- The Washington Times - Saturday, July 27, 2002


Consumer groups say financially strapped Americans might start flooding into bankruptcy court now to avoid the new rules laid down in the landmark bankruptcy bill speeding through Congress.

"To Joe Blow, I'd say be very careful about unsecured debt, about credit cards, and tell your family that if they're in financial trouble, they should think about declaring bankruptcy sooner rather than later," said Travis Plunkett of the Consumer Federation of America.

But banking and business groups insisted that most Americans should never even have to think about the legislation, which took almost five years to reach the point where the Republican-controlled House, the Democrat-controlled Senate and the White House are all ready to sign on.

"The bankruptcy system is still going to continue to be there for most Americans. Nothing is going to change," American Bankers Association spokeswoman Catherine Pulley said. "This bill is only going to affect Americans who can afford to pay their bills back, but choose not to."

The House planned to pass the compromise bankruptcy legislation last night before leaving for the summer. The Senate will take up the bill next, and President Bush already has indicated that he will sign it.

Most of the bill would go into effect six months after Mr. Bush's signature.

Personal-bankruptcy filings rose 15 percent last year, federal officials reported in April. There were 1.5 million bankruptcy filings in the U.S. Bankruptcy Courts in the 12 months that ended March 31, the most recent data available.

Personal bankruptcy accounts for about 97 percent of that, officials said.

Seven out of every 10 consumer-bankruptcy filings are filed under Chapter 7 of the U.S. Bankruptcy Code, which allows people to escape paying any of their credit-card and other debts. Filings under Chapter 13 force people to repay debts over time in accordance with a court-approved plan.

The legislation applies a new standard if a debtor is found to have sufficient income to repay at least 25 percent of the debt over five years or has at least the median income for his or her state. Then, the debtor would automatically be forced into a Chapter 13 repayment plan.

Right now, a bankruptcy judge or a private lawyer appointed by the Justice Department usually decides whether someone qualifies for dissolution of debts or should be forced to repay under a reorganization plan.

Credit-card companies and banks have complained for years about the rise in Chapter 7 filings, which forces them to eat billions of dollars in losses a year from bankrupt consumers, Miss Pulley said.

Those companies pass on those costs to other consumers, lawmakers said. The legislation "sends a signal that the bill-paying American consumers are not going to be stiffed for the amount of bad debt that is written off by people who wish to use bankruptcy as a financial-planning tool," said House Judiciary Chairman W. James Sensenbrenner, Wisconsin Republican.

The American Banking Association estimated only about 10 percent of bankruptcy filings will be affected by the legislation, Miss Pulley said.

But consumer advocates say the legislation couldn't have come at a worse time. Tens of thousands of people have lost their retirement savings and jobs since the Enron Corp. and WorldCom Inc. accounting scandals became public.

"So you have a WorldCom employee who loses her job, loses her health insurance, gets a paltry severance, and is left with a retirement plan that may be worth nothing," said Frank Torres, spokesman for Consumers Union. "That person may find it impossible to file for bankruptcy, but her employer, WorldCom, is free to file for bankruptcy after it cooked the books and cheated investors."

Most Americans don't stiff banks and credit-card companies on their debt, Mr. Plunkett said. "Experts say there are three reasons why people declare bankruptcy: They lose their jobs, they have high medical bills or they get a divorce," he said.

"Most people who declare bankruptcy are not people who are scamming the system; they've been hit with a major financial emergency," he added. "They may have had heavy loans, but they intended to pay them back, and then boom. Something happened. This is a bad time because so many Americans are economically vulnerable right now and this is going to hurt them."

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