Originally created 09/24/98

Bankruptcy law changes proposed



WASHINGTON -- The Senate overwhelmingly passed major legislation Wednesday to overhaul the bankruptcy laws and make it harder for people to sweep away their debts.

The vote on the compromise measure was 97-1, with Sen. Paul Wellstone, D-Minn., the only one to oppose it and Sens John Glenn, D-Ohio and John Warner, R-Va., not voting.

With credit card companies pushing for drastic changes, a more stringent bill passed the House in June on a 306-118 vote.

The Clinton administration supports some changes in bankruptcy laws but has said it cannot support the House-passed bill in its current form. But with only a few weeks remaining in the session, lawmakers faced a daunting task of reconciling the two versions and sending a bill to President Clinton.

Lawmakers are alarmed by a rising tide of personal bankruptcies amid a strong economy. But several senators insisted that the credit card companies, which aggressively solicit customers, share some of the blame for mounting consumer debt.

Some Augusta area bankruptcy lawyers and credit counselors agree.

"I feel that the creditors should take some responsibility to qualify people for credit," said Kim Lind, certified credit counselor with Consumer Credit Counseling Services of Augusta.

Jim Duncan said he deals mostly with low-income clients who are in debt they will never be able to get out of, most of which is from credit cards. Banks realize they can make money off high risk debtors by charging high interest fees, he said.

"They need to be tougher who they send these credit cards to," he said.

The new laws, if passed, probably will have little effect on low income debtors. The laws are targeted at upper-income bankruptcy filers, Mr. Duncan said.

Bankruptcy attorney Terry Leiden, however, said the laws might help local debtors. As he understands the proposals, the bills could raise homestead exemptions, which means more of the debtor's property would be protected under bankruptcy.

Right now, Mr. Leiden said, Georgia and South Carolina have some of the lowest homestead exemptions in the state. Both states have similar bankruptcy legislation, he said.

Unpaid credit card debt is now estimated at $40 billion, and companies say they are being forced to charge higher interest rates that hurt consumers who handle credit responsibly.

"One wonders about the good faith of the credit card companies," Sen. Dianne Feinstein, D-Calif., said before the vote. "Responsibility is a two-way street."

In drafting the bill in consultation with White House negotiators, senators included some provisions designed to protect consumers. Credit card companies, for example, would be barred from dropping consumers who pay on time or charging them higher interest rates.

Senate passage of the bankruptcy legislation came a day after senators defeated a proposal to raise the federal minimum wage by $1 an hour -- an action viewed by opponents as another blow to Americans struggling to get by. Democratic supporters of boosting the minimum wage vowed after their defeat to campaign hard on the issue between now and the November elections.

The measure, rejected by a 55-44 vote, would have raised the minimum wage earned by some 12 million Americans to $6.15 an hour on Jan. 1, 2000. The first 50-cent increase would have taken effect Jan. 1, 1999.

Sen. Edward Kennedy, D-Mass., chief backer of an increase, said the vote showed that the Republicans were in the sway of business interests. He predicted that for Democrats, the minimum wage increase "will be a central issue in the course of this campaign."

Despite the strong economy, the number of Americans filing personal bankruptcies last year jumped to 1.3 million -- up more than 300 percent since 1980.

Both the House and Senate versions would make it more difficult for people to simply file court papers and erase their bills. The House measure would introduce a "means" test for people filing for bankruptcy court protection from creditors.

It would require people who earn at least the median U.S. income, about $51,000, to file for financial reorganization under Chapter 13, subject to a court-ordered repayment plan, if they can pay back 20 percent of their debt within five years.

But the Senate bill would give some discretion in the matter to the bankruptcy judge -- who would have to consider a debtor's ability to repay. A Chapter 13 reorganization generally would be required if the debtor could pay back 30 percent or more.

Credit card companies complain that too many people take shelter under the more lenient Chapter 7, which erases debts, when they could afford to restructure their debts under Chapter 13.

Key features of Senate and House bills to overhaul the bankruptcy laws:

SENATE BILL

--Requires bankruptcy judges to consider a debtor's ability to repay in deciding how the debtor is treated. People generally would be required to file for financial reorganization under Chapter 13, subject to a court-ordered repayment plan, if they can pay back 30 percent or more of their debt within three years.

Credit card companies complain that too many people take shelter under the more lenient Chapter 7, which erases debts.

--Requires that credit card bills show how long it would take consumers to pay off their debts by paying the monthly minimum amount and what their total payments would be, including interest.

--Gives top priority to child support and alimony payments in bankruptcy cases, putting them ahead of federal income taxes, bankruptcy attorneys' fees and other obligations.

--Allows parents who had set up special savings accounts for their children's college education and later filed for bankruptcy to keep the money in the accounts.

--Bars credit card companies from dropping consumers who pay their full balances or charging them special fees.

--Expands the $50 liability limit for stolen credit cards to debit cards.

--Puts a $100,000 nationwide cap on homestead exemptions for bankruptcy, in an effort to prevent debtors from shielding their assets in luxury homes.

Currently, Florida and Texas allow debtors to shield their homes no matter how high their value.

--Limits the number of repeat bankruptcy filings that can be made under different circumstances.

--Exempts people from paying bankruptcy court filing fees if they can't afford to.

HOUSE BILL

--Establishes a "means" test for people filing for bankruptcy court protection from creditors. It would require people earning at least the median U.S. income, about $51,000 for a family of four, to file for financial reorganization under Chapter 13, subject to a court-ordered repayment plan, if they can pay back 20 percent of their debt within five years.

--Considers nondischargeable, meaning it can't be erased or written down, credit card debt incurred 90 days before an individual files for bankruptcy.

--Gives top priority to child support and alimony payments in bankruptcy cases.

--Prohibits debtors from converting certain assets into exempt property sheltered by homestead exemptions within one year of filing for bankruptcy protection.

Unlike the Senate bill, there is no $100,000 nationwide cap on homestead exemptions.

--Limits the number of repeat bankruptcy filings that can be made under different circumstances.

--Requires musical recording artists to continue to honor their recording contracts when they enter into bankruptcy proceedings.

Staff writer Frank Witsil contributed to this article