The Senate is expected to approve today a bill making it more difficult for high-income individuals to file for bankruptcy protection from creditors.
About 1.3 million Americans filed for bankruptcy in 1999, down from 1.4 million in 1998. As a result of 1998 bankruptcies, $40 billion in consumer debt was never paid off, according to the American Bankers Association. The Senate bill, and a similar House bill that passed in May by a 313-108 veto-proof margin, are designed to increase the amount of money creditors can recover.
Richard McGrath, a spokesman for bill co-author Sen. Robert G. Torricelli, New Jersey Democrat, said the legislation attempts to strike a balance between protecting consumers who need help and promoting creditor repayment.
“Senator Torricelli believes that the nation’s surging economy has masked an alarmingly high rate of bankruptcies that cost everyday consumers money and threaten to erode future economic growth,” Mr. McGrath said.
Bankruptcies cost U.S. households $400 a year, said Catherine Pulley, an American Bankers Association spokeswoman. That’s because credit-card companies, which are lobbying hard for the legislation, and other businesses increase interest rates and other prices for all their customers to recoup their losses.
Bank of America, the nation’s fifth-largest credit-card issuer, lost $700 million in 1998 to bankrupt customers.
“The whole issue is that the legislation should consider protecting the rights of individuals who are in dire financial straits… . At the same time, it has to consider making the courts take repayment capacity into account,” said Terri Bolling, a bank spokeswoman.
Ms. Pulley of the ABA said the rate of bankruptcies in the nation’s longest economic boom should raise a red flag.
“When you have this kind of a [bankruptcy] record in the midst of a booming economy and low unemployment, it’s a sign that the system is broken and needs improvement.
“Bankruptcy should absolutely be the last resort, no matter what,” she said.
The U.S. economy entered a record 107th month of expansion yesterday, with unemployment rates at a 30-year low.
There are two types of consumer bankruptcy Chapter 7 and Chapter 13. Under Chapter 7, all of a debtor’s assets are liquidated and used to pay back creditors. But many debtors don’t have liquid assets, so creditors never recover their money.
Under Chapter 13, debtors and creditors work out a monthly repayment plan over three to five years.
Under the Senate bill, if filers have a certain level of income relative to their debt based on a formula and can pay back either 25 percent of their debt or $15,000 over a five-year period, they must move into Chapter 13 from Chapter 7.
A number of amendments have been tacked onto the bill, only some of which are directly related to bankruptcy. One would increase the minimum wage by $2 over three years. Another would prevent gun manufacturers from ducking wrongful death lawsuit debts by filing for bankruptcy.
Still other provisions are aimed at making bankruptcy reform more consumer-friendly, as opposed to the House version, which is seen as more creditor-focused. President Clinton threatened to veto the House bill.
Creditors have put significant resources into passage of bankruptcy reform, according to the Center for Responsive Politics. The National Bankruptcy Coalition has spearheaded a lobbying effort, receiving more than $500,000 in funds from the ABA, nearly that amount from the Credit Union National Association and almost $80,000 from Visa USA.
Consumer advocates accuse credit-card companies of contributing to the very bankruptcy they now seek to restrict.
“[Credit card companies] have a significant amount of responsibility. There’s just a vast body of evidence that links household debt to the bankruptcy rate. And credit-card debt is the most volatile form of household debt,” said Travis Plunkett, legislative director for the Consumer Federation of America.
He noted that the number of people filing for bankruptcy fell in 1999 as credit-card lenders shied away from at-risk individuals for fear of losses.
Mr. Plunkett said the legislation gives creditors free rein to target at-risk consumers, knowing they will be able to recoup their losses.
“That’s like a green light to more unscrupulous lenders to extend credit,” he said.
After the Senate bill’s expected passage today, the legislators will go into conference with House members to hammer out a bill that both congressional bodies can agree upon.