Senate OKs Strict Law on Bankruptcy

The Senate overwhelmingly passed a bankruptcy reform bill Thursday that would make it more difficult for financially strapped individuals to shed their debts but approved a number of last-minute amendments making the measure more palatable to consumer groups.

The bill, which passed 83 to 15, is designed to reverse a 15-year surge in bankruptcy filings and to extract more money from borrowers whose debts are now simply erased.

The act is expected to be worth several billion dollars a year to the banking and credit card industries, which spent much of the 1990s--and more than $37 million in the last election cycle--lobbying for it.

But several of the provisions added Thursday addressed objections from consumer groups. One amendment would close a long-standing loophole that in certain states allowed formerly wealthy debtors--such as movie star Burt Reynolds and former baseball commissioner Bowie Kuhn--to emerge from bankruptcy without losing their multimillion-dollar homes.

Other changes would place new restrictions on unscrupulous lenders and provide bankruptcy relief for battered women who don’t get support from their spouses.

The Senate bill now must be reconciled with a version of the legislation passed by the House earlier this month. Some amendments could be tossed out in those negotiations. But there is little difference on the legislation’s main provisions, and congressional leaders expect a final measure to be sent quickly to President Bush, who has indicated he will sign it.

The bill, the first major overhaul of bankruptcy codes in a generation, was pushed mainly by Republicans but attracted 36 Democratic votes, reflecting bipartisan agreement that existing bankruptcy laws are flawed.

“This is not a perfect bill, but it’s better than what we have now,” said Sen. Joseph I. Lieberman (D-Conn.), who supported it. “When I was young, declaring bankruptcy was such a painful, humiliating process that people entitled to didn’t do it. The ethic has changed so much that there are now people gaming the system.”

The measure’s main goal is to require more individuals seeking bankruptcy protection to repay at least a portion of their debts.

The act’s core component is a “means” test designed to force more debtors out of Chapter 7, in which their obligations are essentially erased, and into Chapter 13, which places debtors on a repayment plan. If the bill becomes law, debtors who make more than their state’s median income and can afford to pay at least $6,000--or 25% of their debts--will not be eligible for Chapter 7.

Women’s groups have opposed the bill, saying it would harm single mothers’ ability to collect child support and alimony from ex-spouses who go through bankruptcy.

Consumer groups have also criticized the legislation, saying it will pad the profits of the credit industry at the expense of consumers forced into bankruptcy by job loss, ill health or divorce.

But such criticism softened a bit Thursday after the Senate’s approval of a flurry of amendments, most sponsored by Democrats.

Chief among them was a provision to cap generous “homestead” protections in a handful of states that allow filers to keep their homes, even if the properties are worth millions of dollars.

The amendment, offered by Sens. Herbert Kohl (D-Wis.) and Dianne Feinstein (D-Calif.), would prevent filers from keeping more than $125,000 in equity in their homes. California and most other states had already established similar limits, but five states--Texas, Florida, South Dakota, Iowa and Kansas--had not.

Critics said Florida and Texas in particular have become havens for so-called high-living debtors. In one of the most high-profile cases, Burt Reynolds erased $8 million in debt in the mid-1990s but kept his multimillion-dollar Florida home.

The amendment “deals with a major problem,” said Travis Plunkett of the Consumer Federation of America. Without the amendment, he said, the bill “allows affluent debtors to stash assets, while other debtors face severe new restrictions.”

Another amendment, sponsored by Sen. Russell D. Feingold (D-Wis.), would eliminate what critics said was the most egregious special favor granted in the bill--a provision to shield about 300 wealthy U.S. investors from million-dollar legal claims by the insurer Lloyd’s of London.

A successful amendment offered by Sen. Barbara Boxer (D-Calif.) is designed to aid low-income families by preventing credit card companies from disputing purchases by individuals within 90 days prior to filing bankruptcy, as long as the purchase amount does not exceed $750.

But even with these amendments, the greatest winners in the bankruptcy bill would remain the credit card and banking industries. The American Bankers Assn. estimates that the legislation could help creditors collect an additional $4 billion a year in the United States.

Moshe Orenbuch, a credit industry analyst at investment bank CS First Boston in New York, said credit card companies alone stand to collect an extra $500 million to $600 million a year in debts that ordinarily would be wiped away under bankruptcy. He said that bankruptcy accounts for about 40% of the industry’s total credit losses each year.

The legislation “is not going to reverse the entire trend of worsening credit losses in a weakening economy,” he said. “But I think it’s an important step.”

Feinstein voted for the bill, while Boxer--who had spent much of the day on the Senate floor pushing for her amendment--was not present for the final vote.

Boxer, who left because of a family engagement, said that, even with the addition of her amendment, she opposed the bill and plans to vote against it when it returns for final consideration after the Senate and House versions are reconciled.