House Passes Tougher Bankruptcy Legislation

The House approved on Wednesday a controversial rewrite of the nation’s bankruptcy laws that would make it harder for people with incomes above $51,000 a year to walk away from their debts.

The bill’s future is uncertain because the Clinton administration has raised the prospect of a presidential veto, arguing the bill would be too harsh on debtors.

The bill passed by a vote of 313 to 108.

The House legislation would affect an estimated 3% to 10% of people who file for bankruptcy--specifically those who make more than $51,000 a year and can pay at least $100 a month on their unsecured debts such as credit card bills. The income cutoff would be adjusted on a regional basis--in California it would be around $58,000.

Despite a booming economy and low inflation, the number of filings for bankruptcy protection has been steadily increasing. About 1.4 million personal bankruptcies were filed last year, or about one of every 68 households. In California, the figure was 204,000, or one out of 52.

Internal Revenue Service calculations of living expenses would be used to determine whether a person has sufficient income to repay debts.

Under Chapter 7, now used by most people filing for bankruptcy, virtually all debts are canceled. Under Chapter 13, by contrast, the individual is required to work out a plan to repay a portion of the debts.

The legislation would force some people to file Chapter 13 under an automatic process that would be linked to their income and to a calculation of their ability to repay bills.

The bill also would allow Florida and Texas to retain their status as financially generous havens for people who file for bankruptcy. Those states have no limits on the value of a home and other personal property a debtor can keep. The bill would impose a $250,000 ceiling on the so-called homestead exemption.

However, states without such limits, including Florida and Texas, can keep their own policies in place. Notables such as former baseball commissioner Bowie Kuhn and actor Burt Reynolds were able to keep multimillion-dollar homes in Florida although they filed for personal bankruptcy. The late Texas Gov. John Connally declared a 200-acre ranch his homestead and was able to keep the property after filing for bankruptcy.

The costs when people fail to pay their debts “are borne not only by individuals, but by consumers who pay their bills responsibly,” said Rep. Edward R. Royce (R-Fullerton), who supported the legislation.

But Rep. Barbara Lee (D-Oakland) said the blame should be placed on credit card companies that are “targeting vulnerable potential new members.” Card company mailings soliciting new customers rose 255% between 1992 and 1998, she told the House.

Retailing organizations and credit card companies have been pushing for such legislation for several years. The House and Senate passed bankruptcy bills last year, but there was no final action before Congress adjourned.

The Senate Judiciary Committee has approved a bankruptcy reform bill that awaits Senate floor action. However, final passage could be jeopardized by an amendment, proposed by Sen. Charles E. Schumer (D-N.Y.), involving the debts of people who have violated laws protecting abortion clinics.