New bankruptcy system would decide level of relief
Sacramento Business Journal - by Sougata Mukherjee Washington Bureau
Lawmakers are once again ready to deliberate changes in the nation's bankruptcy laws as Congress gets back to legislative business following President Clinton's impeachment trial.
On Feb. 24, two House managers of the impeachment trial, George Gekas, a Republican from Pennsylvania, and Bill McCollum, a Florida Republican, introduced the Bankruptcy Reform Act, which looks identical to last year's bankruptcy bill.
That bill passed the House with more than 300 votes before running out of time in the Senate.
The bill could face more opposition this year. Several House Democrats are expected to come out against the bill in the next few days, contending it favors the credit card industry and banks, and does not support the needs of consumers who are not abusing the bankruptcy system.
The bill, which is co-sponsored by Democrats Rick Boucher and James Moran of Virginia, would set up a new system in the nation's courts to judge whether consumers filing for bankruptcy can wipe off their entire debt or pay a portion of it.
The new system essentially would determine the amount of financial relief essential for a debtor. If debtors have more than $51,000 in annual family income, they would automatically be moved to Chapter 13 or a repayment plan in most cases. Chapter 13 allows debtors to keep their assets as long as they agree to a repayment plan. Chapter 7, in contrast, allows the court to liquidate a debtor's non-exempt assets and excuse the debtor from making any further debt payments.
In order to satisfy some of the bill's critics, Gekas said the legislation protects child support and alimony payments. It also requires credit-card companies to disclose more information about the interest that will be charged on debt.
"We have tweaked this bill as much as we can," Gekas said. "From here on, we have to see who wants real reform and who wants to keep on tweaking."
Dissension has surfaced in the Senate.
Last year, Sen. Charles Grassley, an Iowa Republican, and Sen. Richard Durbin, an Illinois Democrat, agreed to work on a bipartisan effort to reform bankruptcy laws.
This year, however, Durbin may introduce his own version of bankruptcy reform that would be based on individual needs rather than a one-size-fits-all system.
He may have the statistical firepower to convince his fellow legislators.
A recent study conducted for the American Bankruptcy Institute, a nonprofit research and educational group, concluded the proposed changes in this year's House bill would benefit few people and could hurt honest Americans trying to start over with a clean financial slate.
ABI Executive Director Sam Gerdano said 97 percent of Chapter 7 debtors had too little income to repay even 20 percent of their unsecured debt over five years.
Therefore, setting the family income threshold up at $51,000 means nothing to bankruptcy filers.
Several studies released last year suggested that 11 percent of Chapter 7 debtors could be shifted to Chapter 13 or a repayment plan, clearing the way for the financial industry to recover part of the $40 billion it loses every year as a result of bankruptcy filings.
Although bankruptcy reform had overwhelming support in the House and the Senate last year, industry observers believe polarization on Capitol Hill and subtle opposition from the Clinton administration will make it a tougher fight this year.
"The chances are very good," Gekas said. "I know there will be arguments made against the bill, and we just have to see how many people can we bring on board. Right now, it looks good."
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