The Senate approved a measure yesterday backed by the credit card industry that would make it harder for people to wipe out debt through bankruptcy, setting a path for quick passage of the bill by the House within weeks.
The 74 to 25 vote in favor of the bill, which would make the most significant changes in bankruptcy law in more than 25 years, was propelled by a 55-member Republican majority that voted in unison, joined by 18 Democrats and one independent.
Transcript: Sam Gerdano, executive director of the American Bankruptcy Institute, was online to discuss the controversial bankruptcy bill.
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_____ Senate Legislation _____
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
House Republican leaders have promised to take up the bill next week and to deliver the votes to pass it. That commitment was based on the Senate keeping the bill free of major new amendments that would have undone scores of compromises made over several years in an effort to get it passed.
President Bush has said he would sign the bill. It would be the second major victory for big business in Bush's second term, after passage last month of legislation intended to curb class-action lawsuits against corporations.
Republicans repeatedly said that all amendments, even those some Republican senators agreed with, had to be defeated because any change would undo delicate, hard-won compromises. Using that reasoning, the Senate's 55 Republicans voted largely as a bloc to defeat most proposals yesterday, as they had during nearly two weeks of debate. During that time business groups warned against voting for amendments they didn't like. The National Retail Federation, for example, said it would call to the attention of its members any senator's vote for an amendment that in its view would "undermine the legislation."
In a victory for the Wall Street investment banking industry, the Senate voted, largely along party lines, against an amendment proposed by Paul S. Sarbanes (D-Md.) and Patrick J. Leahy (D-Vt.) to prohibit an investment bank that advises a company before it files for bankruptcy from continuing to advise it after the company is in bankruptcy. The Republican leadership, led by the bankruptcy bill's major sponsor, Sen. Charles E. Grassley (R-Iowa), pushed to defeat the amendment even though it was backed by Securities and Exchange Commission Chairman William H. Donaldson, a Bush appointee, who has called permitting such dual representation "a mistake" that could undermine investor confidence.
Republicans made exceptions to their own no-amendment rule yesterday, however, and allowed senators from their party to vote in favor of a few amendments, which passed. Sen. Charles E. Schumer (D-N.Y.) led an unsuccessful attempt to curb exemptions during bankruptcy for complex trusts that wealthy people can use to shield money from debtors. But to appease several Republican senators who are troubled by the trusts, the Republican leadership allowed Sen. James M. Talent (R-Mo.) to offer an amendment, which was adopted, that would extend to 10 years from the current two the time creditors have to challenge whether such a trust was created to hide money.
Schumer said the Talent amendment was keeping "the status quo" because it is hard to prove intent, in two years or 10. "Which millionaire is going to hire a lawyer and say, 'Make sure to leave a paper trail so they can prove intent'?" Schumer said. "Of course you can't prove intent, particularly if the intent is to hide the assets. . . . As my kids would say, 'Hello?' "
Republicans also agreed to an amendment offered by Sen. Richard J. Durbin (D-Ill.) to give some bankruptcy exemptions to disabled military veterans.
Otherwise the bill remained essentially as it was introduced. It would require credit card companies to give customers more information on how much longer it will take to pay off their balances by making minimum payments, a requirement the industry fought but eventually agreed to. It would give bankruptcy judges more power to impose more limitations on severance bonuses and other compensation paid to executives at companies that have filed for bankruptcy protection -- a provision some businesses, including the troubled asbestos industry, had hoped to change to apply only where fraud contributed to a bankruptcy, not just unethical or incompetent behavior.
The Senate-passed bill would require many people filing for bankruptcy court protection to repay a portion of their debt under Chapter 13 of the bankruptcy code rather than allowing them to erase it almost entirely under the more commonly used Chapter 7. It is estimated that the proposed legislation would force 30,000 to 100,000 additional filers a year into Chapter 13.
Consumer groups and many Democrats say the bill is too harsh on people dealing with sickness, divorce or job loss.
The banking, credit card and retail industries, which have pushed for the legislation for more than seven years, argue that changes to current law are needed to end abuse of the system by people who shirk their financial obligations when they could repay some of what they owe.
The three industries gave more than $56 million to political parties and candidates in the 2004 elections, most of it going to Republicans, according to the Center for Responsive Politics, a nonpartisan nonprofit research group that tracks political contributions. For example, more than 60 percent of a combined $44 million in political contributions by banks and retailers went to Republicans.
Grassley, Sen. Orrin G. Hatch (R-Utah) and Sen. Jeff Sessions (R-Ala.) praised yesterday's vote as a victory for people who pay their debts responsibly. Consumer advocates and Democrats including Durbin, Sen. Russell Feingold of Wisconsin and Sen. Edward M. Kennedy of Massachusetts said it was a triumph of special interests such as big banks and other lenders over the public interest.