A bill making it harder for consumers to dissolve their debts by declaring bankruptcy is on the verge of becoming law, culminating an extensive--and expensive--campaign led by credit card companies.
A nearly identical bill was vetoed by then-President Clinton just three months ago. But with President Bush signaling support for the legislation, it is likely to proceed swiftly onto the books following expected Senate approval today.
Sought by the financial services industry in response to dramatic increases in personal bankruptcies since the mid-1980s, the rebirth of the Bankruptcy Reform Act underscores the ascendant fortunes of business interests in Washington. Congress dismantled ergonomic regulations last week and appears eager to cooperate with corporate lobbyists on a range of issues.
The bankruptcy bill was the subject of a particularly lavish lobbying campaign, with banking and credit card firms doling out more than $37 million in political contributions last year--the bulk of it to Republicans.
The bill's central aims are to reduce the number of individual bankruptcy filings--which soared from 298,000 in 1985 to more than 1.2 million last year--and obtain more money from those who qualify for bankruptcy protection but can afford some level of repayment.
"People have to stop looking at bankruptcy as a convenient financial planning tool while other honest Americans have to foot the bill," said Sen. Charles E. Grassley (R-Iowa), the bill's sponsor. "A system where people aren't even asked to pay off their debts contributes to the fraying of the moral fiber of our nation."
The bill's main provision establishes new "means" tests designed to bump more filers out of Chapter 7, in which debts are erased after liquidating certain assets, and into Chapter 13, where debts are typically restructured and paid off over three to five years.
Under the measure, consumers generally would not be eligible for Chapter 7 if they earn more than their state's median income and can repay at least 25% of their unsecured debt over five years. Experts say this new hurdle would likely affect up to 10% of those who currently qualify for Chapter 7.
During Senate debate this week, the measure's Republican backers repeatedly made the case that the bankruptcy system--conceived as an avenue of last resort--has been exploited by irresponsible debtors. And even many opponents complained more about the bill's details than its intent.
But critics charge that the legislation will mainly pad the profits of the credit card companies at the expense of financially strapped consumers.
Major women's organizations and children's advocacy groups opposed the measure, saying it would make it more difficult for mothers to collect alimony and child support payments.
Consumer groups complained that the act creates unnecessary new protections for lenders, while doing nothing to curb their increasingly aggressive marketing of credit to college students and those with troubled credit histories.
The 420-page bill also contains a number of provisions catered to narrow interests. These range from car loan issuers to a few hundred U.S. investors trying to fend off attempts by the insurance firm Lloyd's of London to collect millions of dollars in legal claims.
"We don't disagree with the goal of this legislation," said Travis Plunkett of the Consumer Federation of America. "No one should escape their debts if they can afford to pay them. But the creditors behind this bill have manipulated that principle to come up with a wish list for their industry."
Holding people accountable for their debts is such a politically safe proposition that the bill is expected to pass the Senate by a comfortable margin. In an indication that passage is imminent, the Senate voted, 80 to 19, Wednesday to close debate on amendments and bring the measure to a vote today.
The House approved a similar version of the measure. Backers anticipate the bills' differences will be easily reconciled and the final product quickly sent to Bush.
Many experts on bankruptcy law say the overhaul is long overdue.
Decades-old bankruptcy statutes are "outmoded" because they focus almost exclusively on an individual's assets instead of income potential, said Michael Staten, director of the Credit Research Center at Georgetown University. "To not consider income is ludicrous," he said.
But critics complain that the bill's attempt to curb abuse creates unfair new burdens for the vast majority of legitimate bankruptcy filers who are thrown into financial trouble by job loss, divorce or unexpected medical bills.
The bill "makes bankruptcy more expensive, complicated and less accessible for the majority, all in the name of going after a few debtors engaged in abuse," said Henry Sommer, a consumer bankruptcy attorney in Philadelphia and author on the subject. "It's using a sledgehammer to kill a fly."
Women's groups are particularly concerned. Current bankruptcy laws often aid single mothers because shedding other kinds of debt helps their ex-spouses emerge in better position to resume paying alimony and child support. But the new law would make it far more difficult to erase or reduce a wide range of consumer debt, from credit card balances to car loans.
"So instead of having a clear shot at collecting child support or alimony, women are going to be facing increased competition [with other creditors]," said Joan Entmacher, vice president of the National Women's Law Center in Washington. Women will lose that competition, she said, because they don't have the resources or sophisticated collection methods of commercial creditors.
A number of special interests get favorable treatment in the bill. The automobile industry was granted a provision that could help it collect billions of dollars in car loan debt that under today's law would simply be wiped away.
The accommodation has to do with so-called cram-down provisions in bankruptcy proceedings, in which outstanding car loans are reduced to reflect the present market value of the vehicle. Under the new law, such cram-downs won't be allowed, meaning debtors will remain liable for the loan's entire amount.
Perhaps the most peculiar favor granted in the legislation is a provision designed to shield about 300 wealthy Americans from Lloyd's of London. The Americans, investors in Lloyd's, have been ordered by British courts to pay millions of dollars to the firm to help it cover steep losses in the late 1980s and 1990s. A provision in the bankruptcy bill would prevent Lloyd's from collecting.
The major winners in the bankruptcy bill are banks and credit card companies that are poised to collect hundreds of millions of dollars more from consumers each year if the measure becomes law.
One of the biggest beneficiaries would be MBNA Corp., the nation's largest issuer of credit cards, which was more aggressive than any of its industry peers in lobbying for bankruptcy reform.
The Delaware-based company and its employees gave a total of $3.5 million during the 2000 election. MBNA topped the list of corporate donors to Bush last year, contributing $240,675 to his campaign and $100,000 to his inauguration, according to the Center for Responsive Politics.
The credit card and finance industries contributed $9.2 million to federal candidates and both political parties last year--67% to Republicans and 33% to Democrats--compared with $4.3 million four years earlier. Donations from commercial banks also swelled to $28.5 million last year, up from $16.6 million in 1996.
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How the Bankruptcy Bill Works
The bankruptcy reform bill is designed to make it harder for consumers to avoid repaying at least some of their debts. The highlights:
* A formula would be used to determine whether people filing for Chapter 7 bankruptcy, which wipes out many kinds of debt, could repay some of what they owe.
* Those who are found able to repay would be reassigned to Chapter 13 bankruptcy, which requires a repayment plan.
* Anyone seeking to file for bankruptcy would be required to get credit counseling.
* It would be harder to protect a personal vehicle from creditors.
* In some cases, it would be easier to lose a home worth more than $250,000 to creditors.
* Creditors could tap retirement funds if a debtor has more than $1 million in an individual retirement account.
Source: American Bankruptcy Institute, Times research