Update:
Senate Approves
Bill to Overhaul
Bankruptcy System
By MICHAEL SCHROEDER
Staff Reporter of THE WALL STREET JOURNAL
March 11, 2005; Page A3
WASHINGTON – The Republican-controlled Senate, brushing aside a flood of last-minute Democratic amendments, approved the most significant overhaul of the bankruptcy system in more than two decades.
By a vote of 74-25, lawmakers passed a bill that would require more people who file for personal bankruptcy protection to repay a portion of their debts.
The Republican majority accepted only a few minor amendments to the bill during debate during the past week, largely to satisfy House Republican majority leaders who have said they would accept the Senate version of the bankruptcy bill as long as it was unencumbered by substantive new provisions.
The Senate vote on the bill was delayed a day because of a battle over an amendment pushed by Democratic Sens. Paul Sarbanes of Maryland and Patrick Leahy of Vermont. The amendment would have stripped out language from the bill that allows investment banks that had underwritten securities for a company before it sought bankruptcy protection to continue representing the same company during the proceedings.
Amendment supporters believe such continuing investment-bank relationships represent a clear conflict, especially in the aftermath of scandals such as WorldCom Inc. That view received support from Securities and Exchange Commission Chairman William Donaldson, who has said permitting such arrangements would be “a mistake.”
Opponents argued the amendment would provide a near-monopoly on bankruptcy work for the two biggest backers of the measure: Lazard and Blackstone Group, both New York investment firms that do almost no securities underwriting. The amendment, which likely wouldn’t have imperiled House support, was voted down 55 to 44.
The Senate version of the bankruptcy bill is expected to move quickly through the House, which passed a nearly identical bill by a 265-99 vote in January 2004. The low turnout then resulted from members not having returned to Washington from the holiday break.
As a first step, the House Judiciary Committee is tentatively scheduled to approve the Senate version of the bill Wednesday. The full House likely will vote to approve the measure after a day or two of debate in the first week of April, following the two-week spring recess, according to Republican House staff.
An even faster timetable isn’t out of the question. Philip Corwin, an outside attorney for the American Bankers Association, said it still is possible the House leadership could send the bill to the floor for a vote immediately after committee action next week. Supporters, including credit-card companies, banks and retailers, are pressing for a quick vote to avoid giving opponents an additional two weeks to sway undecided members with any negative media coverage of the bill.
The new rules would go into effect six months after the bill is signed into law by President Bush, who has said he supports the overhaul.
Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys, said passage of the legislation may produce a “bulge of people who might file earlier” for bankruptcy than they had planned. The numbers also may jump in the next few months as a result of attorneys advertising “that the law would become less favorable” to filers, Mr. Sommer said.
The bankruptcy legislation is aimed at limiting consumers’ use of Chapter 7 of the U.S. Bankruptcy Code to wipe out credit-card bills or loans unsecured by a house or other assets. Under a new means test, filers with income higher than their state’s median income who can pay at least $6,000 over five years – $100 a month – would be forced into Chapter 13, where a judge would order a repayment plan.
Among other provisions, people would be required to pay for credit counseling six months before filing for bankruptcy protection. Certain types of debt can’t be wiped out in bankruptcy, including child support, alimony, student loans and most taxes.
Backers of the legislation argue that the bankruptcy system has become increasingly abused by compulsive shoppers, divorced or separated fathers avoiding child support, and wealthy debtors who shield assets in trusts or through loopholes in the law. Opponents say the bill would penalize middle-income workers, single mothers, minorities and the elderly, and would remove a safety net for those who have lost their jobs or face big medical bills.
Only a few amendments were added to the bill, including a provision offered by Sen. Edward Kennedy (D., Mass.) stipulating that corporate insiders can’t receive retention bonuses to remain with a company while it is being reorganized unless he or she has received a job offer from another company. The turnaround-company industry lobbied unsuccessfully the past few days to have that measure removed.
Another significant amendment approved by the Senate directs bankruptcy judges to give special consideration in the means test to low-income veterans, active-duty service members and veterans with serious medical conditions.
The bill also has a little-noticed but important provision that is designed to prevent systemic financial crises by letting creditors close out their derivatives contracts with companies that have filed for bankruptcy.
Although the provision has been long pushed by the Federal Reserve Board, the Treasury Department and big financial-services companies, it has been attached for years to failed past bankruptcy-overhaul legislation. The law would reduce risk by allowing swaps and other financial contracts to be unraveled quickly and easily, without the approval of slow-moving bankruptcy courts.
Write to Michael Schroeder at mike.schroeder@wsj.com
