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Proposed bankruptcy reforms steamrolling through Congress would hinder consumers from getting out from under their credit card debt and enact significant changes for corporate filers, Connecticut lawyers warn. “The banking lobby has finally gotten its way,” proclaimed Bridgeport, Conn., bankruptcy specialist Richard D. Zeisler of H.R. 333, the “Bankruptcy Abuse Prevention and Consumer Protection Act,” which sailed through the House of Representatives March 1 by a 309-108 vote. The bill is similar to S. 420, which, as of press time, was being debated on the Senate floor. Though no one is certain exactly what measures will be part of the final legislative package, consumer bankruptcy attorneys fear the worst, in large part because President George W. Bush has indicated that he would sign the bill if it clears the Senate. Former President Clinton vetoed nearly identical legislation last year. SEEKING UNIFORMITY The House bill, according to Torrington, Conn., consumer bankruptcy lawyer Audrey B. Blondin, would establish a so-called “means tests” that consumers would have to pass to qualify for Chapter 7 bankruptcy. Those who did not fall into certain income and IRS standards would be steered into Chapter 11 proceedings, in which they would be subject to debt-repayment plans. People’s Bank Executive Vice President and General Counsel William T. Kosturko said proponents of the measure aren’t seeking to create a “debtor’s prison,” but rather a system under which people with sufficient income would be made to repay a reasonable portion of their debts. Studies undertaken by the University of Indiana at Bloomington and the nation’s major credit card companies, Kosturko said, have found that consumers have the financial ability to repay as much as 35 percent of outstanding consumer debt forgiven each year. As a result, “the cost of credit losses . . . gets spread amongst the other consumers who do pay their debts,” he added. In addition, the bill would bring uniformity to the way bankruptcy laws are enforced throughout the country, Kosturko said. Currently, consumers are much more likely to be granted Chapter 7 protection in the Northeast than in the South, he maintained. Blondin, however, calls the proposed reforms “Draconian.” If enacted, debtors would be far less likely to receive a “fresh start,” while credit card companies would be granted more opportunities to block consumers from discharging certain debt, such as credit card cash advances. “It’s very bad for women and children,” she maintained. With less relief from credit card bills, consumer filers, Blondin predicted, would be less likely to make good on their child-support and alimony obligations as well as payments to secured creditors, such as mortgage lenders. OVERBURDENING THE SYSTEM? As currently proposed, the bill also does not account for cost-of-living differences in deciding Chapter 7 eligibility, contended Zeisler, of Bridgeport’s Zeisler & Zeisler. The proposed reforms also don’t address what Zeisler believes to be the “root of the problem . . . which is, credit is too available,” he said. In addition, the administrative burden of deciding who’s eligible for Chapter 7 protection will “totally overburden the system,” Zeisler insisted. Bankruptcy judges have criticized the legislation for creating only 23 additional judgeships, arguing that many more are needed. Congress has not authorized additional bankruptcy judgeships since 1992, when it approved 35 new positions. As for proposed changes for corporate filers, one provision of the House bill would cap the exclusive period for a debtor to file for Chapter 11 bankruptcy protection at 18 months. If the ailing business didn’t submit a reorganization plan by that point, then creditors would be allowed to seek court approval for their own plans. The bankruptcy code currently does not have a time limit. The change could be burdensome for large companies filing for Chapter 11 protection, attorneys and bankruptcy experts say. The proposed legislation also includes a controversial provision that narrowly applies to retailers that file Chapter 11. The proposal sets a 120-day limit for a retailer to decide whether it will continue with or turn over its leases to a landlord. James J. Tancredi, a bankruptcy and workout attorney at Hartford, Conn.’s Day, Berry & Howard, said the provision would make it harder for retailers to resell their leases in order to pay off their debts. Still “up in the air,” according to Tancredi, are proposals to address the tendency of large corporations to file bankruptcy in debtor-friendly Delaware, a source of frustration for bankruptcy practitioners in Connecticut and other states. The House bill, Tancredi said, seeks to restrict venue to a troubled corporation’s principal place of business, while the bill that cleared the Senate Judiciary Committee remains silent on the issue.

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