Erasing Debts With Bankruptcy Gets Harder

By MARCY GORDON, AP Business Writer

WASHINGTON – Erasing medical bills, credit card charges and other debts in bankruptcy soon will become more difficult under landmark legislation that has vaulted its last major hurdle before Senate passage.

The legislation gliding toward congressional passage following Tuesday’s procedural vote in the Senate would constitute the most sweeping overhaul of U.S. bankruptcy laws in a quarter-century.

Senate passage this week and likely House approval of that bill next month would deliver to President Bush (news – web sites) the second of his pro-business legislative priorities after Republicans fattened their majorities in both chambers in November’s elections.

Congress sent Bush a law last month placing most large multistate class action lawsuits under federal court jurisdiction, making it harder for plaintiffs to join together and win multimillion-dollar judgments in state courts.

Banks, credit card issuers and retailers have pushed for eight years for bankruptcy revisions that would force more people to repay at least part of their debt. It nearly passed in 2002 — failing when the Senate accepted, but House Republicans rejected, a Democratic amendment barring protesters from using bankruptcy to avoid paying court fines for blocking abortion clinics.

This year, with four more Republican senators, the abortion provision was rejected Tuesday on a 53-46 vote. Later the Senate voted 69-31 to limit further amendments, close the debate and hold a final vote this week.

The bill would set up a new test for measuring a debtor’s ability to pay.

Those with insufficient assets or income could still file a Chapter 7 bankruptcy, which if approved by a judge erases debts entirely after certain assets are forfeited. But those with income above the state’s median income who can pay at least $6,000 over five years — $100 a month — would be forced into Chapter 13, where a judge would then order a repayment plan.

Critics say that’s unfair because many people who file for bankruptcy have lost their jobs, or are going to lose them.

According to current law, a bankruptcy judge determines under which chapter of the bankruptcy code a person falls — whether they have to repay some or all of their debt.

Sensing a long-elusive victory at hand, Republican backers exulted Tuesday and urged colleagues to move speedily through remaining Senate deliberations.

“The sooner we finish work in the Senate and get the bill to the House, the sooner our bankruptcy system will be focused as it should be on helping those with real need, and less vulnerable to abuse by consumers who have the ability to repay their debts,” said Sen. Charles Grassley (news, bio, voting record), R-Iowa, the bill’s primary author.

The bill’s supporters argued that bankruptcy frequently is the last refuge of gamblers, impulsive shoppers, divorced or separated fathers avoiding child support, and multimillionaires, often celebrities, who buy mansions in states with liberal homestead exemptions to shelter assets from creditors.

Opponents, too, have a litany of stories. Sen. Edward M. Kennedy (news, bio, voting record), D-Mass., speaks of Zoraya Marrero, a single mother with three children from Woodbridge, Va., the eldest of whom has spina bifida. Having had to return $60,000 in state disability benefits and medical coverage for the child, and paying medical expenses, Marrero recently filed for bankruptcy.

Most applicants “did not seek bankruptcy relief willingly,” Kennedy says. “Millions of … Americans in similar situations have filed for bankruptcy only after exhausting all other options.”

A recent Harvard University study found that costly illnesses led to about half of all personal bankruptcies and that most people who file for bankruptcy protection because of medical problems have health insurance.

Consumer and civil rights groups and unions say the legislation is unfair to low-income working people, single mothers, minorities and the elderly and would remove a safety net for those who have lost their jobs or face mounting medical bills. They say it would turn the bankruptcy courts into collection agencies for the credit card companies.