Senate Passes Bankruptcy Bill

The Senate has passed a major overhaul of national bankruptcy laws, clearing the measure for quick action in the House.

The consumer bankruptcy bill, which addresses some foreclosure issues, easily cleared the Senate by a 74-25 vote after two weeks of debate.

Republican leaders managed to defeat numerous amendments offered by Senate Democrats that would have made the bill (S.256) unacceptable to the House.

One amendment by Sen. Richard Durbin, D-Ill., would have prevented mortgage lenders from pursuing claims in Bankruptcy Court if they violated a federal anti-predatory lending law. The Senate voted 58-40 to kill the Durbin amendment. Sen. Durbin offered a similar amendment in 2001 and it failed by only one vote.

American Bankers Association executive vice president Edward Yingling said the bankruptcy bill is the product of eight years of congressional debates and amen-dments. "The time has come for this fair and balanced bill to become law."

President George Bush has signaled that he is ready to sign the bankruptcy bill.

The 500-page bankruptcy bill contains several provisions that would benefit mortgage lenders and servicers.

One provision sought by the Mortgage Bankers Association removes a $4 million cap on single-asset bankruptcies so that owners of large commercial properties cannot drag out the bankruptcy process and delay foreclosure at the lender's expense. "We are very pleased the Senate has passed this legislation," MBA senior vice president Kurt Pfotenhauer said.

Another provision would make it more difficult for delinquent homeowners to employ multiple bankruptcy filings to delay foreclosure.

The bankruptcy bill also closes a loophole that allows apartment renters to avoid or delay eviction. S. 256 also makes homeowner and condo association fees non-dischargeable debts.

While the bill contains some provisions for the real estate industry, it is mainly designed to make it difficult for borrowers to escape credit card, auto and other consumer debt by filing for bankruptcy.

Bankruptcy filers with incomes above the area median will likely have to pay a portion of the debt under a five-year repayment plan. These plans leave homeowners little disposable income to meet unexpected expenses and it could, if the borrower falls behind on mortgage payments, complicate loss mitigation efforts.

The bill also sets a nationwide homestead exemption of $125,000, which allows homeowners to shield $125,000 of equity from creditors. Cred-itors have a claim on the excess equity, however. The debtors can chose to pay their creditors over time or immediately sell the house, according to Jeff Morris, a resident scholar at the American Bankruptcy Institute.

The bankruptcy bill still allows homeowners to take advantage of higher or unlimited homestead exemptions in their home states, provided they have lived in that state for 40 months.

This allows residents of Florida and Texas to enjoy an unlimited homestead exemption and shield multimillion-dollar mansions from creditors. If they don't meet the 40-month residency requirement, however, they only get to shield $125,000 of real estate equity.

S. 256 establishes a residency requirement, Mr. Morris explained, and an individual cannot qualify for an unlimited homestead exemption simply by owning a vacation home in Florida.

"Generally speaking, you have to permanently reside at that property," the ABI resident fellow said.

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