With the congressional season winding down, local industry advocates are confident at least one important banking bill will pass before the current session’s close, predicted for the end of October.

The bankruptcy reform bill may resolve problems many banks have been paying greater attention to since the economic downturn of the late 1980s. According to Daniel J. Forte, president of the Massachusetts Bankers Association, the bill will tighten up bankruptcy legislation and prevent banks from losing money.

One problem with the current laws became evident during the mass real estate depreciation of the late 1980s, he said. During that period, many condominiums lost substantial portions of their value. Because of current bankruptcy regulations, consumers were only required to pay back what the property was actually valued at during the foreclosure period, regardless of the often much higher sum borrowed to purchase the property. If a condominium was purchased at $100,000 and at the time of the bankruptcy filing was worth $70,000, the bank would lose $30,000, Forte said.

According to Tanya Duncan, director of federal regulatory and legislative policy for the MBA, the bill is an important issue for Massachusetts bankers. The number of bankruptcies has increased nationally despite a good economy, she said.

“Bankruptcy [filings] increased from 330,000 in 1980 to 1.4 million in 1999, so that’s what caused the legislation,” said Duncan.

“There are a number of abuses taking place within the system where individuals that could afford to pay their debts back have been given absolution,” she said.

Although the exact wording of the bankruptcy reform bill is still under negotiation between Congress and White House policy makers, the bill would include the so-called cram down provision to eliminate the burden faced by banks when residential values fall.

“The cram down provisions … are really important to the small banks and borrowers,” said Forte.

In addition, the bill would include a means test to determine whether an individual could file a Chapter 7 bankruptcy, under which debts are discharged, or Chapter 13 bankruptcy, which requires a three- to five-year repayment plan, said Duncan. This will prevent another type of abuse which has increased in occurrence, she said.

“Wealthy individuals have used the bank code to protect their assets when they could have paid their debts,” said Duncan.

Consumers end up paying the price for abuse of the current code in the form of higher costs, Duncan said. “It’s been estimated that over $40 billion in consumer debt was erased through bankruptcy and that resulted in each American family paying over $400 a year [extra],” she said.

“It’s really hard to say at this point what the final package will look like but there will certainly be a [means] test,” said Duncan.

Despite the optimism expressed by the MBA, other industry watchers said the bill has little chance of passing during the 106th Congress.

“Slim,” is how Samuel Gerdano, executive director of the American Bankruptcy Institute, characterized the bill’s chances of passing this session.

Eye on Elections
In February of this year, the bill had enough support to pass in both the House and Senate with veto-proof margins, he said. But shortly thereafter, women’s advocacy groups, pro-choice groups and others voiced disapproval over attachments to the bill, resulting in it becoming “stuck in the mud,” he said.

“Initially, when the Senate bill passed in February, it passed with several non-banking provisions which became controversial – for instance, increasing the minimum wage and a number of tax breaks,” he said. These issues became a major sticking point.

“More recently, the bill has been hung up on other issues. The minimum wage has been separated [out] but there’s an abortion subject attached to it, and once you have an abortion tenant with it, it’s hard to pass it,” Gerdano said.

Currently, House members in favor of the bill are looking to attach it to a bill that is likely to pass, said Duncan. “At one point they were considering a transportation bill appropriation,” she said.

“[President Clinton] has threatened veto of the bankruptcy reform legislation twice over a few issues. One of them is a minimum wage provision and another is an anti-abortion violence amendment [which was] included,” said Duncan. Pro-choice advocates have voiced concern that, under the proposed bill, those ordered to pay restitution if found guilty of anti-abortion violence would be able to discharge their debt through bankruptcy.

“They’re working on a compromise on this issue and they’ve been in contact with the White House … and they’ve been working with other leaders of Congress,” she said.

Gerdano said he doubts the measure will pass because of the election season in which the bill has fallen. “People have an eye on Nov. 7. It is a priority of the Republican leadership. So Senate Democrats really have no incentive to give the opposing party a legislative victory, especially if they think in another month they may have the [congressional] majority,” he said.

The MBA supports the overall bill, said both Forte and Duncan.

“It’s not the perfect piece of legislation but, by and large, I believe it’s a fair bill. It does move the priority for women and children from seventh priority to first priority, which was a favorable change from the current bankruptcy laws,” said Duncan. This would mean that child support and alimony debt would be in the first pool of debtors paid by the person filing bankruptcy.

The bill has a number of problems which legislators will have to overcome, according to Gerdano. The scope of relief available to individual consumers is substantially narrowed, he said. Secondly, the bill does not address the mechanics of how certain provisions actually would work. “For example, the bill requires as a pre-condition for filing that all consumers go through a period of debt or credit counseling. On the face of it, it sounds like a good idea … However, there’s over 1.3 million new bankruptcies filed every year and there just aren’t enough credit counseling services to meet that demand. The bill makes no provisions on how to pay for it,” he said.

Currently, the bankruptcy problem has subsided somewhat. The number of filings have fallen by 8 percent since 1998, which is a modest decrease, said Gerdano. “It is typical at the end of an economic expansion that there is a slight plateau, then a slight decline,” he said. Filings under a sustained expansion do drop a little bit, but they haven’t dropped back to 1985 levels, he said.

The decline in filings is due to low interest rates and high employment, which has given households a chance to catch up on their balance sheets, he said. “But if there is an economic downturn, then the people will have a problem meeting their obligations if they come due,” he said.

Considering the amount of back and forth the bill has to go through before all parties interested in the bill are satisfied, William Zewadski, co-chairman of the American Bar Association’s Bankruptcy Litigation Subcommittee, said he doesn’t expect the legislation to pass. With the lobbying efforts and politicizing the bill has gone through, he said it is more likely to receive serious consideration in the next congressional session instead.