By Peter Feltman and Catherine Hubbard, CCH Washington Staff Writers

The House of Representatives on October 1, 2002, approved legislation to extend farmer bankruptcy provisions under Chapter 12 of the U.S. Bankruptcy Code for six months until July 1, 2003. Without this legislation, the Chapter 12 provisions are set to expire on January 1, 2003. The legislation, H.R. 5472, now goes to the Senate.

Chapter 12 of the Bankruptcy Code was added in 1986 on a temporary basis, but has been extended many times since then, although efforts to make it permanent have so far failed. It allows farmers to reorganize their finances instead of having to sell their farms, which Chapter 12 supporters believe would be more likely to happen under Chapter 11. Supporters say special treatment is needed to protect farmers in cases where a few bad crop years deplete their funds.

The House felt the need to pass the extension measure because a similar provision currently in the comprehensive bankruptcy reform bill is stalled in conference committee between the House and Senate. Both bodies passed bankruptcy reform more than a year ago, but disagreements over final language have led to an impasse. Congress adjourns for November elections in a matter of weeks, so House members are urging the Senate to act on H.R. 5472 to extend relief to farmers. Some see House passage of the farmers' protections as a sign that comprehensive reform will not happen in this Congress after all, which is surprising because to many it seemed like a done deal in early 2001 when the bills were passed--before a downturn in the economy and the events of September 11.

Meanwhile, five U.S. Senators recently urged for passage of the comprehensive bankruptcy reform bill, saying that the measure has wide support but is being held up by a few in the House of Representatives. A conference committee called to work out the differences in the final language completed its work last summer, but the House has not scheduled a vote due to opposition from those who believe that anti-abortion activists will be penalized by the bill. The conference committee has a provision that says that civil judgments cannot be discharged in bankruptcy for those guilty of acts of violence against lawful activities of commerce. Proponents of this language fear that anti-abortion activists will try to avoid such judgments through bankruptcy if this provision is not made law.

During a Sept. 25, 2002, news conference, Senator Orrin Hatch (R-Utah), the top republican on the Senate Judiciary Committee, which has jurisdiction over bankruptcy legislation, said that since the House may not act, he believes the Senate should take up and pass the bill, instead of waiting for the House. The Senate could probably deal with the vote on bankruptcy in just a few hours, Hatch said. Senate Majority Leader Tom Daschle (D-S.D.) also appeared at the news conference to urge House passage of the bill, but he did not commit to having the Senate bring it up first. Also appearing were Senators Chuck Grassley (R-Iowa), Harry Reid (D-Nev.) and Tom Carper (D-Del.).

In the face of this contentious debate among lawmakers, special interest groups are making their feelings known about the reform measure as time to act is running out. At the Cato Institute, a libertarian think tank in Washington D.C., a recent event brought together critics and supporters of the bill, to discuss the reform measure's relative merits and faults.

The stricter rules under the Bankruptcy Reform Act conference report (H.R. 333) would discourage consumers from seeking bankruptcy protections and force debtors underground, according to Lawrence Ausubel, an economics professor at the University of Maryland. "Most of the debts that are written off right now will continue to be uncollectible," Ausubel said. The problem is not increased bankruptcy filings, but increased consumer debt as a percent of disposal income, he said, noting that credit card solicitations last year increased to 5 billion--about 50 per U.S. household.

"The bill creates the illusion that limiting consumers ability to obtain bankruptcy protection somehow solves the problem of consumer insolvency," said Ausubel, adding that "it makes matters worse." For instance, if the bill increases the probability of collecting people's debts, credit card solicitations would nearly double, he predicted. "It's very hard to understand where the crisis is if lenders are still willing to issue unsecured debt to consumers," he said.

The Chapter 13 provisions of the conference report would force people into an underground economy and shift from formal bankruptcy to informal bankruptcy, where the debtors would get paid in cash and would not leave a forwarding address to collectors, said Ausubel. "All we'll have done is increase the amount of people who go underground simply because they can't get a fresh start under bankruptcy law," he said.

However, Jacobo Rodriguez, financial services analyst with Cato, said the current bankruptcy filing system makes it increasingly attractive for debtors to apply for bankruptcy. The number of filings continues to increase every year, he said, noting that more than 1.5 million people declared bankruptcy over the past year, ending June 30. He noted that 1 million of those cases were filed under Chapter 7.

Creditors get "nothing or very little back under Chapter 7," which allows people to discharge their debt, said Rodriguez. He predicted that as more people file for bankruptcy, creditors will increase interest rates for all consumers in order to recoup their losses. "Innocent consumers are paying for the mistakes of the guilty," he said. Unlike Chapter 13, Chapter 7 does not require debtors to liquidate their assets to repay debts, he noted. For most people, "the benefits for filing bankruptcy greatly outweigh the costs," he said.

Todd Zywicki, a professor at the George Mason University School of Law, said the conference report is "a moderate balanced, commonsense reform to weed out fraud and abuse." The conference report would increase penalties for fraud committed by debtors, creditors and lawyers, he noted. The means-testing provisions require that if a debtor makes above the state median income and can repay a substantial portion of the debt without significant hardship, he or she should repay when filing under Chapter 13, he noted. The conference report would require that an individual "should pay what you can pay," he said. "We're not asking people to live like paupers," he said.

In addition, the bill would target abuse by bankruptcy lawyers and bankruptcy mills, Zywicki said, noting that such lawyers will need to prove that they have tried to work out a consensual repayment plan with the creditors. In addition, he favored the $125,000 cap on the homestead exemption for someone who is charged with investor fraud.

For more information on the current rules of bankruptcy and how they interact with a comprehensive asset protection plan for your small business, visit our new chapter of the "SOHO Guidebook"--Protecting Your Assets. New, more stricter rules for debtors will be part of any bankruptcy reform, and you may want to consider what it could mean to you and your business if you're currently experiencing dire circumstances.

Related items:

Bankruptcy Reform Not Friendly to Small Businesses, Families

Bankruptcy Reform Stalls on Final Issue; Record Filings Continue Nationwide

Economy, Bankruptcy Reform on the Rebound

Is Bankruptcy Reform Dead Again?

Record Bankruptcies Signal Changes To Come

Senate Passes Its Version of Bankruptcy Reform

House Approves Bankruptcy Reform Bill of 2001

President Vetoes Bankruptcy Reform Bill

Congress Agrees on Bankruptcy Reform Act; Veto Likely

Bankruptcy Reform Legislation of 1999 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

Bankruptcy Reform of 1998 Stalls in Senate

Senate Overwhelmingly Passes 1998 Bankruptcy Bill, Tough Conference Looms

Bankruptcy Reform Legislation of 1998 Approved by House; SBA Asked To Study Impact