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

Congress's long and arduous journey to reform the nation's bankruptcy laws may be in the final stages, but the last hurdle to passage may prove to be the most difficult. Meanwhile, the current economic climate in the United States and the pending get-tough-on-debtors reform package are being cited as the primary reasons for a record increase in individual bankruptcy filings over the last 12 months.

Congressional Reform

A congressional conference committee on May 22, 2002, again failed to reach a compromise between competing House and Senate bankruptcy bills. The last issue to resolve is whether protestors can discharge fines and civil judgements from illegal protests, said Committee Chairman Rep. James F. Sensebrenner (R-Wis.). Negotiations will continue and the committee plans to meet again in mid-June.

The committee is attempting to reconcile the Bankruptcy Abuse Prevention and Consumer Protection Bill of 2001 (HR 333) and the Bankruptcy Reform Bill of 2001 (Sen 420), which were passed early in 2001 and have languished in the intervening months of recession, financial scandal and terror attacks.

The Senate bill would prohibit protestors from discharging judgment debts if they resulted from illegally harassing, intimidating, interfering, obstructing, injuring, threatening, or committing acts of violence against those providing or obtaining lawful goods or services, including abortion. The House version is silent on the issue.

Conference members Sen. Charles Schumer (D-N.Y.) and Rep. Henry Hyde (R-Ill.) led committee efforts during the last few weeks to resolve the issue. At the May 22 conference they could not agree on whether the law should apply to those blockading abortion clinics.

Sensebrenner asked Schumer and Hyde to continue negotiating. Despite the lack of an agreement the committee now understands the issue more than it did, he said. "I think we are getting there," said Sensebrenner.

Specifically at issue was the difference between a "blockade" and a "peaceful protest," as Hyde wanted to ensure that peaceful protestors were not caught in the new legislation. Schumer agreed that peaceful protestors should not be subject to the proposed restrictions on discharge, but those who blockade clinics should not be allowed to use the bankruptcy code to retry judgments against them.

As for the areas of common ground, both the House and Senate have agreed to stiffen the rules and requirements for debtors seeking relief under bankruptcy. Stricter means-testing would be used to determine what form of bankruptcy a debtor could use. In addition, fewer debts would be eligible for elimination and more debtors would be subject to repayment plans.

One particularly difficult issue had been the homestead exemption, where some states allow debtors to shield unlimited amounts on money in a home protected from creditors, while others offer little or minimal exemption amounts, creating inequities in the bankruptcy process. Conferees agreed to require longer residency periods to claim the unlimited exemption, or be limited to $125,000 of equity. Convicted felons would not be allowed to shield any amount of home equity above that cap.

However, another agreed-on provision would extend the time frame in which debtors could move to a new state and still take advantage to the former state's exemption. Thus, a debtor from an unlimited-homestead state could move to another limited-homestead state and still have two years to claim the more liberal exemption.

Ultimately, even with reform, it appears that inequities favoring the wealthy will still continue in the bankruptcy code, while debtors with more limited means will be held to tougher standards than under the old rules.

Record Filings Reported

In the last year, more than 1.5 million bankruptcy filings were reported to the Administrative Office of the U.S. Courts. From March 31, 2001, to March 31, 2002, filings were up more than 15 percent over the previous time period from a year ago. Approximately two-thirds of the bankruptcies filed for Chapter 7, while slightly less than a third filed Chapter 13.

In addition, during the first three months of 2002, filings were up 3.3 percent to 379,012 cases--the highest first quarter figure ever and the second-highest quarter ever recorded.

Moreover, recent figures also cite that nearly 1 million of those bankruptcy filers are women, and that women outnumber men in bankruptcy cases by 300,000 annually. Also, because of their likely role as caregivers in our society, these female filers bring almost 2 million children into bankruptcy court with them.

On the flip side, reports show that about 200,000 women will be creditors in a bankruptcy proceeding, seeking child support and/or alimony payments from bankrupt filers. And even though these debts are not dischargeable in bankruptcy, these creditors will now be forced to compete on the same level with banks and credit card companies, recently elevated to more secured status under the new proposed reforms that mandate repayment plans over liquidation.

Experts point to the lagging national economic conditions and likely eventual passage of this stricter reform law as reasons for the spike in filings.

"The continued record-breaking pace of new bankruptcy filings will likely fuel new calls for legislation making bankruptcy less available," said Samuel J. Gerdano, executive director of the American Bankruptcy Institute, a non-partisan organization dedicated to research and education on matters related to insolvency . "While the pending bill will ultimately reduce the scope of bankruptcy relief, in the short term it will push filings higher, as consumers race to take advantage of the current debtor-friendly law."

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. It now appears that new, more stricter rules for debtors will be part of bankruptcy reform, and you may want to consider what it could mean to you and your business if you're currently experiencing dire circumstances.

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