Bankruptcy fix: a tightening, or an unfair squeeze?

Law professor Elizabeth Warren opposes the bill rewriting the nation's bankruptcy law. There's no doubt about it.

If the truth-in-labeling law applied the way it does to cereal, says the Harvard Law School expert, the bill now before a conference committee in Congress would be titled the: "Squeeze Working Families, Divorced Women with Children, African-American Homeowners, Elderly People, and Students, While Letting Wealthy People and Corporations Conduct Business As Usual Act."

That is not the way banks, the credit-card industry, and other lending institutions see it.

As put by the American Bankers Association, the bill would correct problems in the current bankruptcy system, which often permits people with financial resources "to walk away from their financial obligations."

Personal bankruptcies have soared from less than 800,000 in 1990 to more than 1.4 million last year. "An alarmingly high rate," says the ABA.

A coalition of several financial groups, Visa, MasterCard, and the National Retail Federation has been pushing changes in the law for five years now to limit "abuses" of the system.

ABA spokeswoman Catherine Pulley in Washington cites case after case of someone purposely piling up debts and then using Chapter 7 of the bankruptcy law to discharge them completely and keep the goods.

Right now the bill is held up over an extraneous difference between House and Senate bills.

The Senate version includes a provision intended to punish those who harass doctors and clinics providing abortions. Such people wouldn't be allowed to declare bankruptcy to avoid paying court-imposed fines or damages resulting from their violent antiabortion actions.

It's unclear whether the measure will pass. Travis Plunkett, legislative director of the Consumer Federation of America, says congressional support for the bill is broad, "but an inch deep." Many legislators aren't crazy about it because they fear a backlash should it pass.

The 400-page bill is opposed by major women's groups, the NAACP, the AARP (retired persons), and other large bodies.

But the financial industry is the largest industrial contributor of all industries to Congress. Sen. Joseph Biden, the strongest Democratic proponent of the measure, has often been referred to as "the Senator from MBNA," a major credit-card company located in his home state, Delaware. In 1999-2000, he received almost $85,000 from MBNA Corp., his largest contributor.

Recently the bill has taken flack for its "millionaire's loophole." Seven states, including Texas and Florida, plus the District of Columbia, allow affluent debtors to keep luxury homes after declaring bankruptcy.

Story after story in newspapers across the country has noted that if former Enron CEO Kenneth Lay were to file for bankruptcy – and his wife mentioned that possibility – he could protect from creditors the $7 million, 13,000-square-foot penthouse he owns in Houston.

Actually, says Professor Warren, he might not need the so-called "homestead exemption." The bankruptcy bill exempts from its tougher provisions those with predominantly business debts, versus the personal debts people pile up on credit cards, car loans, etc.

Last month, Senate-House conferees supposedly capped the homestead exemption in the seven states and the District of Columbia at $125,000 – but only for certain convicted felons.

In one way, it expands the exemption. Mr. Lay and others with expensive "homesteads" could move to another state and still exempt their property for two years in a bankruptcy procedure.

"This law carefully preserves loopholes for wealthy people and corporations while it squeezes ordinary people until their eyeballs pop out," says Warren.

Another oddity: The bill exempts bankrupt businesses with more than $2 million in debt. So small businesses get caught by provisions that speed up the liquidation of assets for creditors' use, but not big corporations.

Advocates of the bill note that those with incomes below the median for their state will not be subject to its tougher provisions.

But as Mr. Plunkett says, "The devil is in the details." All those applying for bankruptcy will have to prove their income and provide extra affidavits, pay stubs, and tax returns from the previous three years, including those from separated partners. They also face mandatory debt and credit counseling. The extra cost for all this could reach $400 per person, Warren estimates.

"This bill has a creditor orientation," says Sam Gerdano, head of the American Bankruptcy Institute in Washington. "It is a sea change from the current law, which is debtor-oriented."

Warren's research finds that more than 90 percent of those going bankrupt have lost their jobs, faced a divorce, or were hit by high medical costs. They didn't want to go bankrupt. She adds that no independent study has found substantial abuse in the present system.