Senate Judiciary Committee Votes out a Bankruptcy Bill

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The Senate Judiciary Committee approved legislation Thursday that would make it more difficult for consumers to eliminate their unsecured debt in bankruptcy.

In a display of bipartisanship, the committee voted 15-to-2 to give creditors the right to ask judges to force consumers to repay debts in Chapter 13 rather than eliminating them in Chapter 7. Currently, only court-appointed bankruptcy trustees may make these requests.

To prevail, the creditor must prove the debtor is abusing the bankruptcy system. Abuse is defined as attempting to eliminate debt in Chapter 7 when the consumer could afford to repay at least 20% of unsecured credit over five years.

This is the second major vote this month on needs-based bankruptcy reform. The House Judiciary Committee approved a bill last week that uses a formula based on income and living expenses to determine if consumers may eliminate their debts in Chapter 7.

"This was a very strong bipartisan vote," said Philip S. Corwin, a principal at Federal Legislative Associates who lobbies for the American Bankers Association. "This bill represents a balanced approach that has an excellent chance of Senate passage this year."

But consumer advocates vowed to block the bill on the Senate floor. …