Congress passes legislation making it more difficult to wipe away debt

WASHINGTON -- Bankruptcy lawyers expect thousands of debt-burdened people to rush to courthouses to beat a new law making it harder to wipe the slate clean of credit card bills and other obligations.

The biggest changes in U.S. bankruptcy laws in a quarter-century will occur 180 days after President Bush signs a bill that Congress sent him Thursday. The 30,000 to 210,000 people that the American Bankruptcy Institute estimates will be affected by the new law can escape its impact if they file for bankruptcy before then.

"We will be up working late trying to get those petitions filed before the deadline," said Eric Roland Spencer, a bankruptcy attorney practicing in Roanoke, Va.

In recent weeks as Congress has debated the legislation, Spencer said, he's seeing seven to eight clients a day, up from four a day beforehand.

The bill passed by the House Thursday on a 302-126 vote marks the second major change in law to benefit business since Republicans increased their House and Senate majorities in last fall's elections. The Senate passed the bill last month, 74-25.

The measure requires people with incomes above a certain level to pay credit-card charges, medical bills and other obligations under a court-ordered bankruptcy plan.

Opponents say the change would fall especially hard on 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 crushing medical bills.

The legislation "protects the credit industry at the expense of the consumer," Rep. Alcee Hastings, D-Fla., declared in House debate. "It will drive more Americans deeper into financial crisis and weaken the nation's economy and social structure."

But backers in Congress and the financial services industry argue that bankruptcy frequently 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.

"Those who abuse the system make getting credit more expensive for everyone," House Speaker Dennis Hastert, R-Ill., said after the vote as he and Senate Majority Leader Bill Frist, R-Tenn., signed the bill to speed it to the president. "Bankruptcy is for those who need help, not those who want to shift costs to other hardworking Americans."

During debate, Rep. David Dreier, R-Calif., pegged those costs, in the form of higher interest rates, at an average $400 a year per family.

Bush said he was eager to sign the bill to curb abuses of the system.

"These commonsense reforms will make the system stronger and better so that more Americans -- especially lower-income Americans -- have greater access to credit," he said.

In a bitter scene on the House floor, Democrats -- most of whom opposed the legislation -- used an array of parliamentary maneuvers to delay the final vote, forcing an unsuccessful roll call vote on adjourning the session and lining up one by one to register their objections in brief, biting statements.

Democrats were furious that the GOP leadership allowed none of the 35 amendments they had proposed earlier to be voted on. They particularly wanted provisions that would exempt from the new bankruptcy requirements military personnel returning from Iraq and Afghanistan, and people whose indebtedness is the result of financial identity theft.

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

The bill is the second piece of pro-business legislation Congress has acted on quickly this year. In February, 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.

Taking effect six months from enactment, the bankruptcy measure would set up an income-based test for measuring a debtor's ability to repay debts. 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. 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.

The legislation also would require people in bankruptcy to pay for credit counseling.

Underscoring the issue's political sensitivity, the liberal group MoveOn was beginning a campaign of radio ads this week against House lawmakers of both parties who support the legislation.

"We're going to call the Republican agenda what it truly is: a war on the middle class," said Tom Matzzie, the Washington director of MoveOn's political action committee.

New personal bankruptcy filings edged down from 1,613,097 in the year ending June 30, 2003, to 1,599,986 in the year ending last June 30, breaking an upward trend of recent years.

Under the current system, a federal bankruptcy judge determines whether individuals must repay some or all of their debt.

---

On the Net:

Information on the bill, S. 256, can be found at http://thomas.loc.gov/

American Bankruptcy Institute: http://www.abiworld.org