Panel OKs Tougher Bankruptcy Rules; Democrats Protest

House and Senate negotiators Wednesday approved a major overhaul of the nation’s bankruptcy laws to make it harder for financially strapped Americans to wipe out their debts, but the Republican-crafted legislation appears to have little chance of becoming law.

Within hours after the House-Senate compromise was reached, Senate Democrats denounced it as a “sweetheart deal for the credit card companies” and predicted a White House veto if Congress passes it before adjourning this weekend.

Under the compromise measure, it would be harder for debtors to seek bankruptcy protection under Chapter 7, which permits most debts to be completely erased. About 70% of all bankruptcies are now filed under Chapter 7. But under the proposed changes, a bankruptcy trustee would examine a debtor’s ability to repay claims.

If the debtor can repay 25% of these claims or $5,000 in five years, then without a special exemption from a bankruptcy judge, he or she must file under Chapter 13, agreeing to repay part of the debt over time.