The following editorial appeared in today's edition of The Washington Post:
The bankruptcy reform in Congress looks like a good deal for the financial industry. For a modest investment - perhaps $20 million in political contributions and another $5 million or so to grease the palms of lobbyists - banks, credit card companies and other lenders are hoping for legislation that may squeeze $3 billion extra from bankrupt debtors every year. But the reform is less obviously good policy. It has been negotiated behind closed doors and will soon be folded into some unrelated legislation and sent over to the White House. Given the dubious mixture of lobbying and secrecy that has advanced the measure, President Clinton should think twice before signing it into law.
Bankruptcy reform involves balancing two principles. Debtors must not be allowed to use the law to avoid repaying loans when they can actually afford to do so; on the other hand, debtors should not be forced into serious hardship. The reform in Congress probably will increase hardship: It toughens the rules for ordinary debtors, most of whom declare bankruptcy not out of irresponsibility but because of catastrophic medical bills, unemployment or divorce. At the same time, the reform does too little to clamp down on an egregious loophole known as the homestead exemption, which is used by wealthy debtors.
Under existing law, debtors in Texas, Florida and three smaller states can prevent lenders from touching any wealth that is locked up in their homes. This applies no matter how valuable the home is: If you own a million-dollar house and few other assets, you can thumb your nose at creditors. Texas politicians - including Gov. George W. Bush, Rep. Tom DeLay and Sen. Kay Bailey Hutchison - have been determined to protect this loophole. So have their counterparts in Florida, notably Rep. Bill McCollum, who is campaigning for the Senate.
Unfortunately, this loophole lobby has defeated a good proposal to cap the homestead exemption at $100,000. Instead, Congress seems to have settled on two minor qualifications to unlimited exemptions. First, if creditors can prove that a house was acquired specifically in order to evade repayment, they can recover their money; but proving this is likely to be impossible. Second, the home owner must have lived in one of the loophole states for at least two years and had the house for that long also. This will prevent millionaires all over the country from moving to Boca Raton the day before they file for bankruptcy. But millionaires usually have lawyers who can fend off creditors for two years while their clients establish residency, so this second qualification won't have much effect either.
Ordinarily, a proposal to tighten the screws on average families while allowing millionaires a loophole would attract some robust criticism. But the White House and congressional Democrats are oddly quiet. They suggest that getting any compromise out of the Texas and Florida delegations was a triumph; and that by establishing the principle of federal limits on state rules, they have made it easier to tighten the limits down the road. But it is hard to escape the suspicion that politicians on all sides just want to bury the homestead issue, so that they can get on with passing a bill for which they have been generously paid.
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