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Bankruptcy Laws Face Overhaul

Moving toward the most far-reaching overhaul of the nation's bankruptcy laws in 20 years, the House must decide whether it should be more difficult for Americans to avoid paying debts.

Opponents charge that lawmakers are bending to the banking industry and credit card lobbies at the expense of honest working people hit by financial disaster.

The House bill under consideration would establish for the first time a "needs" test for people filing for bankruptcy court protection from creditors.

It would require people earning at least the median U.S. income (about $51,000) to file for financial reorganization under Chapter 13, subject to a court-ordered repayment plan, if they can pay back 20 percent of their debt within five years.

Credit card companies have complained that too many people have taken shelter under the more lenient Chapter 7, which erases some debts, when they can actually afford to reorganize their debts under Chapter 13.

"This bill is going to affect the enormous increase in bankruptcies," Rep. Bill McCollum, R-Fla., a chief sponsor, said Tuesday in a telephone interview.

McCollum said support for the measure is broad and bipartisan, with most Republicans and about one in four Democratic lawmakers endorsing it, likely assuring House passage.

The House was expected to take up the measure Wednesday.

The Clinton administration, which supports some changes in the bankruptcy laws, has said it cannot support the House bill in its current form. The administration prefers a more temperate Senate measure but also would like to see changes in it.

The House is acting in response to a staggering trend. Despite the strong economy, the number of Americans filing personal bankruptcies last year jumped to 1.2 million, up more than 300 percent since 1980.

The rising tide of bankruptcies spills across demographic, ethnic, and social lines. Factors cited include a rising divorce rate, expansion of legalized gambling, changes in health insurance, aggressive soliciting by credit card companies, and widespread advertising by bankruptcy attorneys.

Credit card companies, retailers, and other credit issuers, meanwhile, contend the personal bankruptcy system has run amok with people abusing the laws and some celebrities making it seem almost fashionable to seek bankruptcy protection.

But consumer groups and other opponents of the legislation blame banks and the consumer credit industry, which continues to send out billions of credit card solicitations each year. The House bill would "turn our courts into a debt collection agency" for the credit industry, said Consumers Union, a consumers' advocacy group.

A political flashpoint in recent weeks has been complaints by consumer groups and Democrats, including Hillary Rodham Clinton, that provisions in both the House and Senate bills would make thousands of single mothers and children owed support take a bac seat to credit card companies in collecting debts.

Under the provisions, credit card debt incurred 90 days before an individual files for bankruptcy would be considered nondischargeable, meaning it couldn't be erased or written down. Child support and alimony, federal taxes, and federal student loan debts are nondischargeable under current law.

The Democrats contend that would hurt children because nondischargeable debts are considered the most important to pay and usually get paid first, forcing single mothers to compete for payment with credit card companies.

Moving to defuse the criticism, Senate Republicans adopted an amendment to give child support and alimony payments top priority in bankruptcy cases, putting them ahead of federal taxes, bankruptcy attorneys' fees, and other obligations.

McCollum said House Republicans also had corrected the problem. "We have done everything humanly possible to give child support top priority," he said.

But Gary Klein, an attorney with the National Consumer Law Center in Boston, charged that the Republicans "are trying to paper over a very serious problem for women and children."

Written by Marcy Gordon

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