WASHINGTON - Commercial banks, thrifts, and other lenders won a major legislative victory this week as a Senate panel approved a bill that would make it more difficult for individual to use bankruptcy courts to avoid repaying loans.

However, the bill contains one troublesome provision that would require companies in bankruptcy to give pension obligations first priority to the proceeds of new loans.

"That is a very big negative," said Edward L. Yingling, chief lobbyist for the American Bankers Association. "It is seen by commercial lenders as killing Chapter 11."

Mr. Yingling said that banks would refuse to extend credit to companies in bankruptcy proceedings if they knew the funds would be funneled to pensioners rather than used to nurse a business back to health.

Flexibility Seen

However, Mr. Yingling said he was optimistic that the provisions, sponsored by Sen. Howard Metzenbaum, D-Ohio, could be reworked before the bill comes up for a vote on the Senate floor.

On the plus side, the panel rejected a related measure, sponsored by Sen. Robert Graham, D-Fla., that would have given the Pension Benefit Guaranty Corp. a priority claim to credit extended to companies in bankruptcy.

Among the other pluses for the banking industry are a handful of credit card provisions, one of which would remove obstacles to an administration proposal to permit credit card tax payments.

Under current law, individuals in bankruptcy still must pay their tax bills. However, credit card debt can be "discharged," or removed as an obligation.

Bankers are concerned that without a change in law, the administration proposal could permit individuals to pay their taxes with a credit card and then file bankruptcy to avoid repayment.

However, the legislation that cleared the Senate panel Thursday makes it clear that credit card debt taken on for payment of federal, state, or local taxes must be repaid.

Bankruptcy Window

In addition, the bill would mandate repayment of credit card debt taken on within 60 days of a bankruptcy filing for the purchase of luxury goods. Current law requires repayment if the purchases were made within 40 days.

"Anyone who purchases something and files for bankruptcy 60 days later had a pretty good idea they were going to file." said Charlotte Rush, lobbyist for MasterCard.

Credit card issuers had hoped the bill also would require repayment of cash advances taken out within the same 60-day period, but were disappointed when the Judiciary Committee decided not to address the issue.

Other provisions in the bill would:

* Encourage use of Chapter 11 filings, in which debtors agree to repayment plans, over Chapter 7 proceedings, in which many debts are simply discharged.

* Prohibit mortgage "cramdowns," in which loan principal is reduced.

* Make it easier for bankruptcy courts to approve larger repayment plans, spread out over five years, for filings under a section of the code that deals with farm bankruptcies.

* Establish a National Bankruptcy Review Commission to make recommendations to Congress on more controversial issues.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.