Bankruptcy rules soon could get tougher

By Sandra Block, USA TODAY

The Senate is expected to pass legislation Thursday that would make it harder for financially strapped individuals to erase their debts, a key victory for business proponents of an overhaul of the nation's bankruptcy laws.
The bill is expected to win speedy approval in the House, and President Bush has said he will sign it.

If enacted, the law would make it harder for individuals to file for Chapter 7 bankruptcy, which erases most debts. Individuals who earn more than their state's median income would instead be required to file for Chapter 13 bankruptcy, which establishes a repayment plan. (Related Q&A: Some would be forced to repay creditors)

Supporters of the bill, which include credit card companies and banks, say the change would prevent abuses by compulsive shoppers, gamblers, deadbeat parents and others who don't want to be responsible for their debts.

Consumer groups say the change would penalize people whose debts were caused by illness or unemployment.


In a Feb. 16 letter to Senate leaders, a group of bankruptcy law professors said the current law "provides crucial aid to families overwhelmed by financial problems." The professors argued that abuses are relatively rare, and said the bill "seeks to shoot a mosquito with a shotgun."

During debate on the Senate floor, Sen. Edward Kennedy, D-Mass., said the bill would hurt single parents.

"The bankruptcy courts are filled with cases of hardworking single mothers who were pushed over the financial brink because they failed to get the child support they deserve," he said.

The bill would take effect six months after it's signed into law. That would likely spur a spike in bankruptcy filings as individuals scramble to file for Chapter 7 before the restrictions take effect, says Sam Gerdano, executive director of the American Bankruptcy Institute.

"Ironically, for a bill designed to reduce consumer bankruptcy filings, it will increase them," at least in the short term, Gerdano says.

The bill would require debtors to go through credit counseling before declaring bankruptcy. But the credit counseling industry has come under fire from state regulators and the IRS for charging excessive fees and misrepresenting themselves as non-profits.

Supporters of bankruptcy reform have been trying to get the bill through Congress for eight years. Previous efforts were blocked by controversial amendments, such as a Democratic measure barring protestors from using bankruptcy to avoid paying fines for blocking abortion clinics.

With four more Republican members in the Senate this year, those efforts were rebuffed.

Contributing: The Associated Press