Kate Snow: Significant changes in bankruptcy law

Kate Snow

CNN Congressional Correspondent Kate Snow has been covering the debate and vote on changes to the federal bankruptcy code, which is the most sweeping overhaul of the code in 20 years.

Q: What are the most significant aspects of this bankruptcy legislation?

SNOW: The biggest change is that people who file bankruptcy will be subject to a means test. Anyone making over a certain amount of income would be forced to file under Chapter 13 rather than under Chapter 7 bankruptcy. This means that they would have to pay off some or all of their debt -- they would not be able to wipe the slate clean.

Another big change has to do with what is called the homestead exemption. This bill tightens a loophole in the current law that enables very wealthy people who file for bankruptcy to keep their homes.

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One other important change involves car loans. There is a provision in this bill that changes how you pay off your car loan if you file for bankruptcy. Under current law, those filing for bankruptcy who still have a car loan must only pay the blue book value of the car.

For instance, if you still owe $14,000 on your loan but your blue book value is only $8,000, you only pay $8,000. The big automobile makers lobbied to change that. The bill that passed tonight contains a compromise offered by Sen. Patrick Leahy (D-Vermont) which says that if you owned your car for three years or less, you must pay off the total amount, not just the current book value. Originally, Republicans wanted people to pay if they owned the car for five years or less.

Q: What are the income limits?

SNOW: According to Sen. Chuck Grassley (R-Iowa), who wrote this bill, each state will have different limits. However, the average cutoff point for a family of four would be about $52,000. In other words, this family files for bankruptcy, it would have to do so under Chapter 13 and pay off all or some of the debt. For a one-income family, the limit would be about $32,000.

Q: What is the means test?

SNOW: It is a complicated and detailed test to calculate a debtor's income, and determines whether the debtor qualifies for Chapter 7 or Chapter 13 bankruptcy. In calculating the debtor's income, according to Sen. Grassley, living expenses are deducted as permitted under Internal Revenue Service standards. It also permits deductions for expenses "to protect the family from domestic violence," actual expenses for the care of elderly or ill non-dependent family members, private school tuition up $1,500 a year, and other expenses.

Sen. Paul Wellstone (D-Minnesota), the strongest opponent of the legislation, wanted to change the bill so that only the debtor's last two months of income would be calculated. However, he lost that battle. The current bill looks at the debtor's last six months of income.

Q: Although there was not a great deal of opposition to this legislation, the opposition was vocal. What are the key differences between the supporters and opponents of this legislation?

SNOW: There are two ways to look at the current bankruptcy system. Those who supported this legislation, both Republicans and Democrats, will tell you that people are abusing the system. The number of bankruptcies over the past 10 years has almost doubled. Supporters say that people have learned that they can be financially irresponsible yet have the slate wiped clean through bankruptcy.

Sen. Wellstone and about a dozen of his colleagues will tell you that people need bankruptcy protection because some people incur exorbitant medical bills because of illness or injury. These senators are afraid that this bill won't provide the protection that some Americans need.

Q: How did Lloyd's of London fare in this bill?

SNOW: They did very well. There was a small part of this bill aimed at a few hundred Americans, many of them millionaires, who owe Lloyd's of London a great deal of money. These people were investors in Lloyd's. When Lloyd's incurred enormous losses in the late 1980s and 1990s, these investors were told that they had to cover the claims against the firm. They did not. They owe millions of dollars to Lloyd's. Last fall, a provision was added to the bill specifically to protect these people to ensure that they would not owe Lloyd's a penny.

Today, Sen. Russ Feingold (D-Wisconsin) sponsored an amendment, which was passed, that stripped out the language about Lloyd's of London. As the bill is now written, these people have no exemption, Lloyd's can keep pursuing them.

Q: When can President Bush expect to have a bill he can sign?

SNOW: This bill which passed the Senate tonight is now going to a conference committee. When the House and Senate do not approve the same version of a bill, a conference committee is formed to reconcile the differences between the two versions. So, this bankruptcy bill is not yet in final form.

One interesting political note regarding this conference committee: It will be the first conference committee appointed under the power-sharing agreement in the 50-50 Senate. It will be interesting to see the makeup of the Senate representation to the committee.

Q: When the bill is finally signed into law, when does it become effective?

SNOW: The bill's provisions become effective six months after enactment. That means as the law is signed, people will have six months to file under the old rules. Some bankruptcy experts have said that bankruptcy lawyers are going to urge people to file bankruptcy claims quickly, so we could actually see an increase in the number of filings rather than a decrease.

Q: Many provisions were controversial. Were there any that had almost unanimous support?

SNOW: There were pieces of the bill that were supported almost universally. Sen. Leahy introduced an amendment that dealt with privacy and prevents the names of children being listed on the documents. Sen. Orrin Hatch (R-Utah) got up and endorsed it. The amendment passed by a vote of 99 to 0.

Q: Did this legislation create any strange political bedfellows, either in support or opposition to it?

SNOW: In getting his legislation through the Senate, Grassley did work with Sen. Robert Torricelli (R-New Jersey), a person many would consider a liberal Democrat. That demonstrates the across-the-board support this bill has had.

Senate passes divisive bankruptcy bill
March 15, 2001

U.S. Senate
U.S. House of Representatives
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