Texas Attorney Lawyer

NEW YORK - Kenneth Lay seemed nothing if not a loyal Houstonian. But it seems he is about to lay waste to the Texas constitution. Here’s how:

Just over 1.4 million Americans filed for bankruptcy last year, but it is the potential bankruptcy of just three Texans who credit-card companies can thank for moving a long-stalled bankruptcy legislation to passage.
Ken Lay, the surprising poster boy for bankruptcy reform.

The three Texans are Kenneth Lay, Jeffrey Skilling and Andrew Fastow, Enron (otc: ENRNQ - news - people ) executives who may someday be forced into bankruptcy–if not prison–for their role in the Enron affair. They and other Enron executives might have benefited from a so-called Homestead exemption that allows bankrupt debtors in some states, notably Texas and Florida but also three other states, to exempt unlimited equity in their homes from the reach of creditors.

Some lawmakers had said they wanted to close the Homestead exemption as part of an overall package that would also disqualify a portion of bankruptcy filers–no one knows how many with any certainty–from taking advantage of Chapter 7 of the bankruptcy code, which allows a debtor to wipe out all his old debts, including credit-card debts. The House-Senate compromise bill would limit the Homestead exemption to $125,000 for convicted felons or for anyone who owes a debt under federal or state securities laws.

Credit-card companies have lobbied hard for changes in federal legislation that would require federal bankruptcy courts to apply a formula to determine if a debtor could file a Chapter 7 bankruptcy petition or be forced to file under Chapter 13, which requires the court to establish a schedule by which the debtor would continue to pay his old debts. (The bill does not affect corporate filings under Chapter 11.)

Congress has passed this kind of legislation more than once. But President Bill Clinton vetoed it in part because it failed to close the Homestead “loophole,” which benefits a few of the wealthier bankrupt while closing the Chapter 7 “loophole,” which may affect some relatively poor bankrupts who mostly owe credit-card debt.

Of course, one man’s loophole is another man’s fundamental right–and this is the case with the Homestead exemption. “Texas’ founding fathers believed the Homestead exemption to be so important that they enshrined it in our state constitution in 1846,” said Sen. Kay Bailey Hutchinson, a Texas Republican, in 1999. “This principle reflects the core values and traditions of our state.”

Of course, Texas’ founding fathers probably envisioned a rancher working his land, not some derivatives trader phoning his broker in the Caymans from his high-rise condo. This is the image many have in mind when they think of Kenneth Lay, who has recently unloaded Aspen, Colo., real estate in what his wife has called their “fight for liquidity.”

What does Kenneth Lay’s $7 million apartment or Andy Fastow’s new mansion have to do with paying credit-card debt? Not much, it would seem, but the closing of the Homestead exemption makes palatable for some senators other parts of the bankruptcy bill that the House passed in March of 2001.

Another stumbling block to final passage of new bankruptcy legislation is whether people involved in violent acts against abortion clinics should be permitted to erase their debts in bankruptcy court. New York Senator Charles Schumer, a Democrat, is leading a group in his party who are threatening to block the bill if it does not contain language that would bar anti-abortion activists from using the bankruptcy process to shield themselves from paying court-ordered fines for the violence. Now, apparently, such a dodge is possible so long as the violent anti-abortionist has few assets but sufficient income to pay his credit-card debts.

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