One for the Creditors

The House of Representatives Wednesday overwhelming approved legislation to restructure what many believe is the country’s overly permissive bankruptcy law. The 150-page bill takes a huge step toward eliminating abuse of the bankruptcy process by irresponsible debtors. But, in so doing, it missed the point of balance and turned into what Rep. Henry J. Hyde (R-Ill.) called “a great bill for creditors.” The best way to restore some sense of balance in the legislation is to soften the rigid formula for debt repayment and give the bankruptcy courts greater discretion in judging individual cases.

Court figures show that, despite the country’s economic prosperity, a record 1.4 million people filed for bankruptcy in 1998, an increase of 20% from the previous year. Most people file under Chapter 7 of the Bankruptcy Code, which allows them to wipe out unsecured credit card debts without much challenge from the creditors. But that does not mean that a large number of people filing for bankruptcy are either fraudulently or irresponsibly trying to avoid repayment of their debts. A study commissioned by the independent American Bankruptcy Institute in Alexandria, Va., showed more than 96% of those who filed for bankruptcy did not have the income to fully repay their debts. Only 3.5%, or fewer than 40,000 of the 1.4 million debtors, had repayment capacity. That clearly shows the existing law does not invite widespread abuse.

Just as clearly, however, the decisive 313-108 House vote--in which half the Democratic representatives voted yes--shows very little sympathy for those who don’t pay their bills at a time of record low unemployment.

Would people have no sympathy for those who truly cannot repay their debts regardless of how well they manage their finances? We doubt it. To those debtors, the House bill is unfair. It is so loaded with pro-creditor provisions--75 by Hyde’s count--that it swings the bargaining power entirely in favor of the creditors. All a creditor will need to do is simply threaten to unleash all the new legal weapons and entangle debtors in costly litigation to discourage even the most meritorious bankruptcy filings.

Banks and credit card companies lobbied hard to defeat an amendment that would have eased the formula for cutting debtors off from the bankruptcy courts by giving judges some discretionary power in individual cases of hardship. They believe bankruptcy judges tend to favor debtors.

But a little compassion is exactly what’s missing in this legislation. The Senate, which is expected to take up the measure later this spring, should introduce an amendment that displays some.