Bankruptcy Bill Would Add To Problem

Mon. July 10, 2000 12:00 AM by Business Wire

Champaign, IL - Congress is on the brink of passing a bankruptcy "reform" bill that would increase the inconsistencies and unfairness of the present system, a University of Illinois law professor says.

Charles J. Tabb, a nationally known specialist in bankruptcy law, faults the bill as "unwieldy, unfair and mean-spirited" to the average debtor, while leaving untouched big breaks for wealthy families filing bankruptcy.

Tabb is particularly disturbed by the failure of Congress to address the homestead exemption in Texas, Florida and three other states. "If you live in Florida or Texas, you can keep a $10 million mansion after filing for bankruptcy," he said. "On the other hand, if you live in Maryland or Delaware, you can be evicted from a tiny clapboard house worth $10,001. The injustice of allowing a debtor in one state to keep a mansion while denying the other a modest shelter is obvious."

In 1997, a bipartisan blue-ribbon commission recommended capping the homestead exemption at $100,000. The current House bill suggests a $250,000 cap on homestead exemptions, but then allows the states to opt out of the cap. "Congress has rejected the commission's sensible and fair recommendation by succumbing to the hue and cry of states' rights," Tabb said. "The only token check that the bill places on the rich Texan and Floridian is to require the debtor to be savvy enough to buy his palatial home two years before he files bankruptcy."

Another largely meaningless gesture toward reform is to prohibit an exemption on a home purchased by a debtor with the intent to defraud creditors. "However, since the courts have long established that it is not fraud to buy exempt property, that apparent limitation in reality is meaningless," Tabb said.

The Illinois law professor also faulted the means tests that is the centerpiece of the bill. "The proponents of the bankruptcy bill proclaim it will reward honest, fiscally responsible debtors and rein in abusive debtors. But under the bill's truly bizarre system of figuring out who has the 'means' to pay their creditors and who does not, buying a $201,000 Ferrari a day before filing bankruptcy and incurring a secured monthly debt of $4,075 does not count," Tabb said.

Much of the bill's impetus comes from the credit-card industry, which hopes to squeeze $3 billion extra from debtors every year, Tabb said. Contrary to assertions by the industry, he said that the vast majority of consumer bankruptcies occur not from irresponsible spending, but because of divorce, unemployment, illness and uninsured medical costs.

The greatest increase in bankruptcy cases in the 1990s involved single or divorced women raising children. "We should not let people use bankruptcy to escape bills they can afford to repay, but we also should not enact legislation that places terrible burdens on the poor, sick or struggling, especially while the credit industry is enjoying record profits," Tabb said.

News, photos provided by Business Wire.