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Senate OKs Bill to Tighten Nation’s Bankruptcy Rules

By Kathleen Day

The Senate approved legislation Thursday that would revamp the nation’s bankruptcy law by making it harder for consumers to wipe out their debt.

The 83 to 15 vote -- hailed by the credit-card industry and decried as unfair by consumer groups -- included the support of 36 Democrats. It comes two weeks after the House approved a similar bill and makes almost certain that the legislation, which President Bush has indicated he will sign, will become law this year, possibly within weeks. It would be the most significant change in the nation’s bankruptcy laws in two decades.

The bill’s swift passage, coupled with last week’s decision by lawmakers to revoke workplace safety rules that had been debated for 10 years, underscores the new influence business has in Washington now that both Congress and the White House are in Republican hands for the first time in half a century.

The legislation is intended to make it harder for individuals to erase debts under Chapter 7 of the U.S. bankruptcy code and make more file under Chapter 13, which would require them to repay a portion of their debt over 5 years.

“Reforming the system will be good for consumers and families,” said Sen. Charles Grassley (R-Iowa), the bill’s lead sponsor. “It will bring more fairness for those who work hard to pay their bills.”

Sen. Patrick Leahy (D-Vt.), the top Democrat on the Senate Judiciary Committee, which has jurisdiction over bankruptcy, voted for the bill, but with some reservations. “The credit-card industry is still getting a heck of windfall and a lot more than they deserve,” he said. He and consumer groups say the industry needs to be more responsible about how aggressively they market credit to consumers.

Republicans fought off most amendments favored by consumer groups that might have unraveled compromises among lawmakers in recent months.

But senators made several major changes to the bill shortly before passing it Thursday evening. These are likely to be the key sticking points when they sit down with members of the House to reconcile the two versions of the bill.

The Senate added an amendment that would cap the home equity a bankruptcy filer could keep at $125,000.

The House version is more complex. It would permit bankruptcy filers to keep home equity of up to $250,000 if the home was purchased within two years of filing for bankruptcy. The equity in homes purchased before then would be subject to state homesteading laws, including those of Texas, Florida and Kansas, which have no limits on the value of homes consumers can keep when in bankruptcy.

The homestead debate was sparked by several bankruptcy filings from well-known people, including actor Burt Reynolds, who kept multi-million dollar homes in states with unlimited exemptions.

The Senate added an amendment that would ensure a consumer would still be able to sue a lender -- or purchasers of a loan -- if the terms of the loan violate federal lending laws.

Another amendment would enable a person filing for bankruptcy and separated from a spouse to exclude the spouse’s income when courts determine eligibility for bankruptcy.