By Catherine Hubbard, CCH Washington Staff Writer

The House of Representatives on March 19, 2003, approved bankruptcy reform legislation (H.R. 975) that would make it harder for consumers to rack up large debts and then discharge their debts by filing for bankruptcy. The bill was approved by a 315 to 113 vote. The legislation contained several tax provisions, including legislative language that would provide greater protections for certain holders of tax liens.

The measure mirrors bankruptcy legislation from 2002, the Bankruptcy Abuse Prevention and Consumer Prevention Bill (HR 333), but does not contain a controversial protestor provision, which lead to the bill's defeat last year. The measure, however, faces an uncertain future in the Senate, where Sen. Charles E. Schumer (D-N.Y.) is expected to offer the controversial provision, which prevents protestors from using bankruptcy laws to discharge any monetary court judgments levied on them as a result of their actions against a lawful commercial activity.

House Judiciary Committee Chairman F. James Sensenbrenner, Jr. (R-Wis.), who introduced H.R. 975, said during floor debate that the legislation would restore "personal responsibility and integrity to our bankruptcy system by offering a fresh start to those who deserve one while cracking down on those who don't." He noted that the House has passed similar bankruptcy reform bills six times during the past three congresses. "Perhaps this seventh attempt will prove to be a charm and finally lead to enactment."

Personal bankruptcy filings increased to a record-high 1.5 million in 2002. Experts estimate the filings cost the average household about $400 per year. Sensenbrenner said House passage of the bill is "a victory for those who work hard and pay their bills, but are forced to shoulder the debts of those who abuse our personal bankruptcy system."

The bill would require debtors with the ability to pay to file under Chapter 13, where courts establish repayment plans, instead of Chapter 7, which erases debts. The legislation would apply a means test, under which a debtor who has sufficient income to repay at least 25 percent of the debt over five years or earn at least the state median income, would be forced to enter a repayment plan.

The bill also would cap homestead exemptions. Sensenbrenner said the exemption cap "places reasonable monetary limitations on unlimited homestead exemptions which have often been misused by debtors to unfairly evade their financial obligations." The bill would cap most debtors' homestead exemptions to a maximum of $125,000 if the debtors acquired such property within less than 40 months preceding filing of the bankruptcy case. The bill also would lower the cap further for those who obtain a home through fraud. Sensenbrenner said the fraud provision would "keep crooked corporate executives from using bankruptcy to shield their mansions and penthouses from the claims of creditors, defrauded shareholders and employees."

In addition, the new tax provisions in the bill would: simplify the calculation of interest applicable to tax claims; provide greater protection for holders of ad valorem tax liens on real or personal property; simplify the process for filing of claims by states for certain fuel taxes; set a priority for tax claims; and prohibit discharge under a Chapter 7 bankruptcy filing of any debt for fraudulent tax payments.

U.S. Chamber of Commerce President Thomas Donohue said the bill will "bring a sense of personal responsibility back into a critically flawed system." The bill would end the practice of wealthy debtors shielding assets to escape their bills, while preserving access to bankruptcy protection for legitimate filers, he said.

Opposition

Consumer rights groups say the legislation would remove a legitimate safety net for low-income people. "With the economy sinking, this unbalanced bill couldn't come at a worse time for American consumers," said Travis B. Plunkett, Consumer Federation of America's legislative director. By making it harder for debtors to wipe away some debts, the bill reduces the financial risk for lenders and encourages them to lower their credit standards even more, he said in a press release.

Some Democrats blamed the credit card industry for the sharp rise in personal bankruptcy filings. "The big winner here is the credit card industry because passage is going to mean billions of dollars to their bottom line," said Rep. William Delahunt (D-Mass.). Credit card companies mail billions of solicitations to people's homes each year, while continuing to hike interest rates and lower their loan standards, said Delahunt. "The credit card industry has created a culture of debt that is overwhelming millions of Americans."

Plunkett accused credit card companies of pushing through legislation "that will limit access to a fresh start in bankruptcy for many who lose a job or suffer other serious hardships." The federation said the credit card industry is "shamelessly offering more credit" to consumers, while asking for stricter bankruptcy laws. "We have fallen victim to the special interests," said Rep. Sheila Jackson-Lee (D-Texas) during floor debate.

Yet Sensenbrenner said "all Americans suffer when people who have the ability to pay their bills do not do so." On March 18, he said, the Spiegel Group, which began offering credit to consumers in 1871, filed for bankruptcy. Analysts estimate that the default rate with respect to Spiegel's credit card receivables ranged from 17 to 20 percent, he said.

The Bush administration supports the bankruptcy reform provisions in H.R. 975. "These common sense reforms will help curb abuses of bankruptcy protections . . . and help avoid future credit problems," according to a statement of administration policy issued on March 19.

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