New Bankruptcy Legislation

Fri Mar 11,12:36 PM ET

WASHINGTON - The biggest rewrite of bankruptcy laws in 27 years is about to turn the path to a debt-free second start, undertaken by more than 1 million Americans each year, into a road less traveled.

A bankruptcy overhaul bill the Senate passed by a 74-25 vote on Thursday would require people with incomes above a certain level to pay credit-card charges, medical bills and other obligations under a court-ordered bankruptcy plan.

Between 30,000 and 210,000 people — from 3.5 percent to 20 percent of those who dissolve their debts in bankruptcy each year — would be disqualified from doing so under the legislation, according to the American Bankruptcy Institute.

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.

Eighteen Democrats and the Senate's lone independent joined Republicans in approving the legislation. It goes to the House next month and then to President Bush (news - web sites), who made it a priority after the GOP increased its majorities in the fall elections.

That would mark a second victory for Bush this year on pro-business legislation he had sought.

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

Congressional and industry backers of the legislation have been pushing for it for eight years, arguing that too many people with the ability to repay at least a portion of the money they owe were walking away from all their debts.

"This legislation restores personal responsibility and fairness to an abused system," said Senate Majority Leader Bill Frist, R-Tenn.


Democratic opponents argued that the changes would keep people who are overwhelmed by medical costs or loss of a job hopelessly in debt for the rest of their lives.

"The concerns and interests of consumers, poor and middle-class families, our uniformed service members and their families, and veterans were cast callously aside," said Sen. Patrick Leahy (news, bio, voting record), D-Vt.

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 in the bill that will enable the same firm to work for a company both before and after it files for bankruptcy. Securities and Exchange Commission (news - web sites) Chairman William Donaldson opposed the move; he said it would further undermine investor confidence already shaken by the Enron, WorldCom and other corporate scandals.

The bill orders the most sweeping overhaul of U.S. bankruptcy laws in more than a quarter-century, reworking a system created soon after the Republic was founded under which indebted people met their obligations to creditors while also being able to get a fresh start.

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.

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, executive director of the group of bankruptcy judges, lawyers and other experts.

Current law allows a bankruptcy judge to determine under which chapter of the bankruptcy code a person falls.

The bill is the second piece of pro-business legislation on which Congress has acted quickly this year. Last month it sent Bush a bill placing most large multistate class-action lawsuits under federal court jurisdiction, making it more difficult for plaintiffs to join together and win multimillion-dollar judgments in state courts.