A federal panel Tuesday narrowly rejected wholesale changes to bankruptcy laws advocated by lenders, opting instead for modest revisions that will provide some help to creditors.
The National Bankruptcy Review Commission, in a 5-to-4 vote, rejected a proposal by Commissioner Edith H. Jones to adopt a "needs-based" bankruptcy system, which would require wealthy consumers to repay some debts.
The panel, however, by the same margin agreed to relax earlier proposals on home equity loans and reaffirmations, which occur when insolvent consumers agree to repay loans to keep their collateral.
The changes did not satisfy lenders.
"There is nothing here that would cause creditors to rethink our opposition to the bankruptcy reform package," said Philip S. Corwin, a lobbyist with Federal Legislative Associates who represents the American Bankers Association. "The commission has adopted a framework that would contribute to higher bankruptcy rates if enacted into law."
"The consumer bankruptcy framework does not go far enough to bring meaningful reform," agreed Richard Jones, vice president at MasterCard International. "Many debtors will get significantly more relief than they need."
Tuesday's meeting, the 20th since the commission's creation in 1995, was its last. The battle over bankruptcy reform now shifts to Congress, which is expected to receive the panel's recommendations on Oct. 20. Hearings are expected next year.
Thomas A. Layman, senior vice president at Visa U.S.A., said the industry will urge lawmakers to reject the consumer bankruptcy recommendations and instead adopt a proposal similar to the one supported by Ms. Jones.
In June the panel voted to ban all reaffirmations, which are currently legal. The compromise adopted Tuesday would allow consumers to reaffirm debts of more than $500 that are collateralized. However, the consumer only could repay the assessed value of the collateral and not the amount of the original loan.
For home equity lending, consumers only could discharge the amount of these loans that exceeded 125% of their home's value at the time the credit was extended. Currently, consumers may not eliminate any debt that is secured by their home.
The proposals were adopted after less than 15 minutes of debate. Ms. Jones, a judge on the U.S. Court of Appeals for the Fifth Circuit, criticized the entire approach. "The proposals do not meet their objective," she said. "It makes consumer finances more difficult and raises costs for everyone."
For instance, she said the commission is essentially eliminating reaffirmations because the proposed approach is so complex that lenders will not use it.
The commission decided to vote on two other issues by mail. Under a plan discussed Tuesday, consumers would be required to repay credit card debts incurred within 15 days or 30 days of declaring bankruptcy.
Mr. Corwin said lenders are better off under current law, which prevents consumers from discharging credit card expenses that were incurred within 60 days of filing and that were used to purchase luxury goods. Under the current proposal, a lender would be helpless if a consumer bought a $2,000 home entertainment center and then declared bankruptcy 31 days later, he said.
"They know they are in financial trouble," he said. "They should stop charging."
The panel also deferred a vote on requiring all real estate developers to either reorganize or liquidate within 90 days of declaring bankruptcy. Currently only developers with less than $4 million in debt are subject to the 90-day limit. Lenders want the $4 million cap eliminated, arguing developers abuse the bankruptcy system to delay repaying debts.
Creditors criticized the practice of deciding important issues by mail, saying it deprives the public of its right to hear the debate among commissioners.
"This is counterproductive," said William Binzel, director of government affairs for MasterCard International. "The benefit of open meetings are the open discussions. How can you debate something in a mail ballot?"
Industry officials urged the commission to hold a final meeting next month so they could vote on these proposals in public.
Commission Chairman Brady C. Williamson, in a brief interview, defended the mail balloting.
"We have discussed all the issues," he said. He also rejected the idea of holding an additional meeting, saying the commission now must devote all its resources to writing its final report.
