Quote by Jay Schechter, JD          

By: Harriet Johnson Brackey                     March 16, 2001

The U.S. Senate voted Thursday to make it harder for people to erase their debts in bankruptcy courts and, in a direct attack on Florida and Texas, to close the door to wealthy debtors who use state laws to shield their assets in luxury homes.

After massive lobbying by the credit card industry, senators voted 83-15 for the biggest overhaul of federal bankruptcy law in two decades.

The bill includes an amendment that would alter a state`s right that dates back to 1868. That`s when Florida voters approved the state constitution, which includes a provision putting a person`s home off limits to creditors. The Senate put a $125,000 cap on home equity that could be protected.

If the cap becomes federal law, it ``would threaten homeownership for millions of American families,`` Sen. Bob Graham, D-Fla., said before the vote. Nonetheless, Graham voted for the overall bill, while Florida`s other Democratic senator, Bill Nelson, voted against it.

The Senate bill now must be reconciled with a version passed by the House March 1. Because there is little difference on the legislation`s main provisions -- which essentially close the door for anyone other than those of limited income to wipe out their debts -- congressional leaders expect a final measure to be sent quickly to President Bush, who has indicated he will sign it.

However, the cap on home equity exemptions is expected to be the target of intense opposition in the conference committee, and that amendment as well as others could be eliminated. President Bush, a former Texas governor, has said he opposes the cap.

``We`re very encouraged by the direction of the bankruptcy legislation,`` White House spokesman Ari Fleischer said Thursday. ``However, we continue to work with leaders on the Hill. The president is looking forward to the presentation of the bill that he can sign.``

Sen. Kay Bailey Hutchison, R-Texas, who has taken a lead on the issue, said, ``I`m going to do everything I can to fix it in conference. It did get fixed last time and I`m going to insist we get exactly what we had last time and nothing different.``

Currently, a person who files for bankruptcy protection in Florida can hold on to not only the full value of a home but also to other major assets, such as retirement accounts.

That has given Florida a reputation as a debtors haven. Sen. Herbert Kohl, D-Wis., cited financier Paul Bilzerian and actor Burt Reynolds in his speech Thursday as examples of people living in Florida mansions while trying to discharge big debts. The unlimited homestead exemption is ``the most flagrant abuse of the bankruptcy system,`` he said as he offered the amendment.

In Texas and Florida alone, Kohl said congressional investigators project the cap would affect 400 cases a year, in which debtors write off $120 million.

Removing Florida`s unlimited homestead exemption would have a ``huge`` impact, said Jay Schechter, an attorney with Singer Xenos Investment Management in Coral Gables . If, for example, someone facing a major debt has no assets other than a pricey home, that person unlike before ``could be forced to sell the house and give up the money or create a scenario in which payment is made.``

Bankruptcy overhaul has been pushed by the banking, credit card and retail credit industries, which have spent millions of lobbying dollars and which donated heavily to the recent election campaigns. Unions, consumer groups as well as local bankruptcy attorneys and judges have strongly opposed it.

The Senate bill, if it becomes law, would for the first time include a ``means test`` designed to force more debtors out of Chapter 7, in which their obligations are essentially erased, and into Chapter 13, which places debtors on a repayment plan. If the bill becomes law, debtors who make more than their state`s median income and can afford to pay 25 percent of their debts will not be eligible for Chapter 7.

States have been allowed, until now, to design their own protections for debtors if they decide to opt out of the exemptions specified in the federal bankruptcy code. When a debtor in Florida files for federal bankruptcy protection, the debtor simply uses the generous Florida exemptions, which include homes, annuities, retirement accounts such as 401(k) accounts, pension benefits and big parcels of rural land. The exemptions put those beyond the reach of creditors.

In addition to home equity, the Senate also wants to limit state protection for Individual Retirement Accounts. The bankruptcy bill includes a cap for an IRA up to $1 million. Senators early this week defeated an amendment by Sen. Edward Kennedy, D-Mass., to remove that cap.

Because of Florida`s protection for annuities -- which hasn`t been challenged in Congress -- Schechter suspects that money will flow into these investment contracts from potential bankruptcy filers, if the Senate bill becomes law.

Congressional efforts to limit state exemptions put the federal law into conflict with Florida law. Asked which would likely prevail in a challenge, Chief Judge Robert Mark of the U.S. Bankruptcy Court in Miami said, ``I`m pretty certain Congress has the authority to preempt any state laws with exemptions.``