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 (search).
The most sweeping rewrite of U.S. bankruptcy laws 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 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 (search) 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.
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 commonsense 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 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 (search) 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 (search), 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 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.