House-Passed Bankruptcy Rewrite Demands More From Debtors
By Matthew Tully, CQ Staff Writer
As debate over the nation's bankruptcy laws heated up this year, supporters of a dramatic system overhaul remained loyal to their key message: People who declare bankruptcy should be forced to pay back at least a portion of their debts, if they can.
It was clear June 10 that the message was out, as the House voted overwhelmingly for a bill that would make it more difficult for people to walk away from their debts.
The House passed the bill (HR3150) by a vote of 306-118 with no dissenting Republicans and with support from 84 Democrats, some of them brought on board by a bankruptcy rate that hit a record level in 1997. The vote sent a clear signal that wide-scale change to the bankruptcy system is a top House priority.
"We are running out of time, and we can no longer say it is up to the next generation to fix what is broken," said bill sponsor George W. Gekas, R-Pa., chairman of the House Judiciary Subcommittee on Commercial and Administrative Law.
Supporters will now turn to the Senate, where the Judiciary Committee has approved a less stringent measure (S1301) that the full chamber has yet to act on. Those pushing hardest for a bankruptcy revamp -- a coalition of retailers and lenders such as credit card companies, credit unions and banks -- are hoping the House vote sends a message to the Senate and President Clinton that changes must be made.
But Democratic opponents and consumer groups are promising to continue their fight against a bill they say lacks compassion for those suffering financially and puts more stock on rigid formulas than on individual circumstances. "People are not just walking away [from their debts]," argued Bill Delahunt, D-Mass. "They are being crushed by debt."
The key part of the bill is a "means test" that would determine who could file for bankruptcy under Chapter 7 of the bankruptcy code, which allows individuals to liquidate their assets and wipe away many of their unsecured debts, such as credit cards. The bill would transfer into a Chapter 13 repayment plan anyone who earned at least the national median income -- about $51,000 for a family of four -- and was found able to pay back 20 percent or more of unsecured debts over five years.
The bill also seeks to force those declaring bankruptcy to repay any debt incurred in the 90 days before they file, addressing concerns that some people rack up large debts just before declaring bankruptcy, knowing they can walk away from liability. Seeking to educate debtors, the bill includes requirements that people be informed about alternatives to bankruptcy before they file. It would also create a pilot program on financial management for some who do file.
The bill's provisions regarding business bankruptcies have produced little controversy. Some critics say, however, that the legislation would hurt small businesses, which would be subject to new reporting requirements, and would have to submit reorganization plans within 90 days of filing for bankruptcy. Chapter 12 of the bankruptcy code, which gives protection to family farmers, would be extended permanently.
During a seven-hour debate June 10, Republicans turned back Democratic amendments that sought to weaken key aspects of the bill -- including the means test -- and pushed through several amendments aimed at increasing support for the legislation.
The final vote was convincing, but the debate was often bitter, with members on both sides reiterating the arguments that have taken them this far.
Supporters came armed with statistics showing that a record 1.35 million people -- or one in every 70 households -- filed for consumer bankruptcy in 1997, up from 1.1 million in 1996. According to figures from the American Bankruptcy Institute, the upward trend has continued this year, with 20,000 more people filing for bankruptcy in the first quarter of 1998 than in the same three-month period in 1997.
The solution, Gekas and others said, is to make bankruptcy less attractive and to establish safeguards to prevent system abuses. With a quick trip to bankruptcy court, they argued, a person can now erase mounds of credit card debt, leaving creditors and other consumers to pick up the tab. "It's the easy street," said Scott McInnis, R-Colo. "It's the easy way out."
Bill supporters argued that the ease and benefits of declaring bankruptcy have worn away the stigma that used to be attached to filing. Even some of those who strongly oppose the bill agree that society is more accepting of bankruptcy.
"It used to be that people would whisper about the guy in the neighborhood who declared bankruptcy, like he had run down Main Street with his clothes off," said Stephen H. Case, a member of the National Bankruptcy Conference, an organization of bankruptcy lawyers, judges and academics. "Yes, the stigma is gone."
But bill critics, including Case, say supporters have ignored some key factors.
They say, for example, that many people enter bankruptcy reluctantly, pushed there by illness, job loss or divorce. With its means test, the bill makes too many assumptions without considering the route each individual takes to bankruptcy court.
Opponents also said lenders should be held responsible for aggressive marketing techniques and reckless lending practices. Delahunt produced a copy of a loan offer his daughter received from a credit card company. The offer included a check for $2,875 that could be immediately cashed at the bank. "My daughter is a full-time student with no regular income," Delahunt said.
One of the bill's fiercest opponents, Jerrold Nadler, D-N.Y., called it "one of the worst special interest bills we have considered in years. . . . This is a bill of, by and for the credit card companies."
Democrats had planned to offer numerous amendments but were disappointed when the Rules Committee, which sets the parameters of floor debate, decided to allow votes on only a dozen measures. "The American people are being cheated because they will not get an open debate," Nadler said.
The House accepted by voice vote an amendment by Rick Boucher, D-Va., to place child support and alimony as the top priority in Chapter 13 repayment plans. It also accepted by voice vote an amendment by E. Clay Shaw Jr., R-Fla., to allow parents to place liens on credit card payments made by a parent who owes child support.
Both amendments were aimed at quelling criticism that the bill, by giving credit card companies more ability to recover losses from those who declare bankruptcy, would make it harder for people to collect past-due child support and alimony. Some Democrats said the amendments did not go far enough, but supporters disagreed. "It's about as good a protection as we can get in there," Shaw said.
By a 222-204 vote, the House adopted an amendment by Gekas to remove the bill's $100,000 cap on "homestead exemptions." The exemptions vary from state to state, shielding at least a portion of a person's residence from creditors during the bankruptcy process. The cap was blasted by politicians from states that have no such limits. In a letter to Judiciary Chairman Henry J. Hyde, R-Ill., Texas Gov. George W. Bush called the provision "a clear violation of states' rights." (Vote 221, p. 1636)
The House defeated, 140-288, an amendment by Nadler to eliminate the test to determine who can enter Chapter 7, as well as restrictions to make it more difficult to erase credit card debts. Gekas said the amendment would have struck at the heart of the bill. "Personal responsibility," he said, "has to be returned to our society." (Vote 223, p. 1638)
Bills: HR3150 (H Rept 105-540), S1301 -- Consumer bankruptcy revisions.
Latest action: House passed HR3150, 306-118, on June 10.
Next likely action: Senate debates S1301 this month.
Reference: Related bill, CQ Weekly, p. 1531; Senate committee, p. 1390; House committee, p. 1304; subcommittee, p. 1073; Senate subcommittee, p. 866.
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