NewsMax.com Wires
Friday, March 16, 2001

With lax laws allowing consumers to go on spending sprees and walk away from their obligations, personal bankruptcies in the United States soared to a record 1.4 million in 1998, up more than 300 percent since 1980. Fox News reported that the total declined to about 1.3 million in 1999 and 1.2 million last year.

"I think that it is a moral question," said Sen. Jeff Sessions, R-Ala. It is an "unhealthy value" to encourage people who can repay their debts to walk away from them, he said.

Senators engaged in a debate on states' rights before they accepted an amendment by Sen. Herb Kohl, D-Wis., allowing debtors in bankruptcy proceedings to keep no more than $125,000 of the equity in their homes.

Kohl had examples: actor Burt Reynolds, who wrote off millions in debt in bankruptcy court but kept his $2.5 million Florida estate; and former corporate raider Paul Bilzerian, convicted of securities fraud, who filed twice for bankruptcy protection but kept his Florida mansion.

Florida and Texas allow an unlimited homestead exemption, which debtors can use to keep their homes' value out of the reach of creditors in bankruptcy court.

Bush has signaled he would sign the bankruptcy legislation, but he opposes national caps on homestead exemptions, a provision absent in the version passed two weeks ago by the House.

Bipartisanship at Last

The Senate measure won support from 47 Republicans and 36 Democrats, while 13 Democrats and two Republicans opposed it. Sen. Peter Fitzgerald, R-Ill., voted present to avoid a conflict of interest because his family owns a bank.

After the legislation is signed into law, there will be a six-month period before the stricter law for debtors takes effect. The initial outcome is likely to send money-strapped debtors scrambling to file for bankruptcy protection, say many observers. Debt-protection entities have already reported an increase in consultations.

Specifically expected is a jump in Chapter 7 filings, a desirable form of bankruptcy that erases all debts after the liquidation of many assets. The new legislation requires people with some ability to pay to file instead under Chapter 13, a harsher section that speeds up repayment plans, among other requirements.

If the filer is shifted to Chapter 13 and he then earns more than the state median income and can repay $6,000 of his unsecured debt over five years, he receives only limited debt cancellation. Filing for bankruptcy under the new law leaves a consumer with a tarnished record for 10 years, compared with 7 under current legislation.

Consumer lawyers say the new law will force more individuals – those with an income above their state's median income – into Chapter 13, which requires debtors to work out a compressed plan to pay off a portion of their debts over three to five years.

But Chapter 13 provisions also dictate that the court may reduce a claim based in whole on unsecured consumer debts by not more than 20 percent of the claim, if the claim was filed by a creditor who refused to negotiate an alternative repayment schedule approved by a credit counseling agency, which provided for payment of at least 60 percent of the amount of the debt over the original repayment period of the loan, or a reasonable extension thereof.

There are unclear provisions contained within the law that create loopholes. For instance, bankruptcy filers are allowed a monthly allotment to cover expenses. Also courts have the discretion to permit individuals to file for Chapter 7, even if they exceed the income requirements. Still, this is at the discretion of the judge, and is thus a roll of the dice for potential filers.

The bill is designed to make credit card companies provide greater disclosure, and establishes truth-in-lending practices for the Internet. There are enhanced consumer protections and information, and education provisions to give the debtor more information to enable him to avoid bankruptcy.

And, under the new law, consumers are required to get credit counseling from an approved nonprofit organization and seek alternatives before seeking bankruptcy protection. (These counseling groups say that consumers usually file as a last resort.)

Penalties under the new law are based on various factors, including a means-test calculation of a debtor's income, with living expenses deducted as permitted under IRS standards. Additional expenses such as food, shelter, clothing and medical, transportation and attorney's fees and charitable contributions are taken into account if a debtor can show need through special circumstances.

The bill, long regarded as a boon for credit card issuers, passed the House in late February.

It not only makes filing for bankruptcy protection more difficult for individuals and businesses unable to pay their debts, but also allows creditors greater authority to collect. According to a spokesman from the Washington-based American Banking Association, creditors expect the bill to reduce credit losses by about 10 percent, and thereby enable them to recover as much as $4 billion annually from higher-income borrowers.

The Cost to Consumers

Self-styled consumer groups have decried the legislation as a bailout for credit card companies, but others, including the banking industry, argue that U.S. families are annually paying roughly $400 each to pay for bankruptcy cleanup in hidden costs through higher credit card fees. Findings show that the number of bankruptcies has risen from 348,000 to 1.4 million over the last 15 years and that credit-issuing businesses absorb nearly $40 billion in bankruptcy losses each year.

"This record number of bankruptcy filings is a clear indication that the system is broken and needs to be fixed," the American Banking Association said in a statement.

Some evidence shows that consumer bankruptcy filings declined by 5 percent last year, according to data compiled by the Administrative Office of the United States Courts, and figures for the first months of this year are not yet available. However, one consulting group that compiles information for a network of Visa bank issuers showed a 20.3 percent increase in consumer bankruptcies from January through March of this year, compared to last year.

"The legislation ends the present practice of wealthy debtors shielding assets to escape their bills, while preserving access to bankruptcy for legitimate filers," according to Thomas Donohue, in a statement made by the U.S. Chamber of Commerce.

"More Americans file for bankruptcy each year than graduate college each year," said Donohue. The Chamber of Commerce urged the Senate to pass the bill.

There is some question as to whether the legislation will be effective. There are many examples, some offered through Web sites, that systematize ways for individuals with high net worth to defraud creditors. These strategies are called "bankruptcy bust-outs," said Michael Zeldin, a money-laundering consultant with accountancy Deloitte and Touche. These "wrongdoers" shelter assets and go offshore to hide them, defrauding creditors, spouses and the IRS.

Banks and retail credit industries have supported legislation to curb bankruptcy abuse through donations to federal candidates of more than $9.2 million during the 2000 election cycle. MBNA Corp. one of the world's largest credit card companies, donated $237,675 to Bush's campaign, making it his largest individual donor, according to Center for Responsive Politics, a research group that studies campaign finance.

Robert Gowering Sr., a consumer bankruptcy lawyer in Ohio, told the New York Times that he expects as much as a 15 percent increase in bankruptcy filings after the law passes. Then he said he expects a dramatic decline after the six-month effective date.

Copyright 2001 by United Press International. All rights reserved.

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