Bankers, Businesses Back Bankruptcy Bill

Supporters of a federal bankruptcy reform bill say the plan's tougher regulations would apply only to people who make more than the median income in their state, allowing low-income earners free to declare themselves broke.

"The bill keeps the courthouse door open, but also holds people accountable for their debts," said Laura Fisher, spokeswoman for the American Bankers Association (search). "It eliminates some abuse in the system."

But critics point out that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (search) -- which could get a final vote in the U.S. Senate this week -- is not intended to protect lower-end economic groups either.

"Consumers are not out there lobbying Congress to obtain more favorable treatment for consumers," said Paul Sweeney, partner at Linowes and Blocher in Bethesda,Md. "You have very well-financed credit card companies pushing to have this legislation passed."

In any case, many businesses and consumers agree that the bankruptcy bill, which has been a top legislative priority of banks and credit card companies for several years, will likely pass this time.

Bankruptcy bills in the House and Senate aim to make it harder for consumers to file for Chapter 7 (search) bankruptcy, under which a person's debt is erased. Instead, the bills would require that some people file for Chapter 13 (search) bankruptcy protection, under which debtors are required to repay at least some of their debt.

The bills establish a "means test" to determine which consumers may be eligible for Chapter 7 or Chapter 13, by looking at the debtor's previous income to determine their ability to repay.

One business representative stressed that the changes envisioned in the congressional bills would only affect 10 to 20 percent of people who file for bankruptcy.

"It would require the wealthiest of the debtors ... to repay," said Peter Lawson, director of congressional and public affairs at the U.S. Chamber of Commerce (search).

But state consumer groups said the bankruptcy bill frustrates people's attempts at solvency.

"We are very concerned about it," said Cheryl Hystad, executive director of the Maryland Consumer Rights Coalition (search). "It makes it difficult for consumers to file bankruptcy," which would otherwise "give people a fresh start."

Senators tried unsuccessfully last week to tack on amendments exempting victims of identity theft (search) from the "means test" and discouraging predatory lending practices. The House version has been referred to the committees on Judiciary and Financial Services.

Huge medical expenses, unemployment and divorce are common reasons people file for bankruptcy, consumer groups said.

People who cannot afford a private attorney or seek assistance through legal aid offices can be affected by the bill's other provisions, said one Baltimore lawyer.

Louise Carwell said the bill in its current form seems to place more requirements on attorneys working in bankruptcy cases, such as thorough investigation of clients' assets, which may raise legal costs.

Carwell, senior attorney in the nonprofit Legal Aid Bureau of Maryland, which offers advice and representation for low-income residents, said that could be too costly for debtors and may force attorneys to give up bankruptcy work.

But Lawson said the bankruptcy bill will ultimately benefit both consumers and companies. The bill will end "bankruptcies of convenience," Lawson said.

"We want those that can afford to repay to do so, instead of passing it on to consumers and other businesses," he said.

Capital News Service contributed to this report.