By John L. Duoba, Business Owner's Toolkit Staff Writer

The House of Representatives on March 1, 2001, approved legislation to reform the nation's bankruptcy laws, making it harder for debtors to wipe out their debts without paying them off. By a vote of 306 to 108, the House passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2001, a bill almost identical to one passed by both houses of Congress in 2000, but vetoed by then-President Bill Clinton.

President George W. Bush backs the bankruptcy overhaul, and according to administration officials, the bill contains "commonsense reforms" that will curb the abuse of current bankruptcy protections. The bill moves on to the Senate, where Democrats who oppose the bill have promised to fight its passage.

Specifically, the bill would incorporate means testing to determine a debtor's ability to repay and the form of bankruptcy that should apply. All debtors with incomes above their state median and the ability to repay the lesser of 25 percent of their debt or $10,000 would be required to file a Chapter 13 reorganization and repayment plan, instead of the more common Chapter 7, which discharges debt after the liquidation of certain assets. Under Chapter 13, all unsecured debt, including credit cards, must be repaid; Chapter 7 does not require the repayment of unsecured debt. Moreover, bankruptcy filers would be required to participate in credit counseling.

In addition, the bill amends the Truth in Lending Act to require that extensive disclosures be given to borrowers for many types of credit plans. Lawmakers hope the increased disclosures will help people make wiser decisions regarding their credit, by further clarifying the rules regarding minimum payments, introductory rates, payment deadlines and penalties.

Even though the number of personal bankruptcies in the U.S. has declined for two years in a row, off an all-time high in 1998, many lawmakers felt the time was right to take action, especially if an economic slowdown is on the horizon.

"This bill seeks to restore personal responsibility and integrity to the bankruptcy system and ensure these laws are fair to both debtors and creditors. Abuse of the current system--estimated to cost the rest of us approximately $4 billion each year--is the driving force behind this bipartisan, balanced and comprehensive reform legislation," said House Judiciary Chairman James Sensenbrenner (R-Wisc.), a supporter of the bill.

Critics of the bill are unhappy with the one-size-fits-all standard for means testing, as well as the elevation of unsecured credit card debt to the front of the repayment line. Many opponents of the bill have connected the high number of bankruptcies to the aggressive marketing tactics of credit card companies, and they believe these companies should be punished, not rewarded, for preying on consumers who can't handle the debt.

The Senate may act on the bill as soon as March 5, 2001.

Related items:

President Vetoes Bankruptcy Reform Bill

Congress Agrees on Bankruptcy Reform; Veto Likely

Bankruptcy Reform Legislation Stalls in Congress

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