Senate OKs Bankruptcy Bill 74-25

bankruptcy law graphic AP / CBS

The biggest rewrite of bankruptcy laws in 27 years is about to turn the path to a debt-free second start - taken by more than 1 million Americans each year - into a road less frequently traveled.

A bankruptcy overhaul bill the Senate passed by a 74-25 vote on Thursday would require people with incomes above a certain level to pay credit-card charges, medical bills and other obligations under a court-ordered bankruptcy plan.

Eighteen Democrats and the Senate's lone independent joined Republicans in approving the legislation. It goes to the House next month and then to President Bush, who made it a priority after the GOP increased its majorities in the fall elections.

CBS News Correspondent Mark Knoller, reporting from Memphis where Mr. Bush has been campaigning to overhaul Social Security, says the president was quick to applaud what he called "the strong bipartisan vote" in the Senate.

In a written statement urging the House to quickly follow the Senate's lead, the president said the bill will curb abuses in the bankruptcy system with a common sense approach that will enable more Americans - especially those with lower incomes - to have greater access to credit.

Between 30,000 and 210,000 people - from 3.5 percent to 20 percent of those who dissolve their debts in bankruptcy each year - would be disqualified from doing so under the legislation, according to the American Bankruptcy Institute.

The legislation would set up an income-based test for measuring a debtor's ability to repay debts. It would require people in bankruptcy to pay for credit counseling and stiffen some legal requirements for debtors in the bankruptcy process.

The bill is the second piece of pro-business legislation on which Congress has acted quickly this year. Last month it sent President Bush a bill placing most large multistate class-action lawsuits under federal court jurisdiction, making it more difficult for plaintiffs to join together and win multimillion-dollar judgments in state courts.

"I applaud the strong bipartisan vote in the Senate to curb abuses of the bankruptcy system," the president said in a statement. "Reforming the system with this commonsense approach, more Americans - especially lower-income Americans - will have greater access to credit."

Congressional and industry backers of the legislation have been pushing for it for eight years, arguing that too many people with the ability to repay at least a portion of the money they owe were walking away from all their debts.

"This legislation restores personal responsibility and fairness to an abused system," said Senate Majority Leader Bill Frist, R-Tenn.

The bill's supporters argued that bankruptcy frequently is the last refuge of gamblers, impulsive shoppers, divorced or separated fathers avoiding child support, and multimillionaires, often celebrities, who buy mansions in states with liberal homestead exemptions to shelter assets from creditors.

Opponents, too, have a litany of stories. Sen. Edward M. Kennedy, D-Mass., speaks of Zoraya Marrero, a single mother with three children from Woodbridge, Va., the eldest of whom has spina bifida. Having had to return $60,000 in state disability benefits and medical coverage for the child, and paying medical expenses, Marrero recently filed for bankruptcy.

Most applicants "did not seek bankruptcy relief willingly," Kennedy says. "Millions of ... Americans in similar situations have filed for bankruptcy only after exhausting all other options."

A recent Harvard University study found that costly illnesses led to about half of all personal bankruptcies and that most people who file for bankruptcy protection because of medical problems have health insurance.

Democratic opponents argued that the changes would keep people who are overwhelmed by medical costs or loss of a job hopelessly in debt for the rest of their lives.

"The concerns and interests of consumers, poor and middle-class families, our uniformed service members and their families, and veterans were cast callously aside," said Sen. Patrick Leahy, D-Vt.

Over the past two weeks, Republicans knocked down Democratic attempts to ease the impact of the legislation on people facing huge debts they cannot pay, including single parents, the unemployed and the ill.

Wall Street investment bankers won a provision in the bill that will enable the same firm to work for a company both before and after it files for bankruptcy. Securities and Exchange Commission Chairman William Donaldson opposed the move; he said it would further undermine investor confidence already shaken by the Enron, WorldCom and other corporate scandals.

The bill orders the most sweeping overhaul of U.S. bankruptcy laws in more than a quarter-century, reworking a system created soon after the Republic was founded under which indebted people met their obligations to creditors while also being able to get a fresh start.

Under the new income test, those with insufficient assets or income could still file a Chapter 7 bankruptcy, which if approved by a judge, erases debts entirely after certain assets are forfeited. But those with income above the state's median income who can pay at least $6,000 over five years - $100 a month - would be forced into Chapter 13, where a judge would then order a repayment plan.

About 70 percent of the people who file for bankruptcy now do so under Chapter 7, while the other 30 percent or so fall under Chapter 13, according to the American Bankruptcy Institute.

Most of the Chapter 7 filers "don't have the income to fund a (repayment) plan that won't fail," said Samuel Gerdano, executive director of the group of bankruptcy judges, lawyers and other experts.

Current law allows a bankruptcy judge to determine under which chapter of the bankruptcy code a person falls.

  • Joel Roberts

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