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U.S. Senate oks tougher bankruptcy rules

March 11, 2005

By Susan Cornwell
Reuters

Reprinted from Reuters
http://www.reuters.com/financeNewsArticle.jhtml?type=bondsNews&storyID=7872195

WASHINGTON, March 10 (Reuters) - Legislation making it harder for consumers to wipe out their debts in bankruptcy passed the U.S. Senate overwhelmingly on Thursday, and appeared likely to become law this spring.

The stiffening of bankruptcy rules sought by business was passed on a vote of 74-25. It now heads to the House of Representatives where leaders hope to act on it next month so that President George W. Bush can sign it into law.

Bush applauded the vote and urged the House to act quickly on the bill, the second item on a White House legislative agenda to overhaul the legal system. Congress passed the first item -- limits on class action lawsuits -- last month.

"By reforming the system with this commonsense approach, more Americans -- especially lower-income Americans -- will have greater access to credit," Bush said in a statement.

Lenders such as credit card companies and retailers have lobbied for the bankruptcy changes for years, arguing it is too easy for people to game the system and walk away from debt.

Critics charge the measure is too harsh and rewards lenders who have encouraged consumers to take on higher debt burdens.

The legislation contains a means test to determine if people should enter compulsory repayment plans, rather than having their assets liquidated to repay creditors.

"Why shouldn't they have to repay some of their debts?" demanded the bill's sponsor Sen. Charles Grassley, an Iowa Republican. "It's only fair to those who do pay their debts."

Opponents said most people in bankruptcy court were there because they faced crushing medical bills, the loss of a job or other calamities, not because they were spendthrifts.

These critics sought unsuccessfully to change parts of the bill that eased conflict-of-interest rules for investment banks. They also charged the bill retained "millionaire loopholes," such as unlimited homestead exemptions in some states.

"This bill sacrifices the hopes and dreams of average Americans to the rampant greed of the credit card industry," declared Massachusetts Democrat Sen. Edward Kennedy.

Republicans have sought the changes in bankruptcy law for years, but their prospects improved with the November election of bigger Republican majorities to both houses of Congress.

Bush would like to follow the class action and bankruptcy bills with curbs on asbestos lawsuits and caps on medical malpractice awards, but those efforts face a tough sell.

The bankruptcy bill's way forward was cleared earlier this week when senators defeated an abortion-related amendment that had scuttled agreement on the bill in the previous Congress.

The Republican-majority chamber rejected a hodgepodge of Democratic attempts to soften the bill's impact on the poor and families with children. Senators accepted one change exempting disabled veterans from the means test, and another exempting some individuals from credit counseling requirements.

The Republican leadership repeatedly warned that any major amendments could hurt the bill's chances in the House. However, the Senate passed an amendment that critics said would help millionaires shelter assets in special trusts. It would permit creditors to reach the assets only if it is shown the debtor created the trust with intent to defraud.

Five Republicans backed an attempt to maintain a ban on banks advising bankrupt companies if they had been their advisers prior to bankruptcy. But the amendment failed, 44-55.

Backers of the amendment pointed out that Securities and Exchange Commission Chairman William Donaldson had warned Congress to proceed cautiously before loosening such conflict of interest restrictions on investment banks. But Sen. Orrin Hatch, a Utah Republican, retorted that Donaldson was wrong.

"Let me tell you something. He's not God Almighty and he's been wrong on a number of things," Hatch told reporters.

Reprinted from Reuters
http://www.reuters.com/financeNewsArticle.jhtml?type=bondsNews&storyID=7872195

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