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Responsible Bankruptcy

Two members of the House of Representatives introduced legislation yesterday aimed at correcting alleged flaws in the current personal bankruptcy code. The Responsible Borrower Protection Bankruptcy Act of 1997 , sponsored by Rep. Bill McCollum, R-Fla., and Rep. Rick Boucher, D-Va., will restrict personal bankruptcy options by forcing borrowers with the ability to repay at least 20% of their unsecured debts into a Chapter 13 filing, instead of a the full liquidation provided under a Chapter 7 filing. The proposed legislation also calls for significant changes in the time period between bankruptcy filings, implementation of administrative reforms and creation of a clearinghouse of bankruptcy statistics. Yesterdays action is backed by the credit card industry which has been thwarted in its efforts to change the code by way of the National Bankruptcy Review Commission. The NBRC will present its recommendations to Congress next month.

The Bankruptcy Issues Council (BIC) today hailed the introduction of legislation in the House of Representatives that would correct a flaw in the bankruptcy code that allows filers to wipe out debts they could repay and institute other changes to make the system more balanced and fair.

The Responsible Borrower Protection Bankruptcy Act of 1997, introduced by Rep. Bill McCollum, R-Fla., and Rep. Rick Boucher, D-Va., would tailor the amount of debt relief to an individual’s needs, close loopholes that allow some filers to circumvent paying their debts and streamline the process to make it more efficient.

“We are very pleased that Representatives McCollum and Boucher have taken a leadership role on bankruptcy reform by introducing this bill,” said a statement from the BIC, which includes representatives of Visa, MasterCard and their member banks. “This bill is a common-sense approach that will go a long way toward fixing some of the fundamental flaws in our bankruptcy code.

“Every American consumer has a stake in seeing that this legislation moves quickly,” said Thomas A. Layman, senior vice president of Visa U.S.A. “All consumers are paying the price for the flaws in the current bankruptcy system, in the form of higher interest rates and higher prices for goods and services.”

“Last year,” said Richard Jones, vice president of MasterCard International, “more than $30 billion in consumer debt was erased through consumer bankruptcy and that figure is expected to approach $40 billion this year. That amounts to a hidden tax of nearly $400 for every American household.”

In introducing the bill, McCollum cited the continuing rise in personal bankruptcies. Last year, for the first time ever, more than one million bankruptcy petitions were filed in the United States, an increase of nearly 400 percent since 1980. The overwhelming majority — more than 70 percent — filed under Chapter 7, where their debts, for the most part, were erased without regard to an individual’s ability to repay. Under Chapter 13, debtors are required to establish a timely repayment plan.

“The most basic flaw in current law is that it allows filers to wipe out debts that they could repay,” Layman said. “The McCollum-Boucher bill will fix that by setting up a system that provides the debtor with the amount of debt relief he or she needs, no more and no less.”

“Perhaps the most important aspect of this legislation is that it recognizes that some people who file for bankruptcy are in financial difficulty and need complete relief from their debts in order to make a fresh start,” said Jones. “This bill makes the system fair for everyone, ensuring that those individuals get a chance to start over, while those who have the ability to repay do so.”

This “needs-based” system is the cornerstone of the bill, which would establish a formula, based on filers’ income and obligations, to determine whether debtors could repay a portion of their unsecured debts. If they could repay all secured and priority debts and at least 20 percent of unsecured debts, they would file under Chapter 13 and begin a repayment plan. The bill includes incentives to encourage more people to file under Chapter 13.

If they could not repay at least 20 percent of unsecured debts, then they would be allowed to receive complete relief by filing under Chapter 7.

The bill also allows for regular reviews of cases, so if an individual’s financial circumstances changed, the repayment plan could be adjusted accordingly. For example, if a debtor lost a job or incurred an unexpected medical expense, the Court could restructure his or her bankruptcy plan. In the most severe circumstances, the Court could decide to move a debtor from Chapter 13 into Chapter 7.

Another key element of the legislation is the requirement that individuals who file for bankruptcy be advised of all their options, including alternatives to bankruptcy. A study released earlier this year by Visa U.S.A. showed that as many as 50 percent of filers said they were not aware that there were alternatives to bankruptcy, such as consumer credit counseling. Of those, 65 percent said they would have chosen another option had they known about it. The bill would require that the Court explain a debtor’s options in writing, including the differences between Chapter 7 and Chapter 13, and provide information on alternatives to bankruptcy.

Other key provisions of the bill would:

” Close a number of loopholes in the law through which individuals are able to take advantage of the bankruptcy system in order to avoid paying their debts;

” Implement a variety of administrative and other reforms designed to streamline the bankruptcy system to make it more efficient for all parties involved;

” Create a clearinghouse of bankruptcy statistics, which Congress would monitor and use to determine whether further reforms are necessary.

“We hope Congress will move forward quickly to consider and pass this legislation,” the BIC statement said. “With more than 4,200 Americans filing for personal bankruptcy every day, we cannot afford any delay. We must fix our broken bankruptcy system as soon as possible.”

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