BANKRUPTCY REVISIONS COULD CUT DEBT GLUT

Congress is trying to reform bankruptcy laws for the first time since the early 1980s.. The House has already passed one version of new rules and regulations. The Senate has adopted similar changes. President Bush has indicated he wants to sign the new legislation.

The changes would make it more difficult for Americans to wipe their debt clean. Opponents say this will make it harder for working people to obtain relief. Proponents say the legislation forces those who abuse credit to take more responsibility.

The proposed changes come against a backdrop of enormous personal debt. The United States has for several years recorded negative savings rates, not because no one saves any money, but because the cumulative credit of all Americans exceeds their savings.

Until just a couple of years ago, the number of bankruptcy filings had been steadily climbing. Thanks in part to the recent economic boom, fewer Americans were forced in the past two years to seek debt relief through bankruptcy. Now some economists fear another bankruptcy onslaught unless the economy perks up.

For individuals, there are two basic bankruptcy options:

Under Chapter 7 of the federal bankruptcy code, individuals with too much debt can seek to have what they owe set aside entirely. With this plan, once a bankruptcy judge approves, someone with even large amounts of debt suddenly doesn't owe a penny, except for certain obligations such as taxes and college loans.

Under Chapter 13, individuals who have the ability to pay can be placed on a closely monitored repayment schedule. Sometimes individuals pay back everything they owe, but more than likely they pay back a portion of the total debt under Chapter 13.

In addition, the federal code has granted considerable leeway to states to set guidelines such as homestead exemptions. In some states, individuals who file for bankruptcy must liquidate virtually all of their assets. But in other states, multimillion-dollar homes are exempt and can't be touched to repay what is owed.

The Senate-passed legislation would cap the homestead exemption at $125,000. The president says he is against the cap, which means individuals who are smart enough to put most of their assets in an expensive home could continue to protect their wealth while obtaining debt relief.

Also, the Senate revisions would require a debtor who is able to pay at least 25 percent of what he owes over five years to make payments rather than getting a Chapter 7 clean slate.

Most of the changes in the House and Senate bills are both sensible and overdue. Easy credit has put far too many Americans into a hole. With stiffer bankruptcy laws, more Americans might exercise credit caution.