Case Settled

Writing a new bankruptcy law

For a time last week, the 230 U.S. bankruptcy judges authorized by law were out of work. But a prolonged crisis was narrowly averted when the unemployed judges were hired back as consultants to district court judges, which enabled them to give advice on legal matters as well as retain their $66,100-a-year salaries. The imbroglio was the latest episode in a two-year-long melodrama that had, in the words of one former judge, threatened to make the bankruptcy courts "the laughingstock of this nation." The confusion finally ended last week when Congress passed legislation that sets up a new federal bankruptcy system.

The bankruptcy courts have been operating in a legal never-never land ever since the Supreme Court declared them unconstitutional in 1982. The high court's grounds: bankruptcy judges had too much power and too little independence because they lacked lifetime tenure. After Congress took up the job of restructuring the bankruptcy court system, business and labor lobbyists got into action to attach other provisions to the legislation.

Because of intense arm twisting by both interest groups, deliberations were protracted, and 600,000 pending cases were put into limbo. The legal authority of bankruptcy judges had to be extended on an emergency basis four times. The final extension expired last week, causing the temporary crisis.

One of the biggest victories in the legislation that Congress passed went to organized labor. Unions have been seething for months because companies such as Continental Airlines and Wilson Foods had declared bankruptcy in order to break contracts. The tactic was upheld in February by the Supreme Court, which declared that a contract can be unilaterally set aside as long as the company proves that the labor pact unduly "burdens" its prospects for recovery. The new act, however, sets up several steps that must be taken before a contract can be broken. Companies first have to bargain with unions over concessions. Then a bankruptcy judge has to determine if the unions refused the concessions without good reason and if the firm faces financial collapse without a new agreement.

Business lobbyists succeeded in protecting various interest groups, like the owners of shopping centers whose tenants go bankrupt. All kinds of businesses will benefit from new measures that make it more difficult for consumers to avoid paying their bills by filing for personal bankruptcy. Since 1979, the number of those cases has gone from 197,000 to 440,000 a year. Judges will now have to consider the ability of individuals to pay off their debts before declaring them bankrupt, and consumers can be held liable for bills they run up during the 40 days before going to court.