Major revision of bankruptcy law likely

Gannett News Service

WASHINGTON — As 4,000 American families file for bankruptcy protection every day — on track to set an annual record — a small group of lawmakers will be rewriting the nation's bankruptcy laws to make it harder for people to walk away from their debts.

Returning to work after Congress' August recess, 23 members of a House-Senate conference committee must negotiate a compromise on bankruptcy reform. The House and Senate approved separate reform bills early this year, but conferees must agree on one version to send to President Bush, who supports reform.

Chances are good, experts say, that the first major revision of bankruptcy laws since 1978 will become law.

"The differences between the two versions are not dramatic. They're mostly in degree rather than philosophy," said Samuel J. Gerdano, executive director of the American Bankruptcy Institute, a nonpartisan research organization that does not take stands on legislation. "It is shifting the law from what is largely now a pro-debtor or debtor-oriented law to one which is much more creditor-friendly."

About 70 percent of personal bankruptcies are filed under Chapter 7, in which many debts, like credit card debts, are simply forgiven. Both the House and Senate versions steer more debtors into Chapter 13 bankruptcy, in which debtors must work out a repayment plan.

Every year, $44 billion in debts are wiped off the books, according to the Coalition for Responsible Bankruptcy Laws, which represents banks, credit card companies, retailers and other creditors. The average American household pays $400 each year in extra credit costs passed on to consumers, according to George Wallace, a lawyer who represents the coalition.

Taking advantage?

Wallace's group estimates that 10 percent to 20 percent of bankruptcy filers are taking advantage of the system: racking up debts and then going to court to avoid paying them. Other studies suggest only about 3 percent of filers could afford to repay their debts. Either way, the complicated "means test" in the reform bill is an attempt to weed out wealthier debtors who really could afford to work out a repayment plan.

The bill is of vast importance to the credit card industry, whose executives and political funds donated more than $9 million to Washington politicians during the last election, according to the Center for Responsive Politics, which tracks campaign funding.

The bill could provide an extra $4 billion to $5 billion a year to creditors, according to Wallace.

Opponents of the bill, mostly liberal Democrats, have derided it as "a credit card industry bailout."

"Does (the legislation) call on the credit card industry to perhaps take some accountability for pumping credit cards on our children and all sorts of other people who then find themselves in trouble and have to file for bankruptcy? No," said Sen. Paul Wellstone, D-Minn.

Plantation, Fla., postal worker Charles Trapp — who declared bankruptcy after his daughter contracted a rare disease — told the House Judiciary Committee in February that as a mailman, "I see firsthand the incredible number of credit card solicitations."

Trapp signed up for some of the offers, racking up $60,000 in credit card debt before being forced to declare bankruptcy because of more than $120,000 in unpaid medical bills. Yet under the bill, his family would be presumed to be abusers of the system, he said, because of his income and his wife's income from United Parcel Service.

Record quarter

During the second quarter of this year, Americans filed more than 400,000 bankruptcies — a record for a quarter. During the first half of the year, more than 740,000 people filed for personal bankruptcy. Most experts predict a record high this year, after two years in which filings dipped.

Backers of the bill say that if the United States enters a recession without fixing the bankruptcy system, "we could face a situation where bankruptcies spiral out of control," said Sen. Chuck Grassley, R-Iowa. Rampant bankruptcies would force lenders to tighten credit and raise interest rates, worsening a slowdown.

But Rep. John LaFalce, D-N.Y., said the bill could hardly come at a worse time.

"Bankruptcy acts as a safety valve during economic slowdowns, providing relief to families that have reached a financial crisis point," he said.

"Yet Congress is moving full steam ahead to pass a bill that will shut off the safety valve for many families."