IF YOU THINK bankruptcy is on the rise in this country, you're right. A record number of petitions for bankruptcy have been filed in recent months, and 750,000 of them are now pending in federal courts.
Traditionally, bankruptcy cases had been handled by special court officials called referees who had extremely limited jurisdiction. They could, for example, make decisions with regard to assets of the bankrupt party but not assets in dispute that were held by a third party. These questions had to be referred to a federal district court, a procedure that was costly in both time and legal fees.
To streamline the system, Congress revised the bankruptcy laws in 1978, making the referees bankruptcy judges and greatly increasing their power. Last June, however, the Supreme Court held the new law unconstitutional because, while it gave the bankruptcy judges more power, it did not give them the special protections other federal judges have -- life tenure and protection against salary reduction. Realizing that its decision might cause chaos in the bankruptcy courts, the Supreme Court did not make its ruling effective immediately, but instead gave Congress until Oct. 4 to amend the law. The legislators could do one of two things -- reduce the powers of the bankruptcy judges or amend the law to give them life tenure and salary protection. They have now adjourned without doing either.
The problem seems to have been that many senators and representatives looked on simple legislation to correct the defect in the 1978 statute as an opportunity to offer a number of other changes to the bankruptcy law. Creditors who were taken by surprise by the leniency of the new law sought to get it tightened up. Members who had always thought the bankruptcy judges should be on a par with all other federal judges sought not only to grant them so- called "Article III" status, requiring that they be appointed by the president and confirmed by the Senate, but to authorize them to preside over the whole range of federal district court cases. Some object to this proposal because the bankruptcy judges are specialists in that field but not necessarily in any other aspect of federal law; others have misgivings about allowing any one president, and particularly the one now in office, to appoint 222 district judges all at once. You can see that there is more at stake here than the procedural aspects of highly technical litigation.
What will happen now that Congress has gone home without meeting the deadline? As a precautionary step, the Judicial Conference -- the policy-making arm of the federal judiciary -- has issued a model rule asking all federal courts to accept bankruptcy cases and refer them to bankruptcy judges who will act as masters; that is, they will make recommendations to the district court, but will make no final decisions themselves. Simple bankruptcy cases, without other complicating questions, will continue to be handled entirely by the bankruptcy judges. This rule will almost certainly be challenged as soon as it goes into effect. In addition, the solicitor general has asked the Supreme Court to extend the Oct. 4 deadline to Dec. 24 in order to give Congress time to consider legislation during the lame-duck session. A ruling on the solicitor general's petition is expected today.
Why can't Congress meet deadlines? True, this is a complicated, technical area of the law, but certainly it is not insoluble. The bankruptcy courts deal with the lives and fortunes (and misfortunes) of hundreds of thousands of Americans. Complex corporate debts and reorganizations must be sorted out. And because a compromise could not be reached in Congress by a day certain, confusion, at the very least, reigns. If you've been contemplating filing for bankruptcy in the near future, you'd be well advised to stave off your creditors, tighten your belt and wait until this mess has been straightened out.