LEXIS-NEXIS® Academic Universe-Document

LEXIS-NEXIS® Academic

June 26, 2000, Monday, FINAL EDITION

SECTION: MONEY; Pg. 10B

LENGTH: 747 words

HEADLINE: Should debtors be able to keep homes? Critics say bankruptcy loophole aids the rich

BYLINE: Christine Dugas

BODY:
The bankruptcy reform bill will let wealthy deadbeats off the
hook, critics say -- even though it was supposed to crack down
on debtors who abuse bankruptcy laws.

A controversial loophole in the law allows debtors in certain
states to use their homes to shelter unlimited amounts of money
from creditors.

In February, the Senate tried to put a $ 100,000 cap on the exemption,
but that provision was recently watered down.

"Now it's just a modest speed bump for the rich," says Harvard
law professor Elizabeth Warren.
The controversy is heating up because House and Senate leaders
are close to reaching an agreement on the bill after years of
wrangling. The agreement could pave the way for its passage as
early as this week.

President Clinton is among the bill's critics. On June 9, he threatened
to veto the legislation. Among other things, Clinton said, he
is concerned that the final bill "may not adequately address
the problem of wealthy debtors who use overly broad homestead
exemptions to shield assets from creditors."

Currently, debtors who file for Chapter 7 bankruptcy must liquidate
most of their assets and use the proceeds to pay creditors. But
the federal bankruptcy code lets them keep some things exempt
from liquidation. States usually determine which assets -- such
as clothing, furniture, cash and home equity -- are exempt.

Five states -- Texas, Florida, Iowa, Kansas and South Dakota --
have unlimited homestead exemptions. The current bill lets debtors
in states such as Texas take advantage of the unlimited homestead
exemption if they have lived in the state and owned a home there
for two years before filing for bankruptcy. They could shelter
millions from creditors if they have a multi-million dollar home.

Sen. Kay Bailey Hutchison, R-Texas, says the Texas homestead exemption
is intended to prevent farmers and ranchers from losing their
livelihood. "This is a fair provision -- one that blocks the
federal government from trampling on states' rights," she says.

But some experts say what may be good for Texas is bad bankruptcy
law. "The two-year waiting period won't catch people who want
to use the unlimited homestead exemption as a means to shelter
assets, because they have the capacity to hire lawyers and delay
the collection process," says Hank Hildebrand, a Chapter 13 bankruptcy
trustee in Nashville.

But middle-income families in Texas who don't have the means to
stave off bankruptcy would be limited to a homestead exemption
of $ 100,000 if they file for bankruptcy within the two-year period.

Many bankruptcy experts call the system unfair and advocate uniform
federal exemptions. A poll released June 13 by the Consumer Federation
of America showed that 84% of Americans oppose the unlimited homestead
exemption.

Several years ago, the Bankruptcy Review Commission, an independent
panel appointed by Congress, proposed setting a floor of $ 20,000
and a ceiling of $ 100,000 on homestead exemptions in all states.
But Congress didn't follow its advice.

The homestead exemption is just part of a bill aimed at reducing
bankruptcy filings. Personal bankruptcies peaked at 1.4 million
in 1998. Last year, they dropped 8.5%. And in the first quarter,
they declined 5.8% from a year earlier.

Creditors say that the current system lets debtors off the hook
too easily. But consumer advocates say the bill targets cash-strapped
families who can least afford the burdens it imposes.

"They are clamping down on low-income debtors and leaving the
door wide open for high-income swindlers," says Gary Klein, senior
attorney for the National Consumer Law Center, a Boston-based
advocacy group.

Holding on to home

Some examples of well-to-do debtors who have taken advantage of
the unlimited homestead exemptions:

* Wall Street financier Paul Bilzerian spent millions to build
an 11-bedroom Florida estate just before filing for bankruptcy.

* Former baseball commissioner Bowie Kuhn bought a $ 1 million
mansion in Ponte Vedra Beach, Fla., two weeks before his New York
firm filed for bankruptcy.

* Actor Burt Reynolds kept his $ 2.5 million Florida estate despite
debts of more than $ 10 million.

* Former Texas governor John Connally declared bankruptcy in 1987
but kept his 200-acre ranch with a large fieldstone home and swimming
pool.

FOR TEXT WITHIN GRAPHIC "Personal bankruptcies
soar" PLEASE SEE MICROFICHE

GRAPHIC: GRAPHIC, B/W, Elizabeth Wing, USA TODAY, Source: The American Bankruptcy Institute (BAR GRAPH); Protected: Wall Street financier Paul Bilzerian built this multimillion-dollar home in the Tampa Bay area shortly before filing for bankruptcy, which protected his home from seizure by creditors.

LOAD-DATE: June 26, 2000