Bankruptcy Reform Revisited

After getting very close to passage last year, legislation making it more difficult for consumers to wipe away their debts in bankruptcy court is moving in Congress again.

Key Republican lawmakers want to move quickly to draft and vote on a bill, "but we will be thoughtful in the process," Rep. Christopher Cannon, R-Utah, chairman of a House Judiciary subcommittee, said at a hearing Tuesday.

Rep. Mel Watt, D-N.C., said he supports changes in the bankruptcy laws in principle but not the House legislation as written, which he said would create "a paupers' bankruptcy court."

"I think we're about to engage in a travesty on the public," said Watt, who is from Charlotte, a major banking center.

Banks, credit card companies and retailers have pushed since 1997 for the legislation, which arises again as the record pace of new personal bankruptcies in 2002 is expected to continue this year.

Lawmakers of both parties — and President Bush — support an overhaul of the federal bankruptcy laws. Consumer and civil rights groups and unions oppose it, saying it is unfair to low-income working people and would remove a safety net for those who have lost their jobs or face huge medical bills.

Bankruptcy filings jumped to a record high last year, gaining 5.7 percent over 2001, according to data released last month. The figures compiled by the Administrative Office of the U.S. Courts showed that new bankruptcy filings in 2002 totaled 1,577,651, up from 1,492,129 in 2001, the year in which the economy slid into recession.

"Concerns about the rising tide of bankruptcy filings and the ever-increasing number of abusive filings are shared across the country," Lucile Beckwith, president and chief executive officer of Palmetto Trust Federal Credit Union in Columbia, S.C., said at the hearing.

Beckwith spoke on behalf of the Credit Union National Association, which she said estimates that nearly 46 percent of all credit union losses last year, about $775 million, stemmed from bankruptcies by customer-members.

House and Senate leaders, including Senate Judiciary Committee Chairman Orrin Hatch, have promised to move quickly on the bankruptcy legislation. Now that the Republicans control both chambers, the process is expected to be speedy.

Rep. James Sensenbrenner, R-Wis., the House Judiciary chairman, put forward the nearly enacted 2002 measure after removing a provision barring anti-abortion protesters from seeking shelter through bankruptcy laws to avoid paying court-imposed fines. Last year, that provision led conservative anti-abortion Republicans to join with House Democrats opposed to bankruptcy overhaul to block the bill, a House-Senate compromise that came the closest to passage of any of the six previous years' versions.

More than 225 groups, including the AFL-CIO, Consumer Federation of America, church groups, the NAACP, the National Organization for Women and the Public Interest Research Group, signed a letter Monday to House leaders asking them to reject the new bill as written.

"At a time when many Americans have been harmed by a very shaky economy and a massive wave of corporate scandals, moving forward mechanically with ... (the bill) would be a mistake," the groups said. "Rising bankruptcies are driven by economic difficulties. The timing of this bill could not be worse."

The legislation could especially hurt women, minorities, the unemployed and the elderly, the groups said.

Proponents of the legislation insist it is needed to stop abuse of the bankruptcy system by people who can afford to repay their debts. The abuse, they say, creates a hidden tax of about $400 a year on every American family through higher interest rates passed on by consumer credit businesses and other charges.

The goal is "to prevent people who have been abusing the system from continuing to do so," said Tom Lehner, executive vice president of the American Financial Services Association, a group representing retail credit businesses.

Under current law, Chapter 7 of the U.S. Bankruptcy Code allows people to erase their credit-card and other debts, usually in exchange for giving up some personal assets. Filings under Chapter 13 force people to repay debts over time in accordance with a court-approved plan.

A bankruptcy judge or a private attorney appointed by the Justice Department usually decides whether someone qualifies for dissolution of debts or should be forced to repay under a reorganization plan.

The legislation would apply a new standard in which, if a debtor had sufficient income to repay at least 25 percent of the debt over five years or earned at least the median income for his state, he or she would be forced into a Chapter 13 repayment plan.