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Bankruptcy bill pushes debt repayment: Proposal could make it harder for individuals to escape debt, put limitations on corporate reorganizations

March 14, 2005

Upon seeking bankruptcy protection in late 2002, Conseco Inc. initiated a plan to shower key executives with millions of dollars in retention bonuses if they prevailed in reorganizing the company.

The windfall for the six officers, totaling more than $9 million, is just one of many instances in which impoverished corporations have sought to recover from bankruptcy by dangling lucrative incentives to deter executives from fleeing.

But in the aftermath of such scandals as Enron Corp. and WorldCom Inc. (now MCI Inc.), U.S. senators from both parties want to prevent what they perceive as corporate-bankruptcy abuses.

Pending legislation that would make it harder for consumers to walk away from their debts includes amendments that would limit companies from paying insiders retention bonuses and severance payments. The bill also would require special trustees to be appointed in bankruptcy cases in which corporate fraud is suspected.

Specifically, the amendments introduced by Sen. Edward Kennedy, D-Mass., would strengthen the ability of bankruptcy courts to annul payments to corporate insiders made by companies in financial distress. Supporters argue the money paid to executives should instead compensate workers, retirees and other creditors.

Opponents of the bankruptcy bill, meanwhile, say it would be difficult to replace the workers most familiar with the company during such turbulent times.

Steve Ancel, a bankruptcy lawyer at Indianapolis-based Sommer Barnard Attorneys PC who represented several borrowers who took out loans to buy nowworthless Conseco stock, understands both sides of the argument.

"You need to offer some sort of inducement, but the inducement doesn't need to border on golden parachutes," he said. "It shouldn't be, 'Stay with us and you'll never have to work again.'"

One of the more egregious examples occurred during the Kmart bankruptcy, in which former CEO Charles Conaway walked away with a golden parachute worth at least $9.5 million. Under the plan, Conaway would have received an extra $6.5 million for staying through July 2003. The company filed its Chapter 11 in January 2002.

Those on the receiving end of the fortunes usually share some blame for steering their companies toward bankruptcy, so why pay them anything at all, argued Paul Hodgson, a compensation expert at The Corporate Library, a Portland, Mainebased independent research firm.

"I think it's a fairly intelligent part of the legislation," Hodgson said. "In many circumstances, payments have to be approved by the creditors. This part of the legislation may extend the authority of the creditors over different parts of the compensation."

Gary Hostetler, a partner at Indianapolis-based law firm Hostetler & Kowalik PC, has been involved in both consumer and commercial bankruptcies during his 25-year legal career. He said the employees who know the company best should guide it out of bankruptcy.

Hostetler represents shareholders in the Chapter 11 reorganization of Columbusbased Kiel Brothers Oil Co. Inc. and said his clients favor the retention package offered by the company. The bonuses are much smaller than the windfalls that grab headlines and are spread across the board to include the average employee, he said.

The company's willingness to recognize those who do the lion's share of the work made it easier for shareholders and the lender to OK the agreement, Hostetler said.

Nationally, personal bankruptcy filings, which had risen sharply in recent years, dipped 2.6 percent, to 1.6 million for the 12-month period ending Sept. 30, according to the Administrative Office of the U.S. Courts.

The number of filings in Indiana continues to rise, however. For the same period, 55,681 Hoosiers resorted to bankruptcy, up 0.4 percent from 2003. About 80 percent of those chose Chapter 7, which lets debtors wipe out credit-card bills and other loans not secured by a house or other asset.

The proposal by Sen. Charles Grassley, R-Iowa, would require more individuals to file under Chapter 13 of the bankruptcy code, which allows the court to set up partial repayment of debts based on means.

Grassley and other proponents claim the unpaid debt forces the public to pay higher prices for goods and services. The bill is favored mostly by credit-card companies and banks that are losing out on payments.

"It's just too easy for people to get into Chapter 7 and basically walk away from all of their debt and still have financial resources waiting for them at the end of the tunnel," said Jim Cousins, president and CEO of the Indiana Bankers Association.

Opponents, such as local bankruptcy lawyer Mark Zuckerberg, blame the credit industry's penchant for offering easy access to credit.

The bill will make it nearly impossible to file bankruptcy, Zuckerberg said. He and fellow attorneys will need to swear in writing that the debtor's information is accurate, similar to what CEOs now do when signing off on company financials. That would create extra work for attorneys, thus driving up the costs to file, Zuckerberg said.

"People not even in college who don't even have incomes are getting gold cards," he said. "[The companies are] the ones who are giving the drugs to the addicts while making money hand over fist."

Hostetler made a similar analogy to bolster his argument against the bill. He said he saw Grassley on C-SPAN arguing the bill's merits by comparing the attempts to curb bankruptcy abuse to regulating liquor stores. Hostetler said there is a difference, in that liquor stores don't send him unsolicited six packs.

U.S. Sen. Evan Bayh, D-Indiana, has entered the debate, offering an amendment to protect military families facing bankruptcy as a result of financial hardship due to active-duty service.

More military families are resorting to bankruptcy relief in part because of the longer and more frequent deployments to Iraq and Afghanistan, Bayh said in a statement. Deployments of six months have stretched to one year or more, placing an unexpected burden on the families, he said.
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