Where's the Reform?
by Patrick J. Neligan Jr.
Neligan, Andrews, Bryson, Foley, LLP
Dallas, Texas
Worried about the escalating volume of personal bankruptcy filings, Congress last year passed a massive bill that would have overhauled the nation’s bankruptcy laws. Former President Clinton exercised his veto power, and the Bankruptcy Reform Act of 2000 was dead. However, with the election of President Bush and support in Congress, chances are the Bankruptcy Reform Act of 2001 will become law, and soon.
The Republican leadership in Congress had hoped to move the bill quickly through Congress, avoiding another round of negotiations and conference committee deliberations. Congress hopes to send the bill to President Bush sometime this month. However, Democrats raised objections to the swift pace, and Republicans had to agree to hold hearings. The House of Representatives opened hearings this week on the bill, which is almost identical to last year’s legislation, and the Senate is expected to do the same.
President Bush has indicated his support for the overhaul of the bankruptcy laws. Lawrence Lindsey, the president’s chief economic policy advisor, was quoted as saying, “While the president might not agree with every word or every provision, on balance it’s probably a favorable bill.” An official word from the White House on the legislation is expected sometime soon.
The primary purpose of the Bankruptcy Reform Act legislation is to reduce the number of personal bankruptcy filings and to curb extensive bankruptcy abuses by wealthy debtors that hurt U.S. consumers as a whole. The legislation would set new standards for how much relief debtors can get and how much they can be made to repay. Debtors who are able to pay some of what they owe could be disqualified from Chapter 71 bankruptcy and required to file under Chapter 13. Chapter 13 requires the debtor to use its future income (in excess of necessary expenses) to pay creditors under a plan that may last up to sixty (60) months. By requiring these debtors to file under Chapter 13, repayment of unsecured debts, such as credit card debt, would have to take place. In addition, a needs-based standard would be used to determine whether debtors can pay at least part of what they owe their creditors, and whether or not they can be disqualified from filing Chapter 7 and forced to file Chapter 13 instead. By requiring debtors to file Chapter 13, the Reform Act would result in more creditors actually receiving money.
There is one particular provision of the proposed legislation that will be of interest to Texas consumers, the provision proposes to limit homestead exemptions. Currently, under Texas law, there is a practically unlimited homestead exemption, which allows many people to avoid losing their expensive homes if they are forced to file bankruptcy. Under the proposed legislation, a cap would be placed on the homestead exemption. The exemption would be limited to the first $100,000 of equity on homes purchased within the two years prior to filing for personal bankruptcy. If a person had more than two years of equity in their homes, individual state laws would determine the cap. Thus, this would limit the opportunity for potential debtors to convert non-exempt assets, like cash, to an exempt asset.
Whether the legislation passes in substantially the same form as it did last year is yet to be determined. With hearings just starting and Democrats looking to slow down its passage, the bill might go through some changes before President Bush can sign it. One thing seems to be certain, there will be substantial reform to the nation’s bankruptcy laws.
1Chapter 7 generally results in a liquidation of the debtor’s non-exempt assets with the proceeds being paid to creditors prorata. Unfortunately for creditors, a majority of Chapter 7 cases involve debtors with only exempt assets leaving little or nothing for the creditors.
