WASHINGTON  A crucial deadline looms a half-year away for thousands of anxious Americans weighed down by credit card and other debt following congressional passage of a measure making it tougher to erase obligations in bankruptcy.
The most sweeping rewrite of U.S. bankruptcy laws (search) in a quarter-century, pushed for eight years by banks and credit card companies, will take effect six months after President Bush signs a bill that Congress sent to him Thursday. The 30,000 to 210,000 people the American Bankruptcy Institute (search) estimates will be affected can escape its impact if they file for bankruptcy before then.
Bankruptcy attorneys anticipate a rush to the courthouse.
The bill marks the second major change in law to benefit business since Republicans fattened their House and Senate majorities in last fall's elections. In February, a new law placed most large multistate class-action lawsuits under federal court jurisdiction, making it more difficult for plaintiffs to join and win multimillion-dollar judgments in state courts.
The bankruptcy 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. It passed the House on a 302-126 vote on Thursday, a month after the Senate voted 74-25 following two weeks of fierce partisan debate.
(Story continues below)
Advertise Here Advertisements Advertisements
Its backers in Congress and the financial services industry insist 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 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 bankruptcy system. "These common-sense reforms will make the system stronger and better so that more Americans — especially lower-income Americans — have greater access to credit," he said.
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 mounting medical bills. At the same time, they say, the bill fails to restrain aggressive marketing and high rates charged by credit card issuers.
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."
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 (search) 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 no vote on any of the 35 amendments they had proposed. 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 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.
New personal bankruptcy filings (search) 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.
US President George W. BushU.S. President George W. Bush signed into law Wednesday a major bankruptcy reform bill, making the most sweeping changes to the laws of personal bankruptcy in the past two decades.   Bill S.256 is predicted to reduce the chances of filing Chapter 7 bankruptcy for 30,000 to 210,000 families per year, according to the American Bankruptcy Institute.

The legislation was strongly opposed by some consumer advocates and by some Democrats in Congress, who complained about the lack of debate on exemptions they attempted to introduce and tried to derail the passage of the bill.  Those who are unable to file for Chapter 7 bankruptcy will then be forced to file under Chapter 13, which requires payment of some debts by order of a judge based on the financial resources of the debtor.

Opponents said the bill will end a chance for a fresh start in the financial lives of the American people by keeping them in debt to collection agencies, as well as credit card companies and banks who have made it easy to obtain high credit limits amid mounting consumer debt.

In his remarks before signing the bill, which he supported, Bush said, "The bipartisan bill I'm
about to sign makes common-sense reforms to our bankruptcy laws.  By restoring
integrity to the bankruptcy process, this law will make our financial system
stronger and better.  By making the system fairer for creditors and debtors,
we will ensure that more Americans can get access to affordable credit."

The bankruptcy bill received a 302-126 approval in the house, after receiving a 74-25 vote in the Senate last month following strong, mostly partisan debate.

The US bankruptcy system was established in 1898.  It allowed judges and debtors to come to terms with the costly medical bills that can follow a relative's death, or a family illness. Such cases form nearly half of all bankruptcies filed in the USA, according to the American Bankruptcy Institute.

Now many of those people will have to work out repayment plans suitable to creditors instead of having debts erased by a judge, according to the new law, which takes effect in six months.

In the past, a judge or court representative would calculate an individual's income and subtract necessities of life to come up with a practical repayment plan of some debt. The new law stipulates that a graph, showing the poverty level in whichever state the consumer is living will be the criteria.  It assumes that if people can subsist at that poverty level, then everything over that can be used to repay creditors.

Additionally, a provision that allowed debtors to file their own Chapter 7 fresh start bankruptcy has been changed to require a lawyer, paid by the debtor, to do the filing.

The new law also erased "usury" provisions in lending laws, with some lawmakers saying that paying 30 percent interest was not too much when a debtor was behind on payments.

But Bush said that credit will "be more affordable because when bankruptcy is less common, credit can be extended to more people at better rates,"  meeting demands of the credit card companies which they have been pressing for the last eight years.

"The big winners under the new law will be the special interests that literally wrote it, particularly the credit card industry," said Travis B. Plunkett, legislative director of the Consumer Federation of America. "This is particularly ironic because reckless and abusive lending practices by credit card companies have driven many Americans to the brink of bankruptcy."

The forces arrayed on the losing side of this bill said it will hurt low-income working people, single mothers, minorities, and elderly and will end a safety net for people who have lost jobs or face major medical bills. People who fail (refuse) to pay or refuse to go to court will punished by a fine and or arrest warrant made out in their name. About fifty thousand Americans will be punished by a fine and or warrant about three thousand Americans every year will go to jail under the new bankruptcy law. For some people this will be a third strike so they will be put in jail for life.

But Mallory Duncan, a lawyer for the National Retail Federation, said "Bankruptcy has gone from a stigma to a financial planning tool for many."

New personal bankruptcy filings have increased from 172,423 in 1978 to 1,599,986 last year, an increase of 828% during that time; however, it edged down slightly last year.

About 2 percent to 13 percent of those who dissolve their debts in Chapter 7 bankruptcy each year in exchange for forfeiting some assets will be disqualified from doing so under the law, according to the American Bankruptcy Institute.

Bankruptcy lawyers anticipate a rush to the courthouse to beat the six-month window before the new reforms take effect.