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With Congress slated to return to Washington Monday, bankruptcy practitioners are anxiously awaiting word on how or if lawmakers can agree to a reform bill before the session ends. Both houses have passed bills that would dramatically affect consumer, tax, international insolvency and financial contracts transactions, and cause the most sweeping overhaul to Chapters 7 and 13 of the U.S. Bankruptcy Code in a generation. Although the ostensible goal of the “reform” measure is to curb perceived abuses by individual debtors, the Bankruptcy Reform Act of 2000 has implications extending well beyond the traditional debtor-creditor relationship, experts agree. The House of Representatives passed its version, H.R. 833, on May 5, 1999 by a 313-108 margin, followed by a Feb. 2 Senate vote on a similar bill, S.625. The Senate bill was approved 83-14. Now, staffs are meeting in private in an effort to reconcile the two versions and craft a bill that the President will support. President Clinton’s advisors have indicated they would recommend he veto the House version, and while the Administration has some serious qualms about the Senate bill, that version is more palatable to the President. At the moment, the issue is linked to extraneous matters, such as an increase in the minimum wage, a school voucher provision and an amendment that would reduce the current disparity between sentences for possessing crack and powder cocaine. Those unrelated issues make the reform bill more attractive to some constituents, and less attractive to others. MEANS TEST The bills have some major differences. The provision that has generated the most attention is a new “means test” to determine which debtors have the resources to repay some debts. Those who have the means would be foreclosed from filing a Chapter 7 liquidation and would instead be limited to a Chapter 13 repayment plan. Under the House bill, exceptions would be allowed only through demonstration of “extraordinary circumstances”; the Senate bill has a lower threshold of “special circumstances.” Additionally, the House bill would strictly adhere to IRS guidelines to determine means, while the Senate version would allow the Treasury Secretary to modify the guidelines for bankruptcy purposes. Further, H.R. 833 would not allow for expenses relating to long-term care of family members, nor would it specifically allow for expenses debtors incur in protecting themselves against domestic violence. S. 625 includes a “safe harbor” provision to shield creditors with below-median incomes. The safe harbor provision currently shields non-defaulting parties by allowing them to exercise contractual rights regardless of the automatic stay or trustee avoidance powers. The means test remains among the most controversial aspects of the proposed legislation, and without a thoughtful restructuring, that provision alone could lead to a veto, observers say. Moreover, Ira L. Herman of Parker Duryee Rosoff & Haft in Manhattan said means testing is particularly unfair to New Yorkers because of their high income relative to residents of other states. “The means test will have a negative impact on the administration of bankruptcy cases in New York because New York is a high income/high expense state, and the means test they are proposing would be based on a national formula,” Herman said. “A great number of New Yorkers in need will be subject to a means test because of their high income level based on their New York residence. That will burden the courts and clog the calendars.” Among the other major differences between the bills are the following: � Homestead exemption. The House bill would set a $250,000 cap on homestead exemptions, while allowing states to opt-out. The Senate bill includes a $100,000 cap with no opt-out provision. � Cram down. Under the House version, cram downs � the practice of restructuring loans in a Chapter 13 bankruptcy without creditor consent � are precluded for any debt secured by personal property acquired within five years of filing. The Senate bill would shield under-secured debt (other than automobiles) for six months prior to filing. � Credit card practices. Both bills seek to address what consumer advocates consider predatory lending practices. The House bill, for example, would mandate prominent disclosure of so-called “teaser” rates, or low introductory interest rates offered to customers as an inducement to sign up for a credit card. The Senate bill goes considerably further and would require lenders to conspicuously disclose teaser rates, and make clear that those rates are introductory. Also, under the Senate version most lenders would have to provide an 800 telephone number to provide specific information on the consequences of paying only the monthly minimum. MANY SIMILARITIES Although major differences remain between the two bills � those manifested primarily in the direct debtor-creditor relationship � there are a number of similarities. For example, in a recent presentation at the New York City conference of the American Bankruptcy Institute, Rick B. Antonoff of Cadwalader, Wickersham & Taft in Manhattan noted that the financial contracts provisions of the two bills are virtually, if not literally, identical. In his presentation, Antonoff said the reform bill would substantially expand the the Bankruptcy Code to increase the type of transactions that would come within the safe harbor protection. Antonoff said in the presentation that the financial contracts provisions are “designed to bolster the existing framework and further reduce the risk to non-defaulting financial participants, and thus, to financial markets as well.” Antonoff said further that the bill would fortify asset-backed securitization transactions by amending the section of the Bankruptcy Code defining property of the estate. Moreover, a provision on the handling of international bankruptcies will have a positive impact, according to Herman of Parker Duryee. The proposed legislation would replace current rules with a standard slowly being adopted worldwide, making “the administration of justice in transnational bankruptcies that much more fair as justice will be administered in a similar way here and abroad,” he said. The reform movement, fueled largely by millions of dollars in campaign and soft-money contributions from consumer creditors, was sparked by several years of troublesome spikes in the numbers of consumers seeking bankruptcy relief. Reform advocates maintain that bankruptcy has lost its stigma, and that far too many people are seeking Chapter 7 relief when they could well afford to pay some, or even all, of their liabilities. Opponents, however, suggest that the increase is a direct result of the marketing strategies of lenders, and insist that the free market will itself correct any imbalance. They note that credit cards remains an extremely lucrative business, and point out that only a small percentage of consumers default. Indeed, in 1999 the total number of bankruptcies dipped 8.5 percent, according to the Administrative Office of the U.S. Courts. Last year marked the first time in four years in which a new national record for bankruptcies was not set. Regardless, there is considerable momentum on Capitol Hill to do something to limit access to consumer bankruptcy while requiring greater accountability on the part of borrowers. What, precisely, to do remains uncertain. Jill Kozeny, spokeswoman for Senator Charles Grassley, an Iowa Republican who has lead the charge to overhaul the Bankruptcy Code, said the Senator remains “hopeful” that a compromise will be reached this session. The bill was sponsored in the House by Representative George Gekas, R-Pennsylvania. “Since February, there have been informal conferences going on,” Kozeny said in an interview this week. “We are very near agreement with the House and Senate Democrats on a conferenced bill.” Both of New York’s Democratic senators, Daniel Patrick Moynihan and Charles Schumer, voted against S.625. However, House representatives from New York were divided on H.R. 833. Bankruptcy reform has not yet emerged as an issue in the Hillary Rodham Clinton/Rick Lazio campaign to succeed Senator Moynihan. In the past, Hillary Clinton as First Lady played a major rule in defeating reform proposals, but has not taken a strong position in this election cycle. Representative Lazio, now a Republican congressman from Long Island, supported H.R. 833. Common Cause lists Lazio as one of the three top Congressional recipients of credit industry money last year.

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