House OKs Bankruptcy Law Revamp

The House approved an overhaul of the nation’s bankruptcy laws Wednesday that would make it significantly harder for some cash-strapped Americans to wipe out their personal debts with a trip to the courthouse.

Approved, 306 to 118, the contentious legislation seeks to curb the rise in personal bankruptcies by imposing strict income limits on debtors seeking bankruptcy relief. A record 1.4 million bankruptcies were filed last year, with Californians leading the way.

“Personal responsibility has to be returned to our society through a change in the bankruptcy laws,” said Rep. George W. Gekas (R-Pa.), the bill’s sponsor.

But critics portrayed the legislation as a gift to the credit card companies and banks, which have lobbied vigorously for the changes, contributed heavily to lawmakers who drafted it and stand to recover billions of dollars a year through stricter bankruptcy hurdles.

“This is a bill of, by and for the credit card companies,” said Rep. Jerrold Nadler (D-N.Y.). “Who benefits from this bill? The credit card companies. Who gets hurt? Middle-class Americans who are in over their heads in debt.”

The House bill would make it tougher for those earning more than the national median income of $50,000 a year for a family of four to file for relief under Chapter 7 of the bankruptcy law, which eliminates most consumer debts.

If such debtors--who make up about 15% of bankruptcy filers--could afford to pay at least 20% of their unsecured debts, they would be made ineligible for Chapter 7 under the reform. Instead, such debtors would have to file under Chapter 13, which provides for a court-imposed repayment plan.

This provision, however, is expected to be softened in the Senate and President Clinton has indicated he opposes it.

Other reforms in the House measure would hold individuals responsible for “last-minute” debt incurred just before declaring bankruptcy and require debtors to pay attorneys’ fees and court costs if their cases are dismissed.

Also, bankruptcy judges would be permitted to throw out a Chapter 7 case if they found “inappropriate use” of bankruptcy provisions--a looser standard than current law.

Experts said the changes would change the bankruptcy landscape drastically--especially in California, which leads the nation in filings and has more residents that are above the new income cap than other states.

Creditors argued that the changes make good sense in a society where declaring bankruptcy has lost the stigma it once held.

The credit and banking industries estimated that about one-fifth of people who filed for bankruptcy last year had the means to pay. The industry said “bankruptcies of convenience” drive up costs for other consumers--to the tune of about $400 for each American household.

William Binzel, vice president of government relations for MasterCard International, called the House action “a very significant step toward correcting the fundamental flaw in the current bankruptcy system that allows some debtors . . . to walk away from those debts and pass the costs on to other consumers.”

Industry lobbyists will now shift their attention to the Senate, where a more lenient version of the legislation is to come up for a vote this summer.

The White House, meanwhile, clearly signaled that it wants the bill altered. “The administration supports bankruptcy reform to prevent abuses but we strongly oppose this bill in its present form,” said White House spokesman Barry Toiv.

Opponents maintained that banks are largely to blame for their losses because they stuff more than 2 billion credit-card solicitation notices into American mailboxes every year--a dozen for every person in the country. The flashy advertisements and “pre-approved” notices lure consumers into spiraling levels of debt, critics argued.

“How many credit card solicitations did you throw out last week?” Nadler asked his colleagues during Wednesday’s lengthy floor debate.

But the bill’s proponents countered that credit card solicitations are not the issue. Financial institutions, they said, were not the ones racking up debt irresponsibly.

“If you can’t afford it, don’t buy it,” said Rep. Scott McInnis (R-Colo.). “It’s not wrong in this country to say . . , ‘Keep your word and pay your bills.’ ”

Whether they are the real problem or not, such solicitations appear to be working.

Roughly 75% of all American households have at least one credit card, according to studies, with the majority of them carrying high-interest debt from month to month.

Overall, credit card debt has doubled during the last five years to about $422 billion. And banks heavily involved in credit card business are now taking in profits double those of banks that are not.

Although portrayed as deadbeats, most of those filing for bankruptcy are victims, said Rep. Sheila Jackson-Lee (D-Texas).

“Nobody throws a party on their neighborhood block when they have to go to bankruptcy court,” Jackson-Lee said.

She argued that the legislation would pit ex-spouses and children of debtors against credit card companies in competition for some debtors’ funds. But sponsors of the bill amended it to make child support and alimony the first priority during bankruptcy proceedings.

Still, many argued that the House bill leans too far in favor of financial institutions. “The credit card industry has drafted a bill that’s designed to keep debtors paying 17% interest for the rest of their lives,” said Kenneth N. Klee, a bankruptcy expert at UCLA Law School who helped draft the last overhaul of the law in 1978.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Bankruptcy Overhaul

Main provisions of the bankruptcy overhaul bill:

Eligibility: Establishes a “needs” test for people filing for bankruptcy court protection from creditors. It would require people earning at least the median U.S. income, $50,000, to file for financial reorganization under Chapter 13, subject to a court-ordered repayment plan, if they can pay back 20% of their debt within five years.

Credit cards: Considers nondischargeable, which means it can’t be erased or written down, credit card debt incurred 90 days before an individual files for bankruptcy. Child support and alimony, federal income taxes and federal student loans debts normally are nondischargeable under current law.

Homestead exemptions: Puts a $100,000 nationwide cap on so-called homestead exemptions for bankruptcy to prevent debtors from shielding assets in luxury homes. Some states, notably Florida and Texas, allow debtors to exempt homes from being counted in bankruptcy repayment cases regardless of value.

Number: Limits the number of repeat bankruptcy filings that can be made under different circumstances.

Recording artists: Requires musical recording artists to continue to honor their recording contracts when they enter into bankruptcy proceedings.

Source: Associated Press