Bankruptcy - Recent Developments In Federal Bankruptcy Law

Brought about by a surge in bankruptcy filings and public concern over inequities in the system, the Bankruptcy Reform Act of 1994 is one illustration of Congress's continuing effort to protect the rights of debtors and creditors. Consistent with Congress's goal of promoting reorganization over liquidation, the legislation made it easier for individual debtors to qualify for chapter 13 reorganization. Previously, individuals with more than $450,000 in debt were not eligible to file under chapter 13, and instead were forced to reorganize under the more complex and expensive chapter 11 or to liquidate under chapter 7. The 1994 amendments allow debtors with up to $1 million in outstanding financial obligations to reorganize under chapter 13.

The new law helps creditors by prohibiting the discharge of credit card debts used to pay federal taxes, or those exceeding $1,000 incurred within sixty days before the bankruptcy filing. In this way, the law deters debtors from shopping sprees and other abuses just before filing for bankruptcy. Creditors also benefit from new provisions that set forth additional grounds for obtaining relief from the automatic stay, and require speedier adjudication of requests for relief from the stay.

It looked as though the bankruptcy system would see more reform with the introduction of the Bankruptcy Reform Act of 1998. The act was a response to a report issued by the National Bankruptcy Review Commission, which recommended that the existing code be fine-tuned in order to provide incentives to debtors to file chapter 13 reorganization and to increase debt repayment. The report was issued in response to concern that debtors were taking advantage of the bankruptcy system, evidenced by the fact that a record number of consumers filed for bankruptcy during a time of economic prosperity.

But the Bankruptcy Reform Act of 1998 was never enacted, and it turned out to be only the beginning volley in one of the most tortuous paths any legislation has seen. The House of Representatives has passed a bankruptcy reform bill no fewer than seven times since 1998, with the Senate close behind, and yet bankruptcy reform has yet to be passed into law as of the time of this writing, despite the fact that President GEORGE W. BUSH and the majorities in the current House and Senate all currently favor some sort of bankruptcy reform.

All of the bankruptcy reform legislation introduced since 1997 shares the same main thrust. Individual debtors would be discouraged from filing under chapter 7, which allows them to liquidate their debts, and would be encouraged to file under chapter 13 instead. The filing under chapter 7 will be presumed abusive if the debtor is deemed able to pay a portion of his debts under a formula set forth in the Reform Act. Debtors who have an ability to repay a portion of their debts out of future income will be forced to reorganize under chapter 13.

The main criticism of all the bankruptcy reform acts that have been passed since 1997 is that they favor creditors at the expense of debtors who truly might not be able to pay, but who technically fail the means test that is used to determine whether they can make some form of repayment. But this criticism has not been the only reason why bankruptcy reform has not passed. For example, the Bankruptcy Reform Act of 2001 failed because a provision was included to prevent anti-abortion protesters from avoiding criminal fines by claiming bankruptcy. Anti-abortion legislators who otherwise would have supported the bill joined forces with opponents of the bill to defeat it. Another bankruptcy reform act passed in the House of Representatives by a vote of 315–113 in March 2003.

While Congress was considering bankruptcy reform, the U.S. Supreme Court handed down two decisions that further defined the limits of bankruptcy law. In Cohen v. De La Cruz 523 U.S. 213, 118 S. Ct. 1212, 140 L. Ed. 2d 341, a unanimous court held that where a debtor committed actual fraud and was assessed punitive damages, the debt would be not dischargeable because the Bankruptcy Code's prohibition against the discharge of fraudulently incurred debts is not restricted to the value of the money, property, or services received by the debtor. In Young v. U.S., 535 U.S. 43, 122 S. Ct. 1036, 152 L. Ed. 2d 79. The court held that three-year lookback period allowing IRS to collect taxes against a debtor was tolled during pendency of a debtor's earlier chapter 13 proceeding.

Apart from developments in the law, bankruptcy was much in the news during the opening years of the twenty-first century as an economic downturn forced many of American's most prominent companies into chapter 11 bankruptcy. In 2001, the energy-trading firm Enron filed for the biggest corporate bankruptcy in history, with $64 billion in assets. Less than a year later, TELECOMMUNICATIONS firm World-Com topped that record when it listed $104 billion in assets in its bankruptcy filing. Other prominent American companies filing for bankruptcy included retailer K-Mart, financial services firm Conseco, and United Airlines parent company UAL.