When the federal commission studying consumer bankruptcy laws meets next week, members will consider two changes that could make it easier for lenders to collect debts.
The revisions, tightening debtors' rights and tilting in favor of home equity lenders, are intended to generate support among creditors for the National Bankruptcy Review Commission's overall reform effort.
But creditor representatives view the changes as insufficient and still vow to oppose the final recommendations that are to be sent to Congress on Oct. 20.
"The proposed changes are just technical in nature," said William P. Binzel, vice president for government relations at MasterCard International. They do not "address the problem of providing more bankruptcy protection than consumers need."
"This substitute proposal fails to address the bulk of lenders' concerns," said Philip C. Corwin, a lobbyist at Federal Legislative Associates who represents the American Bankers Association. "It does nothing about the very excessive exemption levels, it still prohibits reaffirmations of unsecured debts, and it permits an automatic conversion from Chapter 13 to Chapter 7."
The revision would allow consumers to reaffirm secured debts worth more than $500. Debtors use reaffirmation to remove a loan from bankruptcy by agreeing to repay it. But only the value of the collateral would be able to be reaffirmed, rather than the amount of the outstanding loan.
Under current law, consumers may reaffirm any debt. The bankruptcy commission had recommended banning reaffirmations completely.
Under the compromise proposal affecting home equity loans, those made for less than the owner's stake in a property would be fully secured, even if the value of the house falls. But on loans exceeding a property's worth, the portion above market value would continue to be considered unsecured debt.
"Regardless of your reservations, I hope you will agree with me that the proposal will find a broader acceptance than the prior set of recommendations," Commissioner M. Caldwell Butler wrote in an Aug. 1 memo to the nine-member panel. "A unanimous vote would go a long way toward enhancing the credibility of our commission."
Sarah B. Cummer, regulatory staff attorney at the Credit Union National Association, said the two proposals do not go far enough.
For instance, she said consumers often want to reaffirm credit card debt so they can emerge from bankruptcy with at least one charge card. But the proposal would prevent this, she said.
Also, Ms. Cummer criticized the home equity provision, saying institutions should not be punished for extending loans that exceed a borrower's equity.
"We would still prefer no cram downs," she said. "That is what we are must comfortable with."
David Sandor, director of public affairs at Visa U.S.A., said creditors will continue to lobby against the commission's recommendations.
"The show is by no means over," he said. "The second act is going to play out in Congress once lawmakers come back into session in September."
Lenders have been advocating a needs-based bankruptcy code, requiring consumers to repay their debts if able. But the commission ignored this plea and adopted proposals in June making it even easier for consumers to wipe away debts. Lenders objected and sent a letter to Congress questioning the commission's credibility.
