Senate approves bankruptcy overhaul - East Valley Tribune: Business

Senate approves bankruptcy overhaul

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Posted: Friday, March 11, 2005 6:12 am | Updated: 9:14 am, Fri Oct 7, 2011.

WASHINGTON - The Senate approved a measure Thursday that would make it harder for individuals to wipe out debt to banks, retailers and credit card companies through bankruptcy, setting a path for quick passage of the bill by the House as early as next week.

The 74-25 vote in favor of the bill, which makes the most sweeping changes in bankruptcy law in more than 25 years, was propelled by a 55-member Republican majority who voted in unison, joined by 18 Democrats and one independent.

House Republican leaders have promised to take up the bill within weeks — 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 carefully crafted over several years in an effort to secure passage of the measure.

President Bush has said he would sign the bill. It would be the second major win for big business in Bush’s second term, following passage last month of legislation intended to curb class-action lawsuits against corporations.

‘‘I applaud the strong bipartisan vote in the Senate to curb abuses of the bankruptcy system,’’ Bush said in a statement. ‘‘Reforming the system with this common sense approach, more Americans — especially lower-income Americans — will have greater access to credit.’’

Lenders had been pushing the legislation for eight years. They argued too many people with ability to repay at least a portion of the money they owe were walking away from all their debts under current law.

‘‘Those who can pay their bills should pay their bills. That’s the American way,’’ said Sen. Orrin Hatch, R-Utah.

Democrats had succeeded in blocking the legislation year after year. They argued the changes advocated by Republicans would keep people who are overwhelmed by medical costs or loss of a job hopelessly in debt the rest of their lives.

‘‘It will have a real impact on real people all over this country,’’ said Sen. Russ Feingold, D-Wis.

Over the past two weeks, Republicans knocked down Democratic attempts to ease the impact of the legislation on people facing huge debts they cannot pay, including single parents, the unemployed and the ill.

Wall Street investment bankers won a provision that will enable the same firm to work for a company before and after it files for bankruptcy. Securities and Exchange Commission chairman William Donaldson opposed the measure; he said it would further undermine investor confidence already shaken by the Enron, WorldCom and other corporate scandals.

Supporters of the bill said bankruptcy often was the last refuge of gamblers, impulsive shoppers, divorced or separated fathers avoiding child support, and multimillionaires — often celebrities — who buy mansions in states with liberal homestead exemptions to shelter assets from creditors.

Each year, somewhere between 30,000 and 210,000 people — from 3.5 percent to 20 percent of those who currently dissolve their debts in bankruptcy — would be disqualified from doing so under the legislation, according to American Bankruptcy Institute estimates. The institute is a group of bankruptcy judges, lawyers and other experts.

The legislation would set up an income-based test for measuring a debtor’s ability to repay debts. It would require people in bankruptcy to pay for credit counseling and stiffen some legal requirements for debtors in the bankruptcy process.

Under the new income test, those 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 then order a repayment plan.

About 70 percent of the people who file for bankruptcy now do so under Chapter 7, while the other 30 percent or so fall under Chapter 13, according to the American Bankruptcy Institute.

Most of the Chapter 7 filers ‘‘don’t have the income to fund a (repayment) plan that won’t fail,’’ said Samuel Gerdano, the group’s executive director.

Under current law, a bankruptcy judge determines under which chapter of the code a person falls.

What bankruptcy law would do

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which passed the Senate on Thursday and is expected to pass in the House of Representatives, limits who can qualify for bankruptcy under Chapter 7 of the bankruptcy code. Chapter 7 is a popular provision with many bankruptcy filers because it permits them to erase their debts after forfeiting their assets. The new legislation would:

• Allow bankruptcy petitioners who earn less than the median income of their state to file under Chapter 7. Those who earn more and can repay at least $6,000 over five years could file only under Chapter 13 debt reorganization, which requires some repayment.

• Require bankruptcy petitioners to pay for and undergo credit counseling within 180 days of filing.

• Extend from six to eight years the time that must pass before a debtor who’s received a Chapter 7 discharge can get another discharge.

• Disallow Chapter 13 discharges if the debtor filed for bankruptcy under Chapters 7, 11 or 12 within four years of the Chapter 13 filing or within two years of a previous Chapter 13 filing.

• Limit state homestead exemptions to $125,000 if the debtor bought the residence within 40 months of filing. However, Florida, Iowa, Kansas, South Dakota and Texas have unlimited homestead exemptions that protect expensive homes from creditors.

For more information about the legislation, see the report by the Congressional Research Service at pdfs/s256/CRS-S256.pdf.

More information

For more information, go to these Web sites: Debt Counselors of America,

Consolidated Credit Counseling Services Inc., American Bankruptcy Institute,

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