RESEARCH Business Government

CONGRESS
Bankruptcy reform bills would allow Enron-type
'off-book' deals

Mark Reutter, Business Editor
(217) 333-0568; mreutter@uiuc.edu

3/1/02

CHAMPAIGN, Ill. — One way to test Congress' resolve in resisting the blandishments of special interest money is to see how a conference committee handles the bankruptcy bills now before it, a University of Illinois expert says.

Last year, the House and Senate passed bankruptcy bills that "were loaded down with goodies for corporate givers to Congress," said Charles J. Tabb, a nationally recognized expert on bankruptcy law at the University of Illinois. A conference to reconcile the two bills is expected soon.

Tabb, the author of "The Law of Bankruptcy," has been one of more than 100 law professors who have criticized the bills as biased against poor and middle-class families, while leaving untouched breaks for corporations and wealthy families filing for bankruptcy protection.

The political fallout of the Enron bankruptcy has refocused attention on several provisions of the bills. For example, as currently written, both versions allow assets moved off a corporation’s balance sheet to be excluded from a company’s estate in a bankruptcy proceeding.

If approved, the billions of dollars that Enron executives funneled through controversial "special purpose vehicles" would not be available to creditors or former employees. "In addition to being unjust to employees who lost their life savings in now-worthless 401(k) retirement plans, the provision would encourage companies to move transactions off their books to escape creditors," Tabb said. What's more, such transactions could be done without public notice under the pending bills.

A provision in the House bill permits people filing for bankruptcy to shield their homes, whatever their worth, from creditors in five states, including Texas. This opens the possibility that Enron officials owning multi-million-dollar homes in Houston could thumb their nose at creditors.

While Enron has received bad publicity for its outsized contributions to Congress, supporters of the bankruptcy bills have spread even larger amounts of cash and "soft money" around Washington.

MBNA America, the nation's largest credit-card issuer, was the single biggest contributor to the Bush presidential campaign in 2000 ($237,675) and gave $100,000 for Bush inauguration events. Consumer credit companies – including banks, retail chains and auto finance companies – have been leading campaign contributors to both political parties, giving more than $30 million since 1997 individually and through political action committees.

Much of the impetus to change the Bankruptcy Code has come from these groups, which are expected to gain $3 billion a year extra from debtors under a "means test" stipulated under the bills. In testimony, Tabb has faulted the means test as "unwieldy, unfair and mean-spirited."

Contrary to representations by industry-sponsored groups, the majority of personal bankruptcies are not caused by "irresponsible scofflaws," the UI expert said, but by middle-income persons grappling with medical problems, divorce or the loss of a job.