The Senate passed legislation Thursday that will make it harder for Americans to rid themselves of debt by filing for bankruptcy.
The House is expected to pass the measure next month, delivering to President Bush a second victory this year on pro-business legislation he had sought.
The vote was 74-25 to approve the most thorough overhaul of bankruptcy laws in a quarter-century.
“The short answer is fairness,” declared Sen. Orrin Hatch, R-Utah. “Those who can pay their bills should pay their bills. That’s the American way.”
Congressional and industry backers of the legislation have been pushing for it for eight years but it repeatedly got stalled. This year, with Republican majorities increased in both the House and Senate in last November’s elections, the bill’s fortunes reversed.
Before the vote and in Senate deliberations over much of the last 10 days, majority Republicans knocked down Democratic attempts to ease the impact of the legislation on people facing huge debts they cannot pay down, including single parents, the unemployed and the ill.
The Senate instead handed Wall Street investment firms a bonus, defeating a Democratic amendment that would have restricted their ability to work for companies both before and after those companies file for bankruptcy.
Senators acted against the advice of Securities and Exchange Commission Chairman William Donaldson, who said such a restriction was needed to build up investor confidence shaken by Enron, WorldCom and other corporate scandals.
For two straight days, Democratic opponents tried to soften the bill’s impact on single parents and other groups, and to restrict credit industry practices that lawmakers said especially hurt the poor.
Critics said the bill would remove a safety net for those who have lost their jobs or face big medical bills.
“It will have a real impact on real people all over this country,” said Sen. Russ Feingold, D-Wis.
Supporters of the bill said bankruptcy often was the last refuge of gamblers, impulsive shoppers, divorced or separated fathers avoiding child support, and multimillionaires — often celebrities — who buy mansions in states with liberal homestead exemptions to shelter assets from creditors.
Somewhere between 3,675 and 210,000 people annually — from 3.5 percent to 20 percent of those who currently dissolve their debts in bankruptcy — would be disqualified from doing so under the legislation, according to American Bankruptcy Institute estimates. the institute is a group of bankruptcy judges, lawyers and other experts.
The legislation would set up an income-based test for measuring a debtor’s ability to repay debts. It would require people in bankruptcy to pay for credit counseling and stiffen some legal requirements for debtors in the bankruptcy process.
The measure would ease some requirements for creditors and enable credit card issuers, retailers and other lenders to recover more of what is owed them.
Under the new income test, those with insufficient assets or income could still file a Chapter 7 bankruptcy, which if approved by a judge erases debts entirely after certain assets are forfeited. But those with income above the state’s median income who can pay at least $6,000 over five years — $100 a month — would be forced into Chapter 13, where a judge would then order a repayment plan.
About 70 percent of the people who file for bankruptcy now do so under Chapter 7, while the other 30 percent or so fall under Chapter 13, according to the American Bankruptcy Institute.
Most of the Chapter 7 filers “don’t have the income to fund a (repayment) plan that won’t fail,” said Samuel Gerdano, the group’s executive director.
Under current law, a bankruptcy judge determines under which chapter of the bankruptcy code a person falls. Chapter 7 now allows people to escape paying any of their credit card and other debts. Filings under Chapter 13 force people to repay debts over time in accordance with a court-approved plan.
Banks, credit card issuers and retailers have lobbied for bankruptcy revisions that would force more people to repay at least part of their debt. Such a bill nearly passed in 2002. It failed when the Senate accepted, but House Republicans rejected, a Democratic amendment barring anti-abortion protesters from using bankruptcy to avoid paying court fines for blocking abortion clinics.
In Bush’s first pro-business legislative victory this year, Congress last month sent him a bill placing most large multistate class action lawsuits under federal court jurisdiction, making it more difficult for plaintiffs to join together and win multimillion-dollar judgments in state courts.