Congress Again Gears Up to Consider Bankruptcy Overhaul

By Catherine Hubbard and Jeff Carlson, CCH Washington Staff Writers

Legislation to overhaul the bankruptcy system once again has begun to move though Congress. The House Judiciary Committee on March 12, 2003, approved bankruptcy reform legislation (H.R. 975) by a 18-11 vote.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2003 (H.R. 975) would make it harder for consumers to rack up large debts and then escape their repayment responsibilities by filing for bankruptcy protection.

The measure mirrors bankruptcy legislation from 2002, the Bankruptcy Abuse Prevention and Consumer Prevention Bill (HR 333), but without a controversial civil protestor provision that lead to the bill's defeat in the House of Representatives. The provision, which would have kept activists from using bankruptcy protections to discharge fines arising in connection with their protests of legal commercial activities, had been added to the Senate version by Sen. Charles E. Schumer (D-N.Y.).

Prior to the last national general election in November 2002, the House effectively killed the House-Senate conference report on the measure by defeating a procedural rule that would have allowed a vote to take place. Specifically, the House GOP was concerned that the protestor provision would adversely affect the activities of anti-abortion protestors.

The new reform bill is expected to easily pass in the House, with a vote possibly taking place by the end of March, according to a spokesman for the House Judiciary Committee. The measure, however, faces an uncertain future in the Senate where Schumer is expected to again offer the protestor provision.

Means Test Examined

Judiciary Committee Ranking Democrat Melvin L. Watt of North Carolina said the bill would not do a good job of reigning in abuse of the bankruptcy system. He said the means testing provision contained in the bill "minimizes the impact on fraud and abuse."

Under the reform measure, a bankruptcy filer would be subjected to a means test of available income and possessions. Those filers above a specific means testing threshold would be forced into stricter Chapter 13 repayment plans instead of Chapter 7 liquidation plans, which discharge nearly all unsecured debt.

Watt stated that means testing "is a terrible idea if the idea is to get to people who abuse the system," he said, adding that the "abuse occurs whether they fall above or below the means test."

The Consumer Federation of America and other public interest groups said the bill "would erect harsh barriers to personal bankruptcy." The means test is overly rigid against those who file Chapter 7 for valid reasons. For instance, a debtor who faces circumstances beyond his or her control, such as a medical emergency, could face litigation if a court challenges his or her Chapter 7 filing, the groups warned in a March 3 letter to Committee Chairman James F. Sensenbrenner (R-Wis.) and other House leaders.

Rep. Jerrold Nadler (D-N.Y.) also criticized the bill, saying it would make it "harder for consumers to get a fresh start" and could cause a decline in consumer spending, which would weaken the economy. Once a person files, the bankruptcy remains on his or her personal record for 10 years, and makes it harder to get a job, an apartment or a loan, he said.

During recent hearings, witnesses testified that the legislation is crucial to closing loopholes in the bankruptcy system. The current system rewards people who lie about their expenses and income to qualify for loans that they cannot afford to repay, said George Wallace, on behalf of the Coalition for Responsible Bankruptcy Laws. Each year bankruptcy filers discharge $44 billion in debt, he said. As the stigma against bankruptcy filers continues to lift, more people will be tempted "to take the easy way out," he warned. The bill would curb fraud and abuse while protecting the system "for those who deserve and need it," he said.

Lucile P. Beckwith, on behalf the Credit Union National Association, said the bill "would create a fairer and more realistic bankruptcy code." Moreover, she said that bankruptcy filers should be required to file under Chapter 13 rather than be able to erase their debts under Chapter 7.

The fraud and abuse provisions would increase the effectiveness of the nation's enforcement system, said Lawrence A. Friedman, director of the Justice Department's Executive Office for United States Trustees. He added that the bill "contains important new statutory tools for identifying and prosecuting people who misuse the bankruptcy system."

Bankruptcy Trends

There was a record-high 1.5 million personal bankruptcy filings in 2002, according to Maureen Sweeney, insurance and research deputy director at the Federal Deposit Insurance Corporation (FDIC). She recently spoke at a February 28, 2003, FDIC roundtable on consumer debt held in Washington, D.C.

Consumer spending has remained high, despite the economic downturn, said Richard Brown, chief economist with the FDIC. While spending has boosted the economy, overleveraged debtors will lead to more bankruptcy filings, he said at the roundtable. Even during good economic times, there were plenty of bankruptcy filings, he said, noting that in the 1997 through 1999 period, there were more than 1.25 million bankruptcy filings each year.

Michael Staten, professor of the credit research center at Georgetown University, Washington, D.C., said subprime lending has lead to increased bankruptcies. Lending to more financially vulnerable borrowers has led to higher delinquency rates, he said. "Having a bankruptcy safety net that's readily accessible certainly makes consumers less cautious about borrowing."

In addition, there is less social sigma against those who file for bankruptcy and increased willingness of banks to lend to individuals who have filed for bankruptcy in the past, Staten said. "It's no longer going to keep you out of the credit market for 10 years." He predicted that bankruptcies "are not going to fall below one million in the foreseeable future."

The solution to the bankruptcy problem will originate in the private sector, Staten said, predicting that Congress will not pass legislation to substantially curtail bankruptcy rights. Creditors are using credit reports to modify their risk modeling, are adjusting loan rates and terms based on overall debt loads, and are identifying accounts that need early intervention and recommending counseling or other assistance. "They're finding ways to cope with the fact that they're doing business with a riskier borrower," he said.

Congress' attempts to reform the nation's bankruptcy laws date back six years to the 105th Congress.

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