WASHINGTON -- Bankruptcy reform legislation cleared an important hurdle Wednesday, and bankers are optimistic that they will finally get some help from Congress in dealing with debtors.
The House Judiciary subcommittee on economic and commercial law held a long-awaited hearing on legislation that would make it more difficult for individuals and businesses to use bankruptcy proceedings to avoid repaying debts.
At the close of the hearing, Rep. Jack Brooks said he will schedule a full committee vote when Congress returns from its recess in September. The Texas Democrat chairs both the full committee and the economic law subcommittee.
The House legislation, introduced by Rep. Mike Synar, D-Okla., mirrors the Senate bankruptcy reform bill. The Senate measure passed unanimously, demonstrating broad support for bankruptcy reform.
"Though the hour is late, the Senate's 94-0 vote .... clearly demonstrates that a consensus bill can garner strong bipartisan support," said American Bankers Association lobbyist Phil Corwin, who testified before the House panel.
Bankruptcy reform was approved by the House in 1992; but the Senate did not act.
The Synar bill, endorsed by the ABA, would streamline parts of Chapter 11 of the bankruptcy code, making bankruptcy proceedings less expensive for all parties involved.
Debts incurred for the purpose of paying taxes would be nondischargeable, and the bill would prohibit "cramdowns," in which the principal amount of a home mortgage is reduced in value. This provision would create some relief for lenders, according to Mr. Corwin.
"These changes should reduce the cost of housing-secured credit by providing certainty to lenders, while also protecting consumers against abusive second-mortgage schemes," Mr. Corwin said in his written testimony.
The measure would also increase the ceiling on personal debts for Chapter 13 filings from $350,000 to $1 million, making court-approved repayment plans available to more people.
This provision would help high-debt consumers reorganize their debts, rather than be forced to liquidate under Chapter 7 of the code.
Although the ABA expressed support for this provision, Mr. Corwin said that the banking group favored placing a $250,000 cap on unsecured debt, "to avoid the discharge of fraudulently acquired debt." Neither the House nor the Senate version of the bill currently contains language to this effect.
While banking interests appear to favor bankruptcy reform, other groups are against tinkering with the framework of the bankruptcy code.
"If you skew the standard in favor of the creditor, lenders' losses may be reduced, but there will be people who live life without hope because of nondischargeable debt," said Kenneth Klee of the National Bankruptcy Conference.