 days after the date of enactment, when the president signs the bill or it is passed over his veto, so the effective date is still more than six months away.

Bankruptcy Measure Would Make Filing for Chapter 7 Much Harder

The Wall Street Journal has analysed how the proposed bills would change the rules for those filing for chapter 7 bankruptcy. The new law would make filing for chapter 7 more difficult. To read the story, point your browser to www.wsj.com (subscription required).

House Bill 333

The House approved H.R. 333, the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2001" by a vote of 306-108 on March 1, 2001. The final vote came after several hours of impassioned debate and consideration of six amendments. Just before the final vote, the House defeated a motion by Rep. John Conyers (D-Mich.) to recommit the bill back to the Judiciary Committee, with an amendment to restrict the marketing of credit cards to those under age 21. The House also defeated a Democratic alternative to the bill, by a vote of 162-256. Now, however, there is...

HR 975

HR975 This is the new name of the House bill which proposes bankruptcy reform. It also requires that debt consolidation companies be non-profit. It was widely reported recently that many so-called not-for-profit credit counseling companies really do make a profit off of the process. This is not legal if they want to continue to receive their special status. There are, of course, many problems with HR 975.


Senate Bill 420

The Senate moved slowly in its consideration of amendments to the bankruptcy bill (S. 420), conducting only four roll-call votes on germane amendments on Tuesday, March 13th. The Senate voted to invoke cloture on March 14th, thereby limiting germane and non-germane amendments and clearing the way for final passage.


History of the Current Bankruptcy Reform Legislation

In June, 1998, the U.S. House of Representatives passed what almost became the most sweeping bankruptcy reform legislation in twenty years. A parallel but slightly less stringent bill was passed by the Senate in September, 1998. The Senate and House versions were then reconciled just before Congress adjourned in October, 1998. The House approved the reconciled legislation but the Senate never voted on the final bill and it died on the Senate floor. Similar legislation was introduced in 1999. That legislation failed to pass in the fall session of Congress.

Similar reform legislation was passed by Congress at the close of the 2000 session but President Clinton vetoed the bankruptcy reform legislation on December 19, 2000, too late for Congress to override his veto, saying that it was unfair to ordinary debtors and working families who fall on hard times. The president said the bill would allow debtors who own expensive homes to shield their mansions from creditors while debtors with moderate incomes, especially renters, must live frugally and comply with rigid payment plans for five to seven years.

The Proposed Legislation

If the proposed legislation is enacted, many individuals will find it much more difficult to file for Chapter 7 bankruptcy protection. Debtors may have to attempt credit counseling before they will be permitted to file for bankruptcy protection. Section 707(b) of the Bankruptcy Code would be amended to provide for dismissal of Chapter 7 cases or (with the debtor's consent) conversion to Chapter 13, upon a finding of abuse. Abuse would be presumed if the debtor had more than $100 in monthly income available to pay general unsecured debt, based on a formula incorporating collection standards of the Internal Revenue Service. Debtors whose family income exceeds a national median for their size family would have to go through this "means testing" on the request of any creditor. Debtors with the ability to pay 25% (Senate version) or more of their unsecured debt would have to file a Plan under Chapter 13 and make payments for a minimum of 5 years. For individuals with higher than normal expenses (many of which would not be counted in the means testing), the new legislation may severely hamper or altogether eliminate their ability to file for bankruptcy protection.

Some other significant changes;

Credit Counseling - Debtors must first attempt to negotiate a voluntary repayment plan through a consumer credit counseling service approved by the Court before filing for bankruptcy protection. This requirement may not apply if the debtor faces a potential loss of property before the debtor could complete the good-faith attempt. The debtor would be required to file with the court a certificate from the credit counseling service. If the debtor entered into a debt repayment plan, the plan would also have to be filed.

Changes to Chapter 13 - Chapter 13 would be changed by requiring a minimum plan term of 5 years for debtors whose income exceeds the national median. Otherwise a three year minimum is required. Debtors would be allowed to pay up to 15% of their gross annual income to charities.

Non-dischargeable Debts - All debts incurred by a debtor over $250.00 within 90 days of the bankruptcy filing would be presumed to have been incurred by fraud, and all fraudulently incurred debt would be non-dischargeable in both Chapter 7 and Chapter 13 cases.

Homestead Exemption - The Senate version contains a $100,000.00 cap on the Homestead Exemption that could be claimed in a bankruptcy action. The House version contains a $250,000.00 cap but states can opt out by subsequent enactment.

Additional Filing Requirements - Debtors may be required to provide copies of tax returns to the United States Trustee (with disclosure to any interested party), and other information regarding income, expenses, and assets. Failure to file this information would result in automatic dismissal. Two percent of all cases would be audited to insure compliance.

What this means to the average consumer:

Chapter 7 May Be Unavailable - Consumers with relatively high income compared to their unsecured debt will have to file under Chapter 13 and make payments for a minimum of five years. This may work well for many people, but for others it takes away much of the incentive to file bankruptcy. It is anticipated that many individuals will also manipulate their financial status by reducing their present income (temporarily quitting a second job or refusing overtime) or by artificially inflating their debts in order to file under Chapter 7.

It Will Cost More - All of the new restrictions, intended to lessen the ease of filing bankruptcy, will result in more time and effort on behalf of the debtor and more work for their attorneys, causing higher attorneys fees.

It May Take Longer To Re-Establish Credit - Most bankruptcy debtors now file under Chapter 7, receive their discharge in about 4 months, and can be in a position to establish reasonably good credit two years later. Under the new legislation the entire process will take longer and those required to file under Chapter 13 will not receive their discharge for five years.

Creditors Will Be More Active - The legislation provides many benefits to creditors, including a number of opportunities to object or get involved in the process. Creditors will have more leverage to obtain payments from debtors through bankruptcy. This also means that creditors may be more difficult to deal with outside of bankruptcy.

The House and Senate bills are designed to reduce bankruptcy filings and increase payments to creditors in bankruptcy. However, the bills contain a number of provisions that may impair the overall effectiveness of the consumer credit system. For example, creditors that are now willing to cooperate in voluntary arrangements because the debtors otherwise may file a Chapter 7 bankruptcy may be less cooperative if that option is removed. The longer minimum plan length in Chapter 13 may also increase the number of plans that default or fail. The legislation may also lead to greater court involvement and will generate additional expense for the courts and the parties involved in them. The extent to which the changes will achieve the desired goals or create undesirable results cannot be fully known until the new system is in place.



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