By Mary Kane

Are people who go bankrupt irresponsible spendthrifts? Or just down on their luck and in need of a fresh start?

The issue is at the heart of the overhaul of America's bankruptcy system.

The debate, now playing out on Capitol Hill, has been sidetracked by several high-profile skirmishes, the latest over whether fines or judgments incurred in abortion protests should be erasable through bankruptcy. Senate and House conferees are scheduled to meet on the issue May 22. The bill could die if no compromise is reached. But hard questions remain about the rest of the legislation.

Since bankruptcy laws first were written in 1898, the country has gone back and forth on how sympathetically or punitively it views debtors. That seesaw has contributed to the long and tortured history of the current reform legislation: A 1994 commission that produced 172 recommendations and a 13,000-word report. Five years of legislative battles. A last-minute veto in the waning days of the Clinton administration. A revival backed by credit card and financial services companies, the largest industry contributor to Congress.

All of that only divided people more sharply over whether proposed changes treat debtors more fairly or make bankruptcy less available to those who truly need it.

Supporters say the reforms end abuses that raged as bankruptcies reached record levels during the 1990s, a period of strong economic growth.

No longer would Americans who rack up big credit card bills expect to walk into bankruptcy court and erase them through Chapter 7 of the code. Instead, such debtors would be subject to "means tests" that could instead push them into Chapter 13. Under Chapter 7, a debtor may get all debt erased through bankruptcy. Chapter 13 requires a court-ordered plan under which the debtor must repay at least some debt.

"We've had the same bankruptcy system for 25 years," said Todd Zywicki, bankruptcy law professor at George Mason University in Fairfax, Va., and an adviser to Congress on the reforms. "During that time we've come to recognize that there are a variety of loopholes and fraud and abuse in the system. This goes after the abusive use of bankruptcy.

"We're actually trying to fix something here."

Opponents don't see it that way.

"This law succeeds in doing what the creditors want," said Henry Sommer, a Philadelphia bankruptcy attorney who worked on the last overhaul of laws, in 1978. "The current system isn't really a mess. That's a myth. That's creditor propaganda. Nothing's perfect, but by and large it's a pretty efficient way of allowing people to get on with their lives."

The means tests, Sommer and others say, will result in more unfairness, because wealthier debtors will hire lawyers to help avoid them.

Moreover, the reforms maintain old loopholes, such as the unlimited homestead exemption in Texas, Florida and five other states that allows debtors to keep luxury properties. Most states shield only a portion of home equity from bankruptcy.

This month, lawmakers reached a compromise requiring debtors to have lived in their homes 40 months prior to filing for bankruptcy in order to qualify for the unlimited exemption. The compromise also prevents those convicted of felonies or securities fraud in the previous 10 years from using the exemption pointedly aiming at former Enron Chairman Kenneth Lay, who owns a luxury penthouse in Houston.

But Brady Williamson, a Madison, Wis., lawyer who chaired the 1994 commission that studied bankruptcy laws, said the homestead exemption essentially remains intact. It means debtors in some states will write off debts through bankruptcy while shielding millions of dollars in real estate assets. And that, Williamson said, remains "the single biggest abuse in the American bankruptcy system."

Lawmakers would create new problems with the reforms, in his view.

"For more than 100 years, this country has had a bankruptcy law that has ... roughly balanced the rights of debtors versus the rights of creditors, and the rights of creditors with respect to each other," he said.

Should the legislation become law, "for the first time in 100 years, it will seriously upset that balance, tilting quite dramatically in favor of creditor interest," Williamson said. "It's also creditor-versus-creditor."

The reforms give the credit card industry and car lenders more favorable positions than in the past, making it harder for someone to discharge, or erase, credit card debt or auto loans. Currently, child support or tax bills are among the very few debts that can't be discharged.

Critics contend this means that people owed child support will be pitted against big credit card companies in competing for debtor payments.

But George Mason's Zywicki dismissed that notion. "Citibank can't put you in jail if you don't pay your credit card bill," he said, contrasting that with penalties for failure to pay child support.

Zywicki and others maintain that the current bankruptcy system favors debtors. People go on buying binges, running up credit card balances they know they cannot pay. Rather than being ashamed, they brag to friends and neighbors.

"There is no stigma to bankruptcy anymore," said Keith Leggett, economist for the American Bankers Association, a Washington trade group that represents lenders.

Meanwhile, to Elizabeth Warren, a Harvard law professor who served on the bankruptcy commission, the reform bill's biggest failing is that it treats consumer and business debts differently.

Kenneth Lay's debts, for example, would be considered business rather than consumer debts, she pointed out. Because the means tests apply mostly to consumer debt, Lay could just discharge his debt under Chapter 7.

But a single mother making $24,000 annually would have to go through means testing including mandatory credit counseling, a court-ordered budget plan and other requirements that add several hundred dollars to the cost of bankruptcy filing.

"I've never before seen legislation that deliberately created loopholes for the rich and powerful while making it more difficult for people at the bottom," Warren said.

Zywicki acknowledged that business and consumer debt are treated differently in bankruptcy but they should be, he said. Consumer bankruptcies, after all, zoomed from 800,000 in 1990 to more than 1.4 million in 2001, all during prosperous times. Business bankruptcies, on the other hand, tend to follow the business cycle.

"We think of consumer debt differently than business debt," Zywicki said. "We think of the bankruptcy system as being totally appropriate for an entrepreneur whose business just doesn't work out. It's a philosophical thing, that consumer debt is just different."

That view makes it all the more puzzling to some, including Zywicki, that provisions to speed up small business liquidation made their way into the bill. The proposals would impose shorter deadlines and greater filing requirements on small businesses, while enhancing creditors' power to force such firms to liquidate their assets. Larger companies would be exempt from the provisions.

Sen. John Kerry, D-Mass., chairman of the Small Business and Entrepreneurship Committee, said in a statement that he couldn't understand why the bill aimed at small businesses, since there hasn't been a significant increase in small business bankruptcies.

The provisions, he predicted, "will have a negative effect on entrepreneurship and the future growth of the economy."

Whatever the fate of the reforms, people at the front lines of bankruptcy will continue to deal every day with troubled debtors and the reasons for their problems.

In her western Pennsylvania courtroom, Judge Judith Fitzgerald, president of the National Conference of Bankruptcy Judges, sees many elderly or divorced people who can't pay their debts because of medical bills, job losses or home foreclosures.

All the fighting on Capitol Hill won't get at the heart of why people go bankrupt, she said.

"My personal view is that no code like this is going to be able to cover all situations when you're looking at so many factors that cause economic decline," Fitzgerald said.