- The Washington Times - Friday, February 9, 2001

A bill that would toughen the nation's bankruptcy laws is expected to pass Congress this year as analysts predict financial failure rates will rise to their highest levels in history.

The bill, sponsored in the Senate by Charles E. Grassley of Iowa and in the House by George W. Gekas of Pennsylvania, both Republicans, is virtually identical to one passed late last year that was pocket-vetoed by President Clinton. The legislation makes it more difficult for debtors to file for bankruptcy under Chapter 7, which offers more protection from creditors than Chapter 13.

President Bush has said he supports some version of the bill.

Todd Zywicki, an assistant law professor at George Mason University, told the Senate Judiciary Committee yesterday that Americans view the bankruptcy system as a joke.

"It is increasingly viewed as a system prone to cynicism and manipulation, and a free ride for debtors lacking in conscience and personal responsibility," he said.

Bankruptcies dipped in the past several years after hitting a high of 1.4 million in 1998. Samuel Gerdano, president of the American Bankruptcy Institute, said rates could rise 10 percent in 2001.

If the bill is passed, filings probably will rise in the 180 days before it takes effect, Mr. Gerdano said. In the long term, debtors may be diverted to alternatives such as credit counseling.

His organization, an education and research nonprofit, does not take sides regarding legislation, he said.

Critics of the bill expressed concerns during the Senate hearing that it is ill-timed. Though all on the 18-member Judiciary Committee panel agreed the bankruptcy system is flawed, some said the present version of the bill is unacceptable.

"The significant changes occurring today in the American economy are not reflected in the bill," said Brady Williamson, a lawyer and former chairman of the National Bankruptcy Review Commission.

He said the bill's business provisions, including those regarding Chapter 11 bankruptcy protection, need to be scrutinized more closely in light of recent layoffs and bankruptcies by large companies.

Rockville, Md., bankruptcy lawyer John Garza said he already has seen an increase in his business clients as the economy slows.

"My phone is starting to ring… . It's going to be a blood bath for the dot-coms," he said, adding that the bankruptcy bill is almost "Draconian."

Randall Newsome, a U.S. bankruptcy court judge in the Northern District of California, also warned the panel that the legislation would make filing onerous for families who genuinely need it.

The financial-services industry has thrown its lobbying power behind the bill. Credit-card issuer MBNA, for example, donated $3.1 million to political campaigns last year and was the top contributor to President Bush's campaign, according to the Center for Responsive Politics.

Catherine Pulley, a spokeswoman for the American Bankers Association, said the industry loses about $40 billion per year because of bankruptcies and hopes to recover $4 billion of that under the legislation.

She pointed out that the bill primarily affects families whose combined household income exceeds the national average of about $50,000.

"This bill is targeted at wealthy filers to stop people who have the ability to pay their debts back from walking away," she said.

Mr. Gerdano said the legislation would broaden categories of non-dischargeable debt for all filers, regardless of income.

He added that the income measure averages the past six months of salary.

A debtor could theoretically be out of a job and still meet the cutoff, he said.

After income level is determined, a formula will dictate the filer's capacity to repay and whether he should go into Chapter 7 or Chapter 13.

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