By Peter Feltman, CCH Washington Staff Writer

After nearly two years of contentious debate, Congress has finally approved a bill drastically changing U.S. bankruptcy laws.

The Senate passed bankruptcy reform, H.R. 2415, during its lame duck session on December 7, 2000, by a vote of 70-28, sending the legislation to the White House, where it faces an uncertain future.

White House staff indicated after the vote that the President will veto the measure, which many Democrats and consumer groups believe lacks adequate consumer protections.

On the other hand, financial groups strongly support the measure, which passed the House in October. While Congress appears to have the ²/₃rds votes needed to override a Presidential veto, congressional leaders would have to decide to keep Congress in session and away from their families to override. Some supporters also hope to persuade the President to sign this measure to preempt a harsher measure from being enacted later by George W. Bush.

The bill is designed to reform existing law, which supporters of the measure believe is needed since currently there is no statutory mandate to require a debtor to repay debts even if he or she has the ability. To this end, the bill has three major goals:

1. to reduce repeat bankruptcy filings
2. to prevent abuses such as running up bills before filing, or using bankruptcy to stall
3. to improve the administration of bankruptcy cases and provide the debtor with alternatives, such as credit counseling.

Currently, there are various types of bankruptcy filings a debtor may choose. Under Chapter 7 filings, debtors receive relief after making their assets available to creditors, and there is no requirement that they use future earnings to pay back any of the relieved-debt. Chapter 13 filings differ, where the debtor is committed to a repayment plan. Other Chapters--9, 11, and 12--deal with municipalities, business reorganization, and family farmers.

Not all debts can be discharged or erased under bankruptcy. Secured debt such as mortgages secured by the home, as well as student loans that are guaranteed by the government, and back taxes, alimony, child support, tort judgment, and debt incurred through fraud, cannot be discharged. In general, individuals can choose to file either Chapter 7 or Chapter 13.

H.R. 2415 is designed to deter filers from using Chapter 7 and instead file Chapter 13, under which they will have to pay whatever debts they can afford. To do so, the bill has a means test, where in most cases debtors could not receive a Chapter 7 discharge of debt if their monthly income is at least 25 percent of the debt, or $10,000.

The bill does allow for various living expenses to be factored into the decision of how much the debtor can pay. Such expenses include: living standards based on IRS standards; expenses designed to protect the debtor from domestic violence; food and clothing expenses; care of the elderly or a disabled family member; private school tuition of up to $1,500 annually per child; payments made to secure creditors.

A safe harbor for debtors exists, but cannot generally be used unless the debtor's income is less than the state median income level.

The bill continues to allow state law homestead exemptions, which critics say are used by debtors who buy expensive houses as a way to protect their assets. Under the bill, if the debtor purchases his or her principle residence less than two years before the bankruptcy filing, only $100,000 in its equity can be kept. In cases where the home was owned more than two years before the filing, state law applies. Some states, such as Florida and Texas, protect the houses of bankruptcy filers, and critics of this practice believe these state laws should be preempted by Congress.

In another controversial area, the bill says nothing about claims against abortion clinic blockers. Some anti-abortion groups have used bankruptcy to avoid paying fines, but the final version of the bill contains no abortion-related provisions.

The bill would make changes to the Truth in Lending Act, to provide more disclosure on the effects of minimum payments, introductory rates, the tax consequences of loans secured by homes (such as home equity loans), and late penalties. The bill also requires electronic credit card solicitations or advertisements to include information issued by the Federal Trade Commission.

Banking groups support the bill, which "will help distinguish between debtors who have virtually no assets or earning power and debtors with the ability to repay all or a portion of their obligations," according to America's Community Bankers, a trade group. "This protects consumers from bearing the costs of those debtors who abuse the system," ACB adds.

The group also applauds the bill's provision to prohibit federal district courts from reducing the value of secured mortgages during bankruptcy proceedings. ACB says this practice, called a cramdown, continues, despite being outlawed by the U.S. Supreme Court in 1993.

Related items:

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Senate Approves Bankruptcy Reform Act of 1999, Includes Minimum Wage Increase

Decline in Personal Bankruptcies Downplays Need for Bankruptcy Reform Bill

House Passes Its Version of Bankruptcy Reform Act of 1999

Bankruptcy Reform Act of 1999 Introduced in the House

Bankruptcy Reform Stalls in the Senate