Senate approves sweeping change that will force more to pay off debts

By William Neikirk
Chicago Tribune

WASHINGTON — In a victory for President Bush and credit-card companies, the Senate approved a controversial bill Thursday that would force more Americans filing for bankruptcy to pay back a portion of their debt.

The Senate passed the measure 74-25 despite sharp criticism from opponents who said it would work greater hardship on people forced into bankruptcy because of the loss of a job, illness or divorce.

Critics also said it likely would keep debtors in bankruptcy for longer periods than in the past while allowing high-income earners to continue to shield such assets as trust funds and expensive homes in states with large homestead exemptions, such as Texas and Florida.

The House is expected to give swift approval to the legislation, considered the most extensive overhaul of bankruptcy laws in 25 years.

Bush praised the bipartisan vote: "By reforming the system with this common-sense approach, more Americans — especially lower-income Americans — will have greater access to credit.''

Senate passage capped an eight-year effort by financial interests to toughen bankruptcy statutes. They see the legislation as a way to crack down on alleged abuse of the bankruptcy system by people who pile up large debts and expect them to be virtually written off in bankruptcy court.

If the measure becomes law as expected, many Americans who file for bankruptcy protection against their creditors will be unable to wipe out medical bills, credit card debt, automobile loans and other debt as they would have been able to do now.

The bill would set up a complex "means test'' that would determine whether bankruptcy filers would be able to entirely dissolve their debt or be forced to pay some of it back over a period of years.

Many bankruptcy filers would be subjected to credit-counseling programs as a condition of getting out of bankruptcy, a provision pushed by supporters to curb future bankruptcies. But the bill does not include any money to pay for the counseling. Experts in the field said consumers would have to seek out nonprofit companies to do the counseling and would have to pay for it themselves.

According to experts, the typical bankruptcy filer is a middle-class person who gets into financial trouble through debt over-extension caused by unemployment, illness or — particularly in the case of women — divorce.

Efforts by Democrats to amend the measure to soften some of its provisions on lower-income people failed. Senate Minority Whip Dick Durbin, D-Ill., lost on amendments that would have exempted military families from its provisions.

"The worst element of the bill is that it is going to force a lot of people deeper into debt,'' he said. "Many won't be discharged from debt under these payback plans because many of them have debts beyond their control. They will be burdened with these debts for years to come.''

But financial interests said the number and cost of bankruptcy filings have grown significantly.

"It has become a problem for credit unions,'' said Pat Keefe, spokesman for the Credit Union National Association, who estimated credit-union losses from bankruptcy "chargeoffs'' at $900 million last year.

"This bill is about fairness and accountability,'' said Sen. Orrin Hatch, R-Utah, adding that it would discourage people from abusing the law by seeking to dissolve all their debts under Chapter 7 of the bankruptcy code.

Instead, the measure seeks to force more Americans to file for bankruptcy under Chapter 13, which requires repayment schedules.

Opponents said the bill would do little to halt abuse of bankruptcy laws and instead would force more people living from paycheck to paycheck into debt-repayment schedules that they can ill afford to meet. Nearly 1.5 million people sought bankruptcy protection last year, but only 30 percent of them had to repay a portion of their debt through Chapter 13 filings.

Critics said the bill would remove a safety net for many Americans who do not have significant savings and find themselves in bankruptcy court because they have lost their jobs or suddenly face a large medical bill.

In order to qualify for the more liberal Chapter 7 forgiveness of debt, bankruptcy filers could not have income higher than the state's annual household median income. If they exceeded the statewide median income and were deemed able to pay their creditors at least $100 a month over five years, they would be put into Chapter 13 repayment plans.

The American Bankers Association estimated that the bill would push perhaps 10 percent of the 1.1 million Chapter 7 filers into repayment plans. The American Bankruptcy Institute estimated that between 3.5 percent and 20 percent of those who now dissolve their debts through Chapter 7 would be pushed into Chapter 13 repayment plans.

Once a bankrupt person is forced into one of these repayment plans, tougher rules would be applied on the amount of debt that would have to be repaid. The chief provision would deny debtors the right to repay only the market value of their cars, as they are currently able to do. Instead, they would have to pay back what they owe on the vehicles — no matter how much the vehicles had depreciated.

Bankruptcy Judge George Blaine in Nashville, Tenn., and University of Texas law professor Jay Westbrook said this provision alone would make it onerous on debtors. Blaine said many debtors would simply give up their vehicles.

Westbrook said that if debtors wanted to keep their cars under this provision, it would mean that, as they made their payments to their car financiers, there would be less money to pay back their unsecured credit card debt. He said it might turn out that credit-card companies would not be able to collect as much money as they currently believe.

Chicago bankruptcy lawyer Greg Jordan agreed that credit card companies might not find the bill to be the bonanza they hoped it would be. He said the credit card industry has been irresponsible in sending credit cards to Americans with few financial resources.

"It used to be a joke that as soon as you went into bankruptcy, you got credit cards,'' he said.

Jordan said he believes that more people would be discouraged from filing for bankruptcy because of the additional legal hoops they would be put through.

"You are going to find a lot of people who will just give up and go underground,'' he said.

Bankruptcy lawyers are also upset because the bill would make them liable for mistakes their clients might make in submitting financial statements to the courts, he said.

Travis Plunkett, spokesman for the Consumer Federation of America, said the new means test is "unnecessarily rigid'' and doesn't give judges the discretion they now have to decide who would be permitted to dissolve debts and who would be required to repay them.

"I don't think somebody who is suffering major illness is the same as somebody who runs up $100,000 in gambling debt,'' he said.

"We don't see any abuse in the (current) system,'' Blaine said. "I would like to see the system work more effectively.''

But with approval of the new legislation, he said, "I fear for it.''