By John L. Duoba, Business Owner's Toolkit Staff Writer, and David Hansen, CCH Washington Staff Writer

Recent developments out of Washington seem to indicate that the U.S. economy has rebounded from six quarters of mild recession and is gaining strength. In addition to annual growth figures of 5.8 percent for the first quarter of 2002 released by the Commerce Department on April 26, 2002, Congress has resumed its efforts to reform the U. S. bankruptcy code--long considered all but dead because of America's economic trauma over the last year or so.

A House-Senate conference committee met on April 23, 2002, to iron out differences between competing bankruptcy reform bills passed by the House and Senate in early 2001, before the economic downturn had fully taken hold. Since their initial passage, the Bankruptcy Reform Bill of 2001 (S. 420) and the Bankruptcy Abuse Prevention and Consumer Protection Bill of 2001 (H.R. 333) had been set-aside by lawmakers in the wake of the economic recession and, later, the September 11 terrorist attacks. Many experts believed a conference report unifying the two measures wouldn't make it out of this session of Congress because of the economic conditions at play.

But with little more than six months until the November national elections (bankruptcy reform has been a significant source of campaign contributions from the banking and credit card industry) and with economic conditions seemingly improving, Congress has decided to act.

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.

In addressing differences between the bills, the conference committee agreed on the conditions by which debtors could exempt their home equity from bankruptcy and now have one outstanding difference to resolve--the ability of abortion protestors to discharge fines in bankruptcy. They had already agreed on various tax law changes.

Significantly, conferees resolved a major issue involving shielding home equity from creditors via the homestead exemption, which drastically differs from state to state. The concern is that debtors will thwart a bankruptcy court by sinking assets into a home in a state that allows the shielding of an unlimited amount of home equity. The Senate bill had exempted $125,000 of equity, while the House only exempted $100,000.

To solve the dispute, conferees agreed that a debtor buying a home in an unlimited-amount state must have 40 months of residency before the state's homestead exemption applies to them. Otherwise, they can only shield $125,000 of equity.

Moreover, if the purchase were made to defraud creditors, the cap would go back 10 years, said Sensebrenner. In addition, an absolute $125,000 cap would override state law for debtors convicted of a felony, a violation of securities law or fraud, as well as debtors who were liable for a claim of personal injury due to willful misconduct.

Although not tax bills, the bankruptcy reform measures would introduce several significant tax law changes. The House and Senate versions contain identical language as to changes in tax law and have been adopted by conferees, said Rep. F. James Sensebrenner, Jr. (R-Wisc.), who chairs the conference.

The changes would:

• Toughen the ability to discharge taxes in Chapter 13 bankruptcies. Some courts allow Chapter 13 debtors to discharge (1) taxes due within three years of the petition date, (2) taxes assessed within 240 days, or (3) taxes related to an unfiled or false return. This practice became known as "superdischarge." Bankruptcy reform would repeal "superdishcarge" in these cases.
• Limit the subordination of ad valorem tax liens to payment of Chapter 7 administrative expenses and a limited number of priority claims.
• Providing a single, uniform interest rate for the computation of all taxes due in all bankruptcy cases.
• Establish new automatic stay exceptions. Debtors have sometimes been unfairly burdened by interest and penalties accruing due to the automatic stay of the setoff of a prepetition tax refund against a prepetition tax obligation. The proposals permit the setoff of a prepetition tax refund against a prepetition tax obligation without a court order.
• Tighten rules for the late filing of priority tax liens. Tax claims that are filed late, but before the trustee begins distribution of the estate, generally lose their priority status, and are distributed as unsecured claims. The new law would set up an even stricter standard. It would require that a tax claim be filed either before the trustee starts distribution or within 10 days after the summary of the trustee's final report is mailed to creditors (whichever is earlier) for the claim to be distributed as an unsecured claim.

The remaining issue to resolve is language in the Senate bill preventing abortion protestors from using the bankruptcy law to discharge fines for blocking clinics. The April 23 conference adjourned before addressing the issue, and it remains to be resolved.

The next meeting of conferees has not been scheduled yet, said Sensebrenner. He "absolutely" believes the abortion issue can be resolved by Memorial Day. "We're now down to one issue that has not been agreed to," he said. Sensebrenner said conferees have been working on different compromises but refused to reveal them. "The ball is on the one-inch line," he said. "We're not there yet, but we're close," he said.

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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