The Atlanta Journal-Constitution
Nicolas Brulliard
WASHINGTON
The Senate opened debate Monday on a bill that could make it harder for tens of thousands of consumers to use bankruptcy to erase their debts. The bill would also make it harder for wealthy debtors in Florida, Texas and other states to take advantage of generous homestead exemptions. Banks and credit card companies say an overhaul of bankruptcy laws is needed to prevent abuses, but consumer groups say the proposed changes would deprive many families of a valuable safety net.
Bolstered Republican majorities in both chambers give the bill a better chance to pass Congress, and President Bush has indicated he would sign it. But Democrats in the Senate will raise the same objections that have blocked the bill several times since it was first introduced in 1997. “This legislation does not deny anyone access to bankruptcy relief, it just requires those who have the means to repay their debts based on their income ability to pay their debts,” said Sen. Orrin Hatch, R-Utah, during the Senate floor debate. “It is that simple. It is fair, it is long overdue, and it is for the better.”
Sen. Charles Schumer, D-N.Y., is widely expected to refile an amendment that blocked the bill last year. It would prohibit people convicted of illegal anti-abortion protests from using bankruptcy to avoid paying fines.
Democrats plan to start filing amendments today, and the Republican leadership said it hopes to get a vote on the bill by the end of this week.
The legislation proposes the biggest change in bankruptcy law in more than 25 years. It would require higher-income debtors to file under Chapter 13 of the bankruptcy code and repay part of their debts over five years. Under Chapter 13, the amount of debt to be repaid corresponds to the person’s disposable income after a deduction of necessary living expenses such as mortgage and car payments or health care bills. Under current law, all consumers may choose to file under Chapter 7, which allows them to discharge credit card bills and other unsecured debts while keeping their house and essential possessions such as a car, furniture and clothes.
The law would establish a test that takes income and expenses into account. People with less than the state median income would retain the right to file under Chapter 7.
The bill would also make it more difficult for wealthy homeowners to exclude most of their assets from bankruptcy by taking advantage of unlimited homestead exemptions in Texas, Florida, Iowa, South Dakota and Kansas. A provision in the bill would require debtors to live for at least two years in a state before filing for bankruptcy if they want to claim that state’s homestead exemption. Estimates of the number of bankruptcy filers who would be affected range from 3 percent to 10 percent. In 2003, U.S. filings reached a record 1.66 million.
Advocates of the legislation say that people who can afford it should pay back a portion of their debts. They argue that the money that doesn’t find its way to creditors results in higher credit card rates for all consumers.
“You have high-income filers who are walking away from $3 to $4 billion annually, some of which they can afford to repay, and it’s just not fair to the rest of us who then have to pick up the tab,” said Laura Fisher, spokeswoman for the American Bankers Association. Law professor Todd Zywicki of George Mason University said the bill seeks to restore fairness to the bankruptcy system and remind filers that bankruptcy is “a very serious thing.”
Travis Plunkett of the Consumer Federation of America countered that the intent is simply to recover more money in bankruptcy for credit card companies and other lenders. He said the bill should make credit card companies take more responsibility for aggressively luring consumers. Opponents also say the bill’s requirements would place too big a financial burden on families whose only way to cope with unexpected job losses or high health care bills is to file for bankruptcy.
“I tend to believe that the bankruptcy system has worked fine in terms of giving people a fresh start, and if I had to err, I would err on giving people a fresh start,” said Jeffrey Warren, a bankruptcy attorney in Florida.
The Senate bill was introduced by Sen. Charles Grassley, R-Iowa. Rep. James Sensenbrenner, R-Wis., has introduced a similar bill in the House.