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Bankruptcy Bill Nears Final Senate Vote

By Kathleen Day
Washington Post Staff Writer
Wednesday, March 9, 2005; Page A01

The Republican-controlled Senate cleared the way for a final vote as soon as today on an industry-backed bill to make it harder for consumers to wipe out debt through bankruptcy.

Senators voted 53 to 46 against an amendment offered by Sen. Charles E. Schumer (D-N.Y.) that had helped sink the legislation in prior years. The measure would have made it harder for people who break the law while protesting abortion to use bankruptcy to avoid paying court-ordered fines.

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If enacted, the bill would:

• Set up a new test for measuring a debtor's ability to repay. People 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 order a repayment plan.

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

• Require people filing for bankruptcy to pay for credit counseling.

• Give top priority to a spouse's claims for child support among creditors' claims on a debtor in bankruptcy.

• Allow for special accommodations for active-duty service members, low-income veterans and those with serious medical conditions in the new income test for bankruptcy applicants.

• Restrict the homestead exemption in states to $125,000 if the person in bankruptcy bought his or her residence at least three years and four months before filing. Florida, Iowa, Kansas, South Dakota and Texas have unlimited homestead exemptions that allow wealthy people to file for bankruptcy and keep their mansions in those states sheltered from creditors.

Source: The Associated Press



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In another vote yesterday, 14 Democrats joined Republicans in a 69-to-31 majority to limit to 30 hours further debate on the legislation. Sixty votes are needed to cap debate in the Senate, and the chamber's 55 Republicans were uncertain just hours before the afternoon vote whether enough Democrats would join them.

Democrats intend to offer dozens of amendments in the debate time remaining, but Senate Republicans, led by Sen. Charles E. Grassley (R-Iowa), think they have the votes to defeat them and then easily pass the legislation, which the credit card and finance industry has pushed for nearly eight years.

The bill would then go to the House, where Republican leaders have promised to move quickly if the Senate keeps it free of controversial amendments. A final House vote could come as early as next week or after Congress returns from a week's vacation for Easter, congressional aides said yesterday. President Bush has said he would sign the bill, which would be the most significant change to bankruptcy laws in more than a quarter-century.

"The sooner we finish work in the Senate and get the bill to the House, the sooner our bankruptcy system will be focused as it should be on helping those with real need and less vulnerable to abuse by consumers who have the ability to repay their debts," Grassley said after the Schumer amendment was defeated and the limit on debate passed.

Opponents of the Schumer amendment such as Sen. Orrin G. Hatch (R-Utah) described it as a "poison pill" intended to kill the bill by invoking the divisive issue of abortion about a problem that doesn't exist.

The Planned Parenthood Federation of America, a nonprofit organization that provides counseling on birth control and reproduction, disagreed, saying antiabortion protesters know how to take advantage of loopholes by shedding assets before appearing in court and then filing for bankruptcy after being found guilty.

"It is ironic that some policymakers who profess to be hard on crime believe that these convicts should not be required to pay court-imposed fines and penalties," said Karen Pearl, the organization's interim president. "This is an unconscionable double standard."

The credit industry, including banks, credit unions, car manufacturers and retailers, says changes in the law are needed to prevent abuse by those who could afford to repay some of their debt under a Chapter 13 bankruptcy reorganization but instead file under Chapter 7 to wipe out nearly all financial obligations.

Consumer groups and most congressional Democrats say abuses are minimal. They say that most people who file for bankruptcy do so because of forces beyond their control, such as illness, divorce or job loss, and that the current law provides bankruptcy judges with sufficient tools to weed out those who misuse the system.

The bill's opponents say the proposed legislation would be overly harsh to consumers while preserving loopholes that wealthy people use in bankruptcy to hide millions of dollars in fancy homes and complex trust funds. They also contend that the bill would do little to curb lending practices such as abusive penalty fees and interest rates that make it hard for many financially troubled consumers to dig out of debt.

Under current law, people filing under Chapter 7 can wipe out their debts if they agree to give up most of their assets. They do not have to prove insolvency, but a court can deny them bankruptcy status if a judge thinks they are abusing the system.

Under the proposed law, people filing for bankruptcy would have to meet certain criteria outlined in a formula that permits judges little leeway.

The American Bankruptcy Institute, a nonpartisan research and education organization, says about 3 percent of those who file under Chapter 7 could afford to repay a portion of their debt under a court-supervised Chapter 13 plan. Lobbyists for the proposed legislation say it's closer to 10 percent. Using those estimates, the legislation would force 30,000 to 100,000 people a year who seek to wipe out their debts to repay some portion of them.

"It's not a reform bill, it's a special-interest special," said Travis B. Plunkett, legislative director for the Consumer Federation of America, a nonprofit research and advocacy group. "It's a triumph of big banks and other lenders over the public interest. It's going to make it more difficult for families who have suffered genuine financial misfortune to get a fresh start in bankruptcy, and it rewards reckless and sometimes abusive practices by the credit card companies."

Plunkett and other consumer advocates said that as many as 66 percent of Chapter 13 filers end up not being able to repay under the reorganization plan and end up in Chapter 7. The proposed bill would only increase the percentage of those who fail under bankruptcy reorganization, he said.


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