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Congress Ready to Tighten Bankruptcy Law

February 14, 2005
Congress is poised to pass legislation that would make it much harder for consumers to wipe out their debts through bankruptcy. Congress has tried to pass similar measures for years and GOP leaders are determined to succeed this time.

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Backers of the legislation -- chiefly credit card issuers -- claim that consumers are too often able to file Chapter 7 bankruptcy, liquidate their assets and get away without paying anything on their debts.

The American Bankers Association (ABA) says the legislation would correct "problems in the current bankruptcy system, which often permits those with financial resources to walk away from their financial obligations."

What galls the bankers is that consumers wiped out by illness, job loss and divorce often have a few dollars left after selling their house, cars and other property. Instead of using that money to rebuild their lives, consumers should have to use it to pay at least some of their debts, the bankers argue.

This year's bill would require those filing for bankruptcy to go through a two-step process that demonstrates they have exhausted their assets. It's expected to force 30,000 to 100,000 people a year to make some repayment under Chapter 13 instead of filing under Chapter 7, which wipes out all obligations.

On the other hand, the proposed legislation does little to close a loophole that lets wealthy individuals shelter large amounts of money in real estate in Texas, Florida and other states which have a homeowner's exemption law.

It's the homeowner's exemption that lets disgraced but wealthy Wall Street, energy and oil industry executives retreat to their mansions in gated communities after a pre-arranged bankruptcy filing.

The total number of bankruptcy cases filed in 2004 totaled 1,618,987, down from the 1,661,996 cases filed for the same period in 2003. The bankers say that, even though the number of bankruptcies is falling, too many consumers are getting away with a few dollars to their name.

"Despite the decline, bankruptcies remain at historic highs, well above the 1.5 million record first set in 2002. This record number causes American families to pay an additional $400 a year in increased costs of goods and services," the ABA argues.

The latest piece of legislation does nothing to curb abusive lending practices. It requires only that lenders point out the pitfalls of paying the minimum balance on a credit card account and provide a toll-free number where consumers could get more information about how long it will take them to pay off their bills.

Congress has tried for years to pass similar bills. It succeeded one time but then-President Clinton refused to sign the measure, saying it was unfair to consumers. Last year, a glitch developed over using bankruptcy to shield individuals from fines imposed for illegal antiabotion protests.

This time around, GOP leaders say they are moving fast to get the bill through before complications arise. Judiciary Committee Chairman Arlen Specter (R-Pa.) says his committee will vote on the bill this week and send it to the full Senate by next week. House leaders are standing by to speed the bill through the lower chamber.

President Bush has left no doubt he will sign the legislation.

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