By Craig Lebamoff and Paula Cruickshank, CCH Washington Staff Writers

The Senate voted overwhelmingly in support of Sen. 1301, an overhaul of the nation's bankruptcy laws. Sen. Paul Wellstone (D-Minn.) was the only senator to vote against the measure. Despite strong bipartisan support for the Senate bill, the long-awaited overhaul of the bankruptcy code faces an uphill battle for passage before Congress adjourns on the tentatively scheduled date of Oct. 9.

Senate and House leaders must now pick members of the conference committee that will iron out differences between the two bodies' bills. The House version (HR 3150) is considered much tougher on debtors, and the House Judiciary Committee--which has original jurisdiction--is currently embroiled in the Starr Report on President Clinton's alleged misdeeds.

The President expressly supports the Senate version, which offers more consumer protections. Creditors, led by the nation's bankers and retailers, support the House version.

White House Response

White House spokesman Barry Toiv said, "we think the Senate bill strikes the right balance between creditors and consumers... and that balance will have to be maintained in any bill that comes out of conference." The White House earlier in the year promised to veto the House version. Another administration official, on Sept. 24, said "the House version is completely unacceptable."

Sen. Richard Durbin (D-Ill.) told CCH the Senate bill has "strong momentum behind it," and he thinks a conference can finish quickly "if there is no sparring over who is appointed to the committee." Principal House sponsor George Gekas (R-Penn) promised to work quickly on a compromise, but one of his staff acknowledged "it will be difficult in the dwindling time left."

Major Difference

Perhaps the most divisive issue of the debate is the means test the House version would place on a debtor who wants to use Chapter 7. This section of the Code allows people in trouble to erase most debts after selling off most assets.

In the House bill, the debtors who earn more than the median family income for a family of four--currently $51,000--and who could pay off at least 20 percent of their unsecured debts would be forced instead into Chapter 13. This allows them to retain assets, but requires repayment over a period of time, generally three to five years.

The Senate bill gives bankruptcy judges more discretion. For example, if a debtor is considering Chapter 7, the judge must consider if they could pay off at least 30 percent of their debts over a three-to-five-year period. The judge then could order the debtor into Chapter 13.

Elizabeth Warren, professor at Harvard Law School, told reporters after the vote that the Senate and House bills have "vastly different philosophies." She noted the Senate version places some responsibility for the vast increase in personal bankruptcies on creditors.

She cited recent statistics from the Federal Reserve that show non-mortgage personal debt has soared from $800 billion in 1989 to $1.27 trillion in 1998. Also, personal bankruptcies were a record 1.35 million last year and are currently running at a 5.9 percent increase over last year. Warren said the Senate bill recognizes that too-easy credit and misleading advertising are also to blame, as is personal irresponsibility. Warrens's views were echoed by Gary Klein of the National Consumer Law Center.

Other Differences

The Senate bill requires lenders to give consumers a worksheet with each credit card solicitation that would aid them in calculating how much debt they can handle.

The Senate adopted by voice vote an amendment by Sen. Herb Kohl (D-Wis.) that would cap state homestead limits at $100,000. The House bill contains no limits, and currently limits on home value exempt from seizure in bankruptcy vary greatly from state to state. Some states have unlimited exemptions, which some debtors abuse by purchasing very expensive homes and then filing for bankruptcy protection.

The Senate bill requires credit card companies to calculate and provide in monthly statements how long it would take debtors to pay off the bills if they only made the minimum payment, and how much interest they would pay over this period of time.

The House bill states any bill incurred within 90 days of bankruptcy filing and not needed for necessities must be repaid.

The Senate bill expands protection of tax-advantaged retirement accounts. Currently, 401(k) plans are protected from creditors, but not individual retirement accounts (IRAs) or state tax-exempt retirement funds.

The Senate bill requires bankruptcy court approval for any reaffirmation agreement. These are private deals between a creditor and debtor to continue paying a bill that would otherwise be wiped out in bankruptcy.

Passed and Killed

The Senate adopted on voice vote an amendment by Diane Feinstein (D-Calif.) requiring the Federal Reserve to conduct a two-year study on whether regulations are needed to keep credit card companies from issuing plastic to consumers already at risk of "accruing unmanageable debt." Feinstein's original version would have required credit card companies to warn consumers in any solicitation if they already had a debt-to-income ratio of 40 percent or higher.

Sen. Tom Harkin (D-Iowa) offered an amendment that would have called on the Federal Reserve to lower interest rates in the face of a slowdown in the economy, but this was defeated 71-27.