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By HELEN HUNTLEY, Times Personal Finance EditorA bill that makes it harder to wipe out debt through bankruptcy filings is headed to a supportive President Bush.
Consumers with heavy debts will find it tougher to erase what they owe under a sweeping overhaul of the nation's bankruptcy law that cleared its final hurdle in Congress on Thursday.
The House of Representatives voted 302-126 to approve the bankruptcy bill, which the credit card industry has been trying to get through Congress for eight years. The bill passed the Senate last month, and President Bush has said he will sign it into law.
Bankruptcy filings have doubled over the past decade, tracking the explosion in consumer credit (it has doubled in the past decade to $2-trillion), with about 1.6-million personal bankruptcies last year.
Most provisions of the new law will go into effect six months after Bush signs it, a delay that could touch off a wave of last-chance filings under the old system.
The complex bill would make a wide range of changes to the way personal bankruptcies are handled but the main components are these:
Middle-income and upper-income people with a minimum income would be required to enter into five-year debt-repayment plans rather than simply eliminating debt by declaring bankruptcy.
Everyone would be required to go through credit counseling before filing for bankruptcy.
Florida would lose its allure as a debtors haven because out-of-state debtors could not protect their assets by buying a mansion in the state just before going bankrupt.
Members of Congress who supported the reform see it as a way to encourage personal responsibility. The legislation takes aim at serial and abusive filers and attempts to force debtors to repay creditors every dollar they possibly can afford. Supporters say it also will benefit businesses and consumers who pay their bills.
"Consumers who pay their bills have been forced to pick up the tab for those who do not by paying more for credit cards, car loans and other lines of credit," Rep. Jim Davis, D-Tampa, said in a statement.
One of 73 Democrats who joined Republicans supporting the bill, Davis said it "protects the bankruptcy system for those who are truly in need of a fresh start and ensures that those who are capable of taking greater personal responsibility make good on at least a portion of what they owe."
Like Davis, other west-central Florida representatives supported the bill. Voting yes were Republicans Ginny Brown-Waite of Brooksville, Mike Bilirakis of Tarpon Springs, C.W. Bill Young of Indian Shores and Adam Putnam of Bartow.
Rep. David Dreier, R-Calif., said bankruptcy costs all American families an average of $400 a year in higher interest rates as lenders seek to recoup their losses from bankrupt customers.
However, as it has over the years, the bill attracted strong opposition from consumer groups, lawyers, bankruptcy judges and law professors. They say abuse is a relatively small problem, but the attempt to wipe it out will make it more difficult and more expensive for consumers who really need relief to get it.
The legislation "protects the credit industry at the expense of the consumer," Rep. Alcee Hastings, D-West Palm Beach, said. "It will drive more Americans deeper into financial crisis and weaken the nation's economy and social structure."
Christopher Peterson, an assistant law professor at the University of Florida, called it "mean spirited."
"The leading causes of bankruptcy are things that are often times beyond consumers' control," he said. "The best available empirical evidence shows people file because they become sick and can't pay for health care or they lose their job or they get a divorce."
Bankruptcy costs lenders about $40-billion a year, but consumer advocates say credit card companies are to blame for a big chunk of their own losses.
"Credit card lenders have become increasingly reckless in offering credit to people who either have no credit record or a bad one," said Travis Plunkett, legislative director for the Consumer Federation of America.
The bill does require some additional disclosures in credit card solicitations and billing statements, including how long it will take to pay off a balance making only the minimum payment.
Adam Hirsch, a law professor at Florida State University, said that despite the cost to banks, society benefits from bankruptcy because it gives people a renewed incentive to work.
"If people were hopelessly mired in debt, they would have no incentive to labor because anything they earned, creditors would seize," he said. "They'd be better off not working and simply living off welfare benefits. To the extent people are denied the discharge in bankruptcy or deterred from seeking it, they may simultaneously be deterred from work and that's bad for all of us."
Without bankruptcy protection, debtors can have their bank accounts seized and their wages garnished to pay a creditor's judgment against them.
The centerpiece of the bankruptcy bill is an income test that will prevent many middle-income and upper-income families from wiping out debts through Chapter 7 of the bankruptcy code.
Lower-income families still will have direct access to Chapter 7. However, debtors whose income puts them above the state median (in Florida about $47,000 for a family of two or $60,000 for a family of four) and who can pay at least $100 a month to unsecured (such as credit cards) creditors, generally must set up a five-year repayment plan under Chapter 13.
Deciding how much a debtor can afford to pay will be based largely on IRS tables and restrictions in the new law, taking away much of the flexibility bankruptcy judges now have.
The American Bankers Association, which supported the bill, says about 19 percent of filers would meet the income test, but only about 5 percent would end up being forced to file Chapter 13.
One thing all debtors would be required to do is pay for and complete an approved consumer credit counseling before filing for bankruptcy. A system still must be created to certify counseling agencies, many of which have come under fire for deceptive practices and high fees.
The bill changes the way some types of debt are treated, which is always an issue in bankruptcy since not everyone who is owed money gets repaid in full. Child support obligations moved up the priority list for unsecured debts, but in many cases there will be less money available to pay them because Congress also gave preferential treatment to loans on recently acquired cars.
"This bill is a hodgepodge of things that special interest groups wanted that they were able to push through Congress after many years of lobbying on the premise there was a need for this legislation," said Tampa bankruptcy lawyer Mark Wolfson, who chairs the business law section of the Florida Bar. "It maybe toughens the system a bit, but it will make the process more expensive."
He and other lawyers are especially concerned about a new requirement that they investigate their clients' finances. The new law says the lawyers could potentially be held financially responsible if the information filed with the court turns out not to be true.
"There are a lot of unknowns out there," U.S. Bankruptcy Judge Michael Williamson said. "You can't hire a private eye to go out and investigate your client, but it will require more attorney time - and time is how lawyers make their money."
Williamson said additional expenses that debtors have to pay will mean less money left over for the unsecured creditors, such as the credit card issuers who pushed for the bill.
Many Democrats were furious that the GOP leadership allowed none of the 35 amendments they had proposed earlier to be voted on. 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.
Information from Times wires was used in this report. Helen Huntley can be reached at huntley@sptimes.com or 727893-8230.