American Bankruptcy Institute Update

November 17, 2005

In This Issue

Highlights

LEGISLATIVE UPDATE

Debt Management Plans Take Direct Hit in Proposed Tax Bill

The Senate’s version of the tax reconciliation bill, now working its way through the Senate floor, takes direct aim at the large national credit counseling organizations that primarily use “debt managem ent plans” (DMPs) as a means to conduct credit counseling. The new provision, if it survives the legislative process, would limit DMP services to 25 percent of the organization’s total activities, if the entity is to qualify for nonprofit status under §501(c)(3) of the Internal Revenue Code. Moreover, the law would require DMP services to be treated as unrelated business income subject to taxation. The Senate provision, tucked away in the massive “reconciliation” bill, is authored by Sen. Chuck Grassley (R-Iowa), chairman of the Senate Finance Committee and also the chief sponsor of the recently enacted bankruptcy law (BAPCPA). Under the new bankruptcy law, all consumer debtors must go through credit counseling within 180 days of filing and receive a certificate from an approved nonprofit budget and credit counselor. The impact would be felt most directly by such entities as Springboard Credit Counseling, Money Management International and GreenPath, all of which rely on DMPs as a major part of their business model. The Senate leadership hopes to finish reconciliation tonight. However, the Senate provision is not in the companion House bill and, thus, would be subject to a House-Senate conference committee.

Pension Reform Would Force Companies to Pay Up

Hoping to reverse the deterioration of pension plans covering 44 million Americans, the Senate voted Wednesday to force companies to make up underfunding estimated at $450 billion and live up to promises made to employees. The action came a day after the federal agency that insures such plans reported massive liabilities and predicted a troubled future.

Pension reform now moves to the House and could face resistance from hard-pressed manufacturers who want to keep a credit-rating provision in the Senate measure out of the final bill.

A union economist warned that the overhaul could lead to the liquidation of bankrupt auto-parts maker Delphi Corp. and push other troubled manufacturers into serious financial trouble.

Read the full analysis.

A “Fiscal Hurricane” on the Horizon

The comptroller general of the United States recently portrayed the nation's finances in bleak terms. "We face a demographic tsunami" that "will never recede," David Walker tells a group of reporters. He runs through a long list of fiscal challenges, led by the imminent retirement of the baby boomers, whose promised Medicare and Social Security benefits will swamp the federal budget in coming decades, USA Today reported yesterday. To hear Walker, the nation's top auditor, tell it, the United States can be likened to Rome before the fall of the empire. Its financial condition is "worse than advertised," he says. It has a "broken business model." It faces deficits in its budget, its balance of payments, its savings - and its leadership.

Walker's not the only one saying it. As Congress and the White House struggle to trim up to $50 billion from the federal budget over five years - just 3 percent of the $1.6 trillion in deficits projected for that period - budget experts say the nation soon could face its worst fiscal crisis since at least 1983, when Social Security bordered on bankruptcy.

In other economic news, U.S. consumer prices picked up more than was expected in October, but financial markets took heart from underlying inflation, which economists see as ensuring a gradual path of interest rate rises ahead, Reuters reported yesterday.

Consumer prices gained 0.2 percent last month, topping Wall Street forecasts for a flat reading as the largest housing cost gain in nearly five years overwhelmed a dip in energy prices. Excluding food and energy, prices also gained 0.2 percent in the month. But bond markets were soothed because the number matched expectations and because of a sense that easing energy costs will hold down overall inflation in the next few months.

Alleged Victims Say Archdiocese Reorganization Plan Inadequate

The Archdiocese of Portland has proposed placing an overall $40 million limit on damages that can be paid to alleged victims of priest sex abuse as part of its bankruptcy reorganization plan, an attorney for victims said Tuesday. The proposed limit is a fraction of more than $400 million that is being sought by those who say they were abused by priests, the Associated Press reported.

David Slader, an attorney for the plaintiffs, contends that the proposed reorganization plan would pit victims against each other for a share of the settlement money and allow the church to cover up most of the abuse by avoiding public trials.

Read the full story.

Review the case’s legal documents.

Banks Brace for Increase in Credit Card, Loan Defaults

A surge in bankruptcy filings ahead of tougher new laws that went into effect last month will translate into a spike in bad loans at some banks and credit card issuers in coming months, the Tennessean reported yesterday. Such large credit card issuers as Bank of America are expected to see the biggest impact. But with industry profits strong, financial experts said that banks are well positioned to absorb higher charge-offs of bad debt. Bank of America has said that losses tied to the bankruptcy law should increase by $400 million to $500 million in the last three months of the year, but that's still only one-tenth of a percent of the bank's more than $500 billion of total loans. In addition to credit card debt tied to personal bankruptcies, some mortgage and car loans might go unpaid.

Credit agency Fitch Ratings forecasts a 30 percent jump in U.S. credit card charge-offs over the next three to four months because of the bankruptcy surge. "The charge-offs will again trend down toward the end of the first quarter," said Kevin D'Albert, a director with Fitch.

Read the full article.

Pressure Mounts for GM's Rick Wagoner

Investors and analysts are losing confidence in GM's Chairman and CEO Richard Wagoner, who took the helm of the world's largest automaker in 2000 and took control of daily operations at its struggling North American unit in April 2005, Reuters reported yesterday. This year alone, the carmaker has lost almost $4 billion, shocked investors with earnings restatements, seen its stock plunge to new lows, come under investigation by federal regulators and given up significant U.S. market share to foreign rivals.

"When Wagoner took over for GM North America, he essentially implied that it was all on his shoulders now," T. Rowe Price analyst Brian Ropp said. "By taking on that role, he took full responsibility for North America, where the key issues are. And things have only gotten worse."

The company has been hurt by slumping sales of its large sport utility vehicles -- its longtime cash cows -- which have now lost popularity due to high gasoline prices. GM is also grappling with high health care and commodities costs. To compound matters, a possible strike at GM's main parts supplier -- bankrupt Delphi Corp. -- could shut down a few plants and force GM to burn through billions of dollars in cash in a matter of weeks, analysts said. "If there is a continued dip in U.S. market share, board members will have to say enough is enough. Even though it is not completely Wagoner's fault, you just have to shake things up," Argus Research group analyst Kevin Tynan said.

In Time for the New Law: The Consumer Bankruptcy Manual (Second Edition)

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ABI Committee Presentations at Winter Leadership Conference

Alert: The Hyatt Grand Champions Resort and Spa and the Renaissance Esmeralda Resort and Spa are sold out. ABI has contracted overflow accommodations at the nearby Miramonte Resort and Spa (Phone: (760) 341-2200/Toll Free: (800) 237-2926). Get your registration in TODAY!

The 17th Annual Winter Leadership Conference, December 1–3, 2005 , in beautiful Indian Wells, California, at the Hyatt Grand Champions Resort & Spa, will feature presentations and sessions from ABI’s committees, including:

The International and Alternative Dispute Resolution committees will co-host a two-part program. The first is "New Chapter 15: Choosing the Law, the Place and Your Destiny." The guest speaker will be Hon. Burton Lifland. The second part of the program, “Resolving Commercial Disputes Out of Court: Asean Initiative and Trend,” will be presented by George Kelakos and Jack Esher.

Register here!

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