Despite reservations by the Chief Justice and the Attorney General, President Carter is expected to sign into law the first major restructuring of the bankruptcy system in 40 years.
The House and Senate passed the legislation late last week amid considerable controversy.
This was stirred when Chief Justice Warren Burger made angry telephone calls to several lawmakers in an attempt to delay a Senate vote until the Judicial Conference's opinion could be heard on a compromise version worked out by conferees.
Burger is chairman of the Judicial Conference, which is authorized by Congress to give its opinion on bills affecting the court system. The judicial group opposes elevating bankruptcy referees to the status of presidentially appointed judges.
Several legislators accused the Chief Justice of breaching the doctrine of separation of powers. Rep. Harold L. Volkmer (D-Mo.) went so far as to write Burger a letter suggesting that, "If you wish to participate in the legislative process in this manner, you consider resigning your current post and seek a position in Congress."
After the Burger phone calls, a House-Senate group met with Attorney General Griffin Bell and made further compromises to suit the two men. The final bill bowed to a Burger request to make the new bankruptcy judges adjuncts to the federal district courts rather than of the higher ranking appeals courts. Also recommendations for judges would be made by circuit councils of the circuits in which the bankruptcy judge is to be appointed. The President is not obliged to accept these suggestions.
Bell thought proposed retirement benefits for the permanent bankruptcy judges were too high, so they were lowered. There also was opposition to the original House plan for a new office of U.S. trustees in each federal court district to oversee panels of attorneys and others dealing with bankruptcy cases. Finally, it was agreed to set up a pilot trustee program in 14 of the 94 federal judicial districts. These include the Eastern District of Virginia and the District of Columbia.
Despite these high level objections, the basic principle of a new independent court was retained.
The present bankruptcy system dates back to 1898. Since World War II the number of bankruptcies has mushroomed, reaching a record of 255,000 in 1976. The new bankruptcy courts are designed to relieve federal district courts of the responsibility of handling the vast numbers of cases filed there.
Its other primary provisions relate to consolidation of laws dealing with business reorganization and greater protection for consumer debtors. Chapters 10, 11, and 12 of the bankruptcy code would be combined into a single Chapter 11, thus eliminating the present custom of maneuvering between chapters in different courts in search of a better deal for creditors.
The Securities and Exchange Commission had objected to consolidation without making provision for a mandatory independent trustee for public companies to protect stockholders interests. The final version grants the SEC an advisory role in bankruptcies of large public corporations.
In 1976 the quarter million bankruptcies filed involved nine million creditors $27 billion in assets and $43 billion in liabilities. Between 85 and 90 percent of those bankruptcies were filed by individuals. The House had sought to ban reaffirmation, the procedure by which a debtor continues to pay off old debts in exchange for receiving new credit. Finance companies, which did a thriving business under reaffirmation, fought the attempt. The Senate Finance Committee originally approved reaffirmation.
In the end a compromise was reached which leaves reaffirmation of debt still available for businesses. In the case of consumers, it would not be permitted unless a court decided paying off cancelled debts was in the best interest of the bankrupt. The debtor would still have 30 days in which to rescind the decision if desired.
The bankruptcy overhaul was six years in the making. On the eve of enactment Rep. Caldwell Butler (R-Va.), ranking minority member of the Judiciary Civil and Constitutional Rights subcommittee, called it "the best piece of legislation to come out of Congress this session. We resisted the provincial approaches of the SEC and Judicial Conference and elevated the status of the (bankruptcy) judiciary to where it should."