Bankruptcy Bill Passes In The Senate
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According to the independent American Bankruptcy Institute, personal bankruptcy filings have reached historic highs. For example, filings first cleared the 1 million mark in 1996. They then surpassed the 1.5 million mark in 2002. And they continue to average more than 1.6 million annually (although in 2004 they have eased off their highs). This article is part of Oxford Analytica’s Daily Brief Service. Click here for information about how to subscribe. The ABI links the high numbers of bankruptcy filings to Federal Reserve research that shows the ratio of household debt to disposable income has also reached record levels. Restructuring the U.S. bankruptcy framework has been a key priority of financial services firms and credit card companies, such as MBNA (nyse: KRB - news - people ), Citigroup (nyse: C - news - people ), JPMorgan Chase (nyse: JPM - news - people ) and Capital One Financial (nyse: COF - news - people ), since 1998. Lenders assert that the existing bankruptcy system is easy to manipulate and allows individuals to walk away from their debts too easily. Consumer advocates have strongly opposed making it more difficult to file for personal bankruptcy. They have attributed the increase in filings, in part, to aggressive credit card promotions and onerous lending terms. They argue that lending policies lead some consumers to take on too much debt. Opponents of tightening the bankruptcy framework claim that unemployment, divorce and most significantly medical costs are the most common catalysts of personal bankruptcy (rather than personal irresponsibility or poor financial understanding). Until fairly recently, party positions on bankruptcy legislation had largely diverged. Generally, Republicans support tightening the bankruptcy framework, and Democrats favor retaining protections for low-income debtors and improved disclosure of the true costs of high-interest rate credit card finance. In 2000, Republican-driven legislation was passed by Congress, but then-President Bill Clinton declined to sign the measure and it was “pocket-vetoed.” However, since then, some Democrats have become receptive to tightening the current framework. Indeed, 18 Democratic and the chamber’s only Independent senator joined all 55 Republicans in voting to approve the bankruptcy bill. Similar cross-party support is expected when the House votes on the legislation. The Senate Republican leadership worked to keep the bill largely free of amendments. This is because the House Republican leadership has vowed quick action on the legislation provided it was passed in a form that reflected previous consensus on key issues. In January 2004, the House approved legislation similar to that just adopted by the Senate. It is possible, but unlikely, that the full House could vote on a counterpart version of the bill sometime next week. However, a vote is most probable in early April shortly after Congress returns from recess. This would clear the way for President George W. Bush to sign the measure. It will become law six months thereafter. Although the legislation includes provisions that apply to many aspects of bankruptcy filings, the most significant sections apply to personal bankruptcy filings. The most significant section of the legislation makes it more difficult for individuals to file for bankruptcy under the more lenient Chapter 7 of the bankruptcy code. Currently, about 70% of personal bankruptcies are filed under Chapter 7. Under Chapter 7, individuals essentially wipe out most unsecured debt (save for alimony, child support, student loans and tax obligations), after making a fair distribution to creditors of whatever non-exempt property the debtor has. The most significant exemption is for protecting a debtor’s primary residence; the specific rules that apply to any debtor’s situation vary from state to state. Chapter 7 allows the individual debtor to make a fresh financial start through the discharge of his or her existing financial obligations in bankruptcy. |