The House gave final passage yesterday to legislation intended to make it harder for consumers to wipe out debt through bankruptcy, clearing the way for President Bush to sign the bill into law as he has promised to do.
Lawmakers voted 302 to 126 for the bill, which is identical to a measure the Senate passed last month. It would make the most significant changes to bankruptcy law since 1978. Its passage by Congress is a victory for executives in the credit card, retail and auto financing industries who have pushed it for nearly a decade. They argue that the changes are necessary to weed out abusers of the system who use Chapter 7 bankruptcy protection to shirk debt they can afford to pay.
House Speaker J. Dennis Hastert (R-Ill.), with Sens. Ted Stevens (R-Alaska), left, and Bill Frist (R-Tenn.), right, answers a question after signing the bankruptcy bill.
(Dennis Cook -- AP)
Bankruptcy Protection: What is Chapter 7 and Chapter 13 bankruptcy? And how will the new bankruptcy legislation change them?
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Mandatory Counseling, A Good Idea in Theory: Michelle Singletary says the bankruptcy counseling provision in the bankruptcy bill "is there as a roadblock. It's a setup, lobbied for by banks and credit card companies, to steer people away from bankruptcy to debt repayment plans."
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"This bill will help restore responsibility and integrity to the bankruptcy system by cracking down on fraudulent, abusive, and opportunistic bankruptcy claims," said House Judiciary Committee Chairman F. James Sensenbrenner Jr. (R-Wis.).
Sen. Charles E. Grassley (R-Iowa), the chief sponsor of the bill, said the bill would preserve two key principles: Those able to pay some of their debts would have to do so, and those who need a fresh start would still be able to extinguish their debt through bankruptcy.
Consumer advocacy groups and many Democrats, who fought the legislation, disagree, arguing that lenders' liberal credit policies and aggressive sales practices have been equally responsible for putting many Americans over their heads in debt. They say the new legislation would be too harsh on individuals driven into debt by job loss, sickness, divorce or military duty. That is especially unfair, they say, because the bill would preserve loopholes that enable wealthy individuals who file for bankruptcy to shield unlimited amounts of money in complex trusts and in multimillion-dollar homes in states including Texas and Florida.
"The big winner under the new law will be credit card issuers, whose reckless and abusive lending practices have driven many Americans to the brink of bankruptcy," said Travis B. Plunkett, lobbyist for the nonprofit Consumer Federation of America. "Now that Americans in bankruptcy will have to pay more back to creditors, they have a right to expect that credit card companies will lower their interest rates and fees. We will be watching credit card companies closely to see if they will become more responsible corporate citizens in return for this unprecedented gift from Congress."
Sensenbrenner, Grassley and other proponents estimate that about 100,000 debtors of the 1 million a year who now file Chapter 7 bankruptcy could repay more than the current system requires. Opponents say the number is closer to 30,000 but that, in any case, the new legislation does little to weed out abuse. Instead, they say, it adds red tape to the process and makes it more expensive by requiring debtors to seek counseling before filing for bankruptcy.
The legislation will become law six months after Bush signs it, which he must do within 10 days or it becomes law automatically.
The central feature of the new bill is that it would take away much of the discretion bankruptcy judges have in deciding who is eligible to wipe out substantial portions of debt by filing under Chapter 7 and who should be forced into filing for Chapter 13 bankruptcy, which requires some repayment of obligations over several years. Instead it would require judges to calculate eligibility by applying a formula, based on income and expenses, to would-be filers whose annual income is above the median in the region in which they live. Those who are required to file under Chapter 13 would have to make repayment for five years. Under current law, those payments cease after three years, even if the debt is not fully repaid.
It also would make consumers who file for bankruptcy wait two to four years longer before they can file again.