With her storage products company in bankruptcy after Kmart Corp. defaulted on payments earlier this year, Chicago entrepreneur Martha Williams needed to act fast.
She rang up other customers to assure them she was staying in business and scrambled to gather funding partners. Late last month, she purchased the remaining assets of her firm, StyleMaster Inc., for $4.3 million.
Those moves were done outside the confines of her company’s Chapter 11 bankruptcy reorganization, a process she said was too rigid to allow for a quick re-entry into business.
“I was trying to save my business as a going concern,” Williams said. “My customers weren’t going to wait long for me to secure financing.”
But under new bankruptcy reform efforts gaining speed in Washington this week, reorganizing debts within the system is expected to get even harder, critics say.
After almost five years of wrangling, lawmakers this week are debating a final stumbling block–an amendment aimed at preventing perpetrators of abortion clinic violence from wiping out their debts in a bankruptcy filing.
House and Senate conferees last week, including Rep. Henry Hyde (R-Ill.), agreed on language that would change the exemptions consumers can take to protect their homes from creditors–previously a key stumbling block.
But they are stalled on a Democratic provision that would keep debts incurred through violations “of laws relating to the provision of lawful services” out of bankruptcy protection. Some anti-abortion activists have used the bankruptcy process in the past to discharge judgments they received in relation to clinic violence.
Hyde said Tuesday that he met with key congressional leaders on the issue and had “cordial discussions,” but no resolution yet. “We are going to take another run at this and try to draft some language that is satisfactory to all sides. We haven’t got it yet, but we haven’t given up,” he said.
Observers also said momentum for the measure is growing.
“The substantive issues have basically been worked out,” said Tiff Worley, legislative liaison to the Association of Independent Consumer Credit Counseling Agencies. “The real fly in the ointment is whether there is the political will to vote for the bill in a down economy. The smart money seems to be on a lame-duck passage after the [November] election.”
But a lobbyist for the credit card industry, which has fought for the measure, said a compromise deal is even closer and stands “on the 1-inch line.”
Ed Yingling, of the American Bankers Association, said Wednesday that with the economy improving and wide support for the measure, he expects a bill will make it to President Bush, who is expected to sign it.
“All the parties want to do a bill. We’re optimistic but cautious because we’ve been on the 1-yard line several times,” Yingling said.
Indeed, bankruptcy reform has been passed in Congress three times but never become law. President Bill Clinton once used a pocket veto to kill the measure.
If the measure does become reality, critics fear it will force many more consumers and small businesses out of the official bankruptcy court process and leave them to fend for themselves with their creditors.
“This bill is tailor-made to address the needs of consumer creditors,” said Keith Shapiro, a Chicago attorney with Greenberg Traurig and president of the American Bankruptcy Institute.
“There is no consumer debtors lobby in the United States, and that is well-reflected in the provisions of the bill. The little guy will have a harder time getting a true fresh start.”
New means test planned
In general, the bill applies a new means test, so that if debtors earn above the state median wage they must go through a review to determine if they have the ability to repay their debts. If a bankruptcy court determines a debtor does have that ability, the debts no longer will be able to be simply wiped away.
There are exceptions in the means testing for people who experience job loss, divorce or illness.
Proponents contend that the measure only seeks to tighten loopholes and keep abusers from manipulating the bankruptcy system when they could pay off their debts.
But Shapiro and other opponents fear the new measures require so much new paperwork and legal steps that many will fall out of the official bankruptcy system.
“A lot will fall into the subculture of out-of-court dealings with creditors, where creditors have the main advantage,” he said.
And small businesses also will feel the pinch.
“Just what you have to go through now is virtually impossible,” Williams said.
Disclosures to be required
Among the new rules affecting small business, complex disclosure statements would have to be filed, Shapiro said. In addition, U.S. Trustee representatives would be required to go to business sites, examine records and monitor operations records for profitability.
“This puts the U.S. Trustee in a day-to-day supervisory role on daily operations,” which that office isn’t staffed to handle, he said.
On the consumer side, the measure would require many debtors to seek credit counseling services, but wouldn’t require those with business or personal injury judgment debts to do the same.
“It forces quicker liquidation of businesses and squeezes working families but leaves every loophole for big business,” said Elizabeth Warren, a Harvard University professor and national bankruptcy expert.
Reform provisions
Since 1997, Congress has been debating a rewriting of the nation’s bankruptcy laws. Here’s a look at the status of some of the major provisions in the current version of the bill, which has been passed by the House and Senate but is tied up in conference committee:
Means test: Consumers with incomes above the state median will be subject to a means test. If they are found to have the ability to pay off a quarter of the debt over five years, they may lose the ability to have their debts wiped out and be required to make restitution on a portion of them.
Home exemption: Under current law, debtors in Iowa, Kansas, Florida, Texas and South Dakota can shield all home equity from creditors in a bankruptcy filing. Other states have various caps on equity (Illinois’ is $7,500). The bill would place a nearly four-year residency requirement on states whose homestead cap is above $125,000, but allow people moving from those high-shield states to carry their exemption for two years.
Credit-scam victims: Last week, conferees removed a measure from Sen. Dick Durbin (D-Ill.) that would have forgiven predatory lending debts in bankruptcy cases.
Small businesses: Currently, bankruptcy judges have wide discretion to give businesses time to reorganize their debts with creditors. Under the bill, companies with less than $2 million in debt would have just 300 days from the bankruptcy filing to file a reorganization plan.
Source: Legislative staffers
