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JUNE 7, 2001


A Kinder, Gentler Bankruptcy Bill?

With Democrats in charge of the Senate, controversial provisions aimed at small businesses and individual consumers appear doomed

Like so much on Capitol Hill these days, it turns out that the recently passed bankruptcy legislation -- which critics charged placed an unfair burden on small businesses and consumers -- may not be a done deal, after all.

Now that majority power in the Senate has shifted from Republicans to Democrats, changes to the legislation, which was criticized by consumer advocates and pushed by the credit-card industry, are expected. The legislation, which would shorten the time available to small businesses to reorganize and also make it more difficult for consumers to walk away from credit-card debt, was on its way to a conference committee after passing the Senate and House earlier this year. There, differences between the House and Senate versions of the bill were to have been ironed out. But the conference committee was never appointed because Republicans and Democrats in the Senate couldn't agree on the panel's political makeup.

Now that the Democrats are the Senate majority, that committee is expected to be formed shortly. When it is, Democratic Sen. John Kerry of Massachusetts, the new chairman of the Senate's Small Business Committee, will ask that it delete the "punitive small business part of the bill," says David Wade, a Kerry spokesman.

KERRY'S SECOND CHANCE.  Kerry's request is likely to be granted because the conference committee will have a Democratic majority, Wade says. Now, explains Wade, "Kerry knows he has a far better chance of getting some language in there to protect small businesses." As Wade sees it, once the conference committee puts such a protection into the legislation, opponents would be hard-pressed to come up with the 51 Senate votes needed to override it.

As it stands now, the pending bankruptcy law shrinks the time small businesses have to reorganize under Chapter 11, which would force more outfits into liquidation, legal experts say.

During Senate debate on the bill in March, an amendment Kerry offered that would have deleted the small-business section was defeated. "His amendment came up at a time when the Republican position was: 'No amendments to this bill whatsoever.' So even people who thought this was a bad bill for small business wouldn't vote for his amendment," says Elizabeth Warren, a Harvard Law School professor and adviser to the National Bankruptcy Commission.

WAVERING SUPPORT.  This time around, says Warren, who testified against the bill before it was passed, Kerry is likely to get the votes he needs. She speculates that no one in Congress has pushed hard to establish a conference committee for the bill because "there was increasing concern that this bill was a bad idea...they voted for it to appease lobbyists but didn't actually push it along."

Calls on Wednesday to the offices of the former Senate majority leader, Republican Trent Lott, and current majority leader, Democrat Tom Daschle, were not returned.

The legislation is "starting to unravel," says Robert D. Manning, an economic sociologist who testified during Senate hearings on the bill earlier this year. "Conservative support is unwavering, but the moderate support is starting to unravel," he says. Manning, a professor at the University of Houston Law Center and author of Credit Card Nation, applauds those second thoughts about the legislation because it "really needs to be rethought and recalibrated."

JUMPING THE GUN.  For the consumer, one of the most onerous sections of the legislation was the imposition of a "means test" to determine who would be eligible to liquidate debt, including credit-card debt.

Nationwide, both consumer and small-business bankruptcy filings have risen this year. Individual filings for April were up about 30% vs. the same period last year, and small-business bankruptcies are running about 20% ahead of last year. Much of the increase is due to the economic downturn and rising consumer debt loads, say bankruptcy lawyers, who also attribute some of the filings to fears that the pending legislation will make filing in the future more difficult.

Now, like the insolvent, the legislation looks ripe for reorganization.

Theresa Forsman in New York
Edited by Robin J. Phillips