By John L. Duoba, Business Owner's Toolkit Staff Writer

The Senate on March 15, 2001, approved legislation to reform the nation's bankruptcy laws, making it harder for debtors to wipe out their debts without paying them off. By a vote of 83 to 15, the Senate passed The Bankruptcy Reform Act of 2001 (S 420), a bill almost identical to one passed by the House of Representatives on March 1, but with one major difference.

The Senate version limits debtors' homestead exemptions, allowing them to keep no more than $125,000 of the equity in their homes when they seek bankruptcy protection. The House-approved bill from earlier this month contains no such limitations, instead deferring to the appropriate state law, which in some cases allows unlimited homestead exemptions.

The amendment, put forth by Sen. Herb Kohl (D-Wis.), seeks to close some state law loopholes in the bankruptcy code that permit debtors to shield expensive real estate holdings as their primary homes.

This issue was cited as one of the reasons then-President Bill Clinton vetoed bankruptcy reform legislation in 2000. Both houses of Congress had passed a reform measure, but the bill did not contain any changes in the homestead exemption.

The current bills now head to conference committee, where negotiators from the Senate and House will try to resolve the differences between them. And this is where the difficulty lies.

President George W. Bush backs the bankruptcy overhaul, but is opposed to the homestead exemption amendment, as are many House Republicans. Most Democrats--feeling the legislation favors big business, banks and credit card companies--were swayed into voting for the measure mostly because of the homestead amendment.

Finding a compromise on this issue may prove to be difficult. So bankruptcy reform legislation, which not long ago seemed like a sure-thing, may have run into some trouble.

Specifically, the Senate bill would incorporate means testing to determine a debtor's ability to repay and the form of bankruptcy that should apply. All debtors with incomes above their state median and the ability to repay the lesser of 25 percent of their debt or $10,000 would be required to file a Chapter 13 reorganization and repayment plan, instead of the more common Chapter 7, which discharges debt after the liquidation of certain assets. Under Chapter 13, all unsecured debt, including credit cards, must be repaid; Chapter 7 does not require the repayment of unsecured debt. Moreover, bankruptcy filers would be required to participate in credit counseling.

In addition, the bill amends the Truth in Lending Act to require that extensive disclosures be given to borrowers for many types of credit plans. Lawmakers hope the increased disclosures will help people make wiser decisions regarding their credit, by further clarifying the rules regarding minimum payments, introductory rates, payment deadlines and penalties.

Even though the number of personal bankruptcies in the U.S. has declined for two years in a row, off an all-time high in 1998, many in Washington felt the time was right to take action, especially if an economic slowdown is on the horizon.

"We're very encouraged by the direction of bankruptcy legislation," said White House spokesman Ari Fleischer. "We're going to continue to work with leaders on the Hill, and the president is looking forward to the presentation of a bill he can sign."

Critics of the bill are unhappy with the one-size-fits-all standard for means testing, as well as the elevation of unsecured credit card debt to the front of the repayment line. Many opponents of the bill have connected the high number of bankruptcies to the aggressive marketing tactics of credit card companies, and they believe these companies should be punished, not rewarded, for preying on consumers who can't handle the debt.

Related items:

House Approves Bankruptcy Reform Bill of 2001

President Vetoes Bankruptcy Reform Bill

Congress Agrees on Bankruptcy Reform; Veto Likely

Bankruptcy Reform Legislation Stalls in Congress

Senate Approves Bankruptcy Reform Act of 1999, Includes Minimum Wage Increase

Decline in Personal Bankruptcies Downplays Need for Bankruptcy Reform Bill

House Passes Its Version of Bankruptcy Reform Act of 1999

Bankruptcy Reform Act of 1999 Introduced in the House