Bankruptcy reform close to OK in Congress

Published April 14, 2005 12:28PM (EDT)

WASHINGTON (AP) -- Bankruptcy legislation that could make it impossible for thousands of people to wipe away their debts is nearing passage by Congress.

After eight years of failed efforts by banks and credit card companies, the biggest overhaul of bankruptcy laws in a quarter-century has been catapulted toward enactment by a Republican majority buttressed by the fall elections. The legislation, which garnered some Democratic votes, cleared the Senate last month 74-25.

The House was voting Thursday on the bill, which 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.

President Bush has said he will sign the bill into law. It marks a second victory for Bush this year on pro-business legislation.

Opponents say the change would fall especially hard on low-income working people, single mothers, minorities and the elderly and would remove a safety net for those who have lost their jobs or face crushing medical bills.

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

Going into effect six months from enactment, the measure sets up an income-based test for measuring a debtor's ability to repay debts. It also requires people in bankruptcy to pay for credit counseling.

Underscoring the political sensitivity of the issue, the liberal group MoveOn said it was beginning a campaign of radio ads this week against House lawmakers of both parties who support the bankruptcy legislation.

"With solid control of both houses of Congress and the White House, the Republican leadership thinks they're free to show their true colors -- taking from the middle class and giving to the wealthy and corporations," said Tom Matzzie, the Washington director of MoveOn's political action committee.

"But we're going to call the Republican agenda what it truly is: a war on the middle class. ... The American people deserve to know who's on their side and who's trying to harm them for the sake of banks and ... credit card companies," Matzzie said.

In two weeks of debate and a series of votes on the Senate floor and later in the House Judiciary Committee, Republicans systematically rebuffed Democrats' efforts to soften the bill with amendments.

Backers in Congress and the financial services industry have been pushing the legislation for eight years, arguing 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.

New personal bankruptcy filings declined to 1,599,986 from 1,613,097 in the year ending last June 30, breaking an upward trend of recent years.

Banks, credit card issuers and retailers have lobbied vigorously for bankruptcy revisions that would force more people to repay at least part of their debt. Such a bill nearly passed in 2002. It failed when the Senate accepted, but House Republicans rejected, a Democratic amendment barring anti-abortion protesters from using bankruptcy to avoid paying court fines for blocking abortion clinics.

The bill creates a test for measuring a debtor's ability to pay.

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. 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.

Critics say that's unfair because many people who file for bankruptcy have lost their jobs, or are going to lose them.

Under the current system, a federal bankruptcy judge determines under which chapter of the bankruptcy code a person falls -- whether they have to repay some or all of their debt.

By Marcy Gordon

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