Congress Pushes for Bankruptcy Overhaul

With personal bankruptcies at a record 1.3 million last year--even in a robust economy--Congress is moving with all the determination of a collection agency toward the most sweeping changes in bankruptcy laws in decades.

House and Senate committees have approved bills to make it significantly harder for individuals with family incomes of more than $50,000 to wipe out their debts by filing for bankruptcy.

Backstage negotiations over the bills’ most controversial features will get underway early this week, and floor action is expected to follow soon after.

Though election-year politics is stalling many bills, and the Clinton administration has reservations about the bankruptcy measures in their present form, some significant tightening of federal bankruptcy procedures is expected to become law.

The bills’ backers say such an overhaul is needed to prevent abuses by reckless spenders.

“We have more bankruptcies than college graduates each year,” complained Rep. James P. Moran (D-Va.). “People need to be accountable and responsible for their debts.”

But opponents complain that the bills amount to a $4 billion-a-year gift to credit card companies and banks. This is how much they would recoup in credit card debt that is now wiped out through bankruptcy filings.

Before these financial institutions ask Congress to crack down on debtors, Sen. Barbara Boxer (D-Calif.) wants them to cut back on some of the 2 billion solicitations and offers they pour out each year.

Since Jan. 1, Boxer said, banks and credit card companies have stuffed offers of $1.3 million worth of credit cards and lines of credit into her mailbox at home. “It’s unbelievable,” she said.

Both bills affect only the estimated 15% of bankruptcy filers whose income is above the national median of approximately $50,000 a year for a family of four. The 85% with lower incomes could still file under Chapter 7 of the bankruptcy law, which wipes out all debts, or Chapter 13, which provides for a repayment plan.

The tougher bill, adopted by the House Judiciary Committee, forces many of those affected to repay part of their debt over five years.

For those with incomes of more than $50,000, the bankruptcy court would determine whether at least $50 a month remains after basic living expenses. If it does, the court would require the debtors to repay 20% of their unsecured debt (typically, credit cards) over five years.

Under the Senate Judiciary Committee’s bill, creditors could ask the bankruptcy court to refuse to allow people with incomes above $50,000 to file under Chapter 7 to avoid paying any debts. Instead, the debtors could be forced to adopt repayment plans at the discretion of the bankruptcy referee.

*

From the creditors’ point of view, the current bankruptcy system makes no sense.

“It is the only social welfare program not based on need,” said Michael McGarry, public relations manager for Visa International, which provides technology and marketing for 15,000 banks, thrifts and credit unions that distribute Visa cards. “Society is picking up the tab when people don’t repay their debts.”

A strong moral overtone accompanies the arguments of those who want change. They point disapprovingly to a popular guidebook to bankruptcy titled, “Debt-Free: Your Guide to Personal Bankruptcy Without Shame.”

“The free ride is over,” said Sen. Charles E. Grassley (R-Iowa), a key author of the legislation.

Mary Rouleau, legislative director of the Consumer Federation of America, responds that most people file for bankruptcy not out of moral turpitude but because of a disaster in their lives.

“They lose their job. They get divorced. They have a medical crisis with no health insurance or not enough health insurance,” she said. The vast majority, she argued, are hard-working people struggling against tough circumstances.

She cited a study showing that the average person filing under Chapter 7 in 1996 had an after-tax income of $19,800 and credit card debt of $17,544. Their income and assets, not to mention their lifestyles, are very different from the spending patterns of the celebrities who have declared bankruptcy, including Burt Reynolds, Kim Basinger and Bruce McNall, former owner of the Los Angeles Kings hockey team.

The Clinton administration opposes the legislation. The Justice Department argued in a letter to Senate Judiciary Committee Chairman Orrin G. Hatch (R-Utah) that “access to Chapter 7 should not be governed by an arbitrary means test” because of the “great variations in circumstances that bring debtors into bankruptcy.”

Opponents of the legislation argue that it places ex-spouses and children in competition with credit card companies for the same pot of money.

To answer these critics, both the House and Senate committees approved amendments specifying that alimony and child support be repaid first. “Deadbeat dads should be given no chance . . . to avoid making child support and alimony payments,” Grassley said.

Opponents insist that if the credit card companies are granted a chance to recover more debt, they should in return have to sacrifice some of their ability to offer credit. Any legislation, said Sen. Dianne Feinstein (D-Calif.), “should put some obligations on those who sell credit so easily.”

The industry argues that it has merely democratized credit by making it available to rich and poor alike. About 40% of cardholders pay their bills in full each month and carry no balance, according to Visa’s McGarry. About 96% of cardholders are current in their payments, he adds, and just 1% of all cards wind up in bankruptcy cases.

Sen. Joseph R. Biden Jr. (D-Del.), whose state is home to many credit card operations, insisted that “credit card companies do not prey on the poor. They take a gamble: They go out and take a chance on a class of people.”

*

The gamble is paying off handsomely. The profits of banks heavily involved in the credit card business were double those of general commercial banks in 1996, according to a forthcoming study by Beverly Burden in the Journal of Bankruptcy Law and Practice.

And the flow of credit keeps accelerating. Consumers had $422 billion in credit card debt outstanding at the end of 1997, double the figure in 1993. And they had $1.6 trillion in potential credit they had not yet tapped.

*

Times researcher Tricia Ford contributed to this story.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Going Broke

Annual bankruptcy filings by businesses and individuals:

Personal: 1.35 million in ’97

Business: 54,000 in ’97

Source: American Bankruptcy Institute