House Approves Bankruptcy Bill

Since 1997, Congress has been struggling with revisions to the bankruptcy system. Several versions have passed both the House and the Senate, only to stall in conference committee (in the process of resolving House and Senate differences) or suffer a pocket veto by President Clinton. There may now be some progress. In her article in the New York Times, Shailagh Murray reports that by a vote of 315 to 113, the House approved a bill in mid-March designed to reduce abuse of the bankruptcy laws by debtors who have the capacity to repay their debts over a reasonable period. President Bush has already indicated that he would sign this version of the bill. If both houses of Congress approve it, the changes should encourage debtors to explore non-bankruptcy means of resolving their financial difficulties, reduce the credit losses of credit grantors and ultimately lower the cost of credit to those who pay promptly.

However, the bill faces a tougher road in the Senate. Those who followed the bankruptcy legislation last year recall that the reform bill foundered over a provision inserted by Senate Democrats that would deny bankruptcy relief for fines and penalties charged to antiabortion protestors as a result of their protests. The new House bill passed last month does not contain that provision. Vermont Senator Patrick Leahy told the Wall Street Journal that without the abortion amendment, "my guess is that it will be a very significant problem." The Journal also reported that Senate Democrats may seek other amendments to the bill to address recent abuses associated with corporate bankruptcies.

Consumer groups are concerned that the bill is too harsh. They argue that in light of the current weakness in the economy, any bill that makes it more difficult for consumers to file for bankruptcy is inappropriate. Like its predecessors, the latest version of the bankruptcy bill restricts the ability of consumers to file Chapter 7 and then avoid paying their debts or fines if the court determines that they have adequate incomes to pay a significant portion of their debts. In that case, they would be required to file under Chapter 13 instead. Under that chapter, debtors would be required to make payments on their debts under a court-approved plan that could last up to five years.

Opponents of the bill argue that these restrictions would increase predatory lending, since those lenders would have a higher chance of recovering at least some portion of their loans. The logic of this position escapes us. Under the proposed bill, recovery in Chapter 13 would be contingent on a demonstration that the debtor indeed had the capacity to repay. So, the only way the law helps creditors recover the loan is if the debtor can repay anyway. It is not clear to us how this encourages "predatory" lending, or even why this is overly hard or unfair to consumers, regardless of the economic climate. It is worth noting that personal bankruptcies have increased by 26.4 percent over the past two years (through December 2002). As indicated elsewhere in this issue (Forecasts Section), bankruptcies are up so far in 2003 by over 8 percent.