Going bust may get more expensive

WASHINGTON – Senate Republicans used their enlarged majority Tuesday to clear the way for an overhaul of the nation’s bankruptcy system, giving banks and credit card companies a victory that had eluded them for years.

The legislation, which is expected to win final passage as early as tonight, would make it harder for debt-laden individuals to clear their debts in bankruptcy court. Instead, many people who seek bankruptcy protection from creditors would be required to devise a plan to repay much of what they owe.

Bankruptcy filings have more than doubled over the last 10 years, with nearly 1.6 million people seeking bankruptcy protection in 2004. Experts blame both creditors and borrowers.

On Tuesday, Senators voted 69-31 to halt debate on the bill after Republicans beat back a string of Democratic amendments that would have made it unacceptable to the House of Representatives. House members have yet to vote on the measure, but they’ve heartily endorsed similar bankruptcy bills in the past and are expected to pass this one.

The debate went to the heart of American consumerism. Legislation advocates argued that many Americans were escaping liability for their debts by filing for bankruptcy under Chapter 7 of the bankruptcy code, which permits them to erase their debts after forfeiting their assets. Retailers, bankers and other credit lenders said the proposal helps bankruptcy courts return to their original mission of providing the hopelessly indebted with a fresh start, not a windfall.

Consumer advocates and legal experts who opposed the legislation claim the rise in bankruptcies reflects the financial strains of rising medical costs and the downside of aggressive credit card marketing to risky, or sub-prime, borrowers who are more likely to default on payments. Revolving debt, most of it credit card debt, exploded from $54 billion in 1980 to $791 billion last year, according to the Consumer Federation of America.

Michael Staten, director of the Credit Research Center at Georgetown University, said the bill is neither as onerous to consumers nor beneficial to creditors as either side argues.

“I think this is the most over-hyped issue that I’ve seen in a long time, frankly on both sides … I don’t think it’s going to prevent the vast majority of people who need bankruptcy relief from getting it,” Staten said.

The legislation sets financial limits on who could qualify for bankruptcy under Chapter 7. The bill allows 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 can only file under Chapter 13 debt reorganization, which requires some repayment.

The law’s impact will likely be greatest in states with the highest bankruptcy filing rates: Utah, Tennessee, Georgia, Nevada, Indiana, Alabama, Arkansas, Ohio, Mississippi and Idaho, in that order, according to the American Bankruptcy Institute.

Independent studies estimate the legislation would force about 10 percent of debtors to seek Chapter 13 debt relief instead of Chapter 7 protection. Those studies estimate that debt ranging from $1 billion to $4 billion would be repaid under the proposed law over a five-year period.

But Staten estimates that only 4 to 5 percent of debtors will be forced into Chapter 13 because most people petitioning for bankruptcy can’t pay even a portion of what they owe.

Travis Plunkett, legislative director of the Consumer Federation of America, said the law, which numbers more than 500 pages, is filled with loopholes and restrictions that, when taken together, will bring added hardship to most debt relief filers.

For instance, income for the past six months is considered when determining whether a bankruptcy petitioner’s income exceeds the state median – the legislation’s proposed criteria for allowing a Chapter 7 filing.

“What if you just lost your job two months ago?” Plunkett asked. “This bill is filled with little traps like that.”

Republicans pushed aside the final obstacle to passage Tuesday when they defeated an abortion-related amendment to the bankruptcy bill that had impeded it from becoming law in the past. The proposal, while aimed at abortion protesters who hinder access to abortion clinics, would have forbidden any violent demonstrators from seeking bankruptcy protection from fines for illegal acts. The amendment, sponsored by Sen. Charles Schumer, D-N.Y., was voted down, 53-46.

In 2000, Schumer’s amendment passed the Senate 80 to 17, with 35 Republicans voting in its favor. This time, only four Republicans backed the change. The dramatic turnaround on the abortion amendment reflected the Republican Senate gain of four seats in last year’s elections, giving them 55 seats and a more conservative outlook. It also reflected the Republican Congress’ eagerness to pass a bankruptcy bill.

Feeling a long-elusive victory to be close, Republican backers exulted and urged colleagues to move speedily through the remaining Senate deliberations.

“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,” said Sen. Charles Grassley, R-Iowa, the bill’s primary author.

Frequently, supporters of the bill argued, bankruptcy is 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.

Opponents, too, have a litany of stories. Sen. Edward M. Kennedy, D-Mass., speaks of Zoraya Marrero, a single mother with three children from Woodbridge, Va., the eldest of whom has spina bifida. Having had to return $60,000 in state disability benefits and medical coverage for the child, and paying medical expenses, Marrero recently filed for bankruptcy.

Most applicants “did not seek bankruptcy relief willingly,” Kennedy says. “Millions of … Americans in similar situations have filed for bankruptcy only after exhausting all other options.”

A Harvard University study published recently found that costly illnesses led to about one-half of all personal bankruptcies and that most people who file for bankruptcy protection because of medical problems actually have health insurance.

Consumer and civil rights groups and unions say the legislation is unfair to low-income working people, single mothers, minorities and the elderly and would remove a safety net for those who have lost their jobs or face mounting medical bills.