Congress Seeks to Toughen Bankruptcy Laws as Personal Debt Mounts

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WASHINGTON -- As personal bankruptcy filings reach record highs, Republican leaders in Congress are pressing hard for a law that would make it tougher for people to file for protection from creditors.

One in 70 U.S. households filed for bankruptcy last year, according to the American Bankruptcy Institute, a nonprofit group that represents more than 6,300 bankruptcy professionals.

Supporters of legislation that would make it harder to qualify for bankruptcy protection say the system is badly abused by some people who are escaping debt they are able to pay.

"There's a tremendous need for (tougher bankruptcy laws) because there are those who really do need protection, and those who are utilizing the laws improperly and shouldn't be able to get away with it," said Senate Judiciary Committee Chairman Orrin G. Hatch, R-Utah.

An advertisement that has appeared in Capitol Hill newspapers over the last few weeks shows the feet of a man and a woman relaxing on a crystal blue beach with a yacht in the background, ostensibly after filing for bankruptcy.

"Bankruptcy shouldn't be a free ride for the wealthy," says the advertisement, which was paid for by banking and retail organizations and housing material providers.

But critics of the House and Senate bankruptcy bills say many people who file for protection are in dire financial straits and are victimized by risky lending and credit policies.

The typical bankruptcy case doesn't involve someone living high on the hog, said Elizabeth Warren, a Harvard Law School professor who specializes in bankruptcy law. She said the average family seeking protection from creditors makes less than $23,000 per year.

"There is a poorer, more deeply in debt group of families going bankrupt every year," Warren said.

In attempt to squeeze those beach bums out of the system, bills pending in the House and Senate aim at shifting some debtors from Chapter 7 bankruptcies -- the least cumbersome of two choices for individuals -- into Chapter 13.

Under Chapter 7, a consumer is able to discharge much unsecured debt, such as credit card or medical bills, within a few months. To do so, a debtor must liquidate assets and pay what he or she can to creditors. Under Chapter 13, a debtor commits to repay at least a portion of the debt with future earnings over three to five years.

Arrangements for repaying secured debt, such as loans for a car or a house, are typically made separately.

The 186-page House bill, sponsored by Rep. George W. Gekas, R-Pa., was approved by the House 306 to 118 in June. The 123-page Senate bill, sponsored by Sen. Charles E. Grassley, R-Iowa, and Sen. Richard Durbin, D-Ill, was approved by the Senate Judiciary panel 16 to 2 in June.

Both bills would prohibit a debtor from filing for Chapter 7 if the household earned more than the median income -- $51,000 for a family of four -- and was able to repay at least 20 percent of unsecured debt.

Mike McGarry, spokesman for the Visa U.S.A. credit card company, said the current system can allow someone earning $100,000 a year to file under Chapter 7. He said personal bankruptcy filings cost the credit card industry $9 billion a year.

"The current bankruptcy system is unfair because it allows people who have an ability to repay a portion of what they owe to simply walk away," McGarry said. "It's the only social welfare system not based on need."

Marianne Culhane, a professor of consumer bankruptcy law at Creighton University in Omaha, Neb., who is studying how the legislation would affect debtors, said many people depend on credit cards because they have lost a job, been divorced or have a serious illness and huge medical bills. …