Lenders Push for Reform as Bankruptcies Hit Record

Last year was a record one for bankruptcy filings, but some members of Congress are continuing to push for legislation that would make it more difficult for consumers to extinguish debts by filing for bankruptcy protection.

In March, the House Judiciary Committee of the U.S. House of Representatives voted 18-11 to tighten bankruptcy standards, a move that set up a lopsided 315-113 victory for bankruptcy reform in the full House. The Senate has also been considering this legislation, though it has yet to pass the Senate in this session.

Supporters of the legislation say it will limit abuses of the bankruptcy system by people who can afford to pay all or some of their debts. In the home mortgage world, bankruptcy filings are often used as a tactic to delay foreclosure.

The Mortgage Bankers Association of America applauded the House for passing the bill. MBA chairman John Courson said that commercial mortgage servicers stand to benefit along with residential lenders. Under current law, commercial property owners with more than $4 million in debt can file for bankruptcy protection and freeze the foreclosure process without being required to either create a repayment plan or make post-petition payments on the property, the MBA said.

"The provision that removes the $4 million cap on single-asset bankruptcies is very important to MBA's commercial members. We strongly urge the Senate to pass this legislation that will protect lenders from the potential abuse of the nation's bankruptcy laws."

The bill also has strong backing from the credit card industry.

Opposition Mounts

But the bankruptcy reform bill is not without opponents among consumer groups. The Consumer Federation of America says that the bill "would place severe restrictions on Americans who file for bankruptcy."

"With the economy sinking, this unbalanced bill couldn't come at a worse time for American consumers," said Travis Plunkett, CFA's legislative director. "The recession, corporate scandals and the attacks of 9/11 have taken their toll on many families."

The CFA said the rise in bankruptcy filings is directly tied to a rise in consumer debt and aggressive marketing by credit providers. According to the group's research, credit card issuers mailed nearly 50 credit card solicitations to each U.S. household last year.

"This bill simply doesn't balance responsibility between individuals and the creditors whose practices have contributed to the rise in bankruptcies," Mr. Plunkett said.

He said the bill does nothing to combat "predatory lending" by lenders. The CFA also criticized the bill for allowing wealthy creditors to shelter assets in homes of unlimited value in five states.

And consumer credit counselor Gene Jolley, creator of the Rapid Debt Reduction Software, said the bill's requirement that consumers seek credit counseling prior to filing for bankruptcy protection may inspire the rise of "fly- by-night" credit counseling agencies.

Some members of Congress are also fighting the reforms. While the bill has widespread Republican backing, many Democrats oppose the changes.

Filings Continue to Rise

According to the Administrative Office of U.S. Courts, bankruptcy filings totaled 1,577,651 in 2002, up from 1,492,129 the year before. That was a 5% increase for 2002, though some experts said that anticipation of a change in law to make filing for bankruptcy more difficult might have encouraged some consumers to file before the law changed.

Samuel Gerdano, executive director of the American Bankruptcy Institute, said that the fourth quarter 2002 record rate of filings was not unexpected.

"With historically high levels of consumer debt and many public companies in financial distress, we expect 2003 to continue this pace," he said.

Chapter 7 filings were up 5.2% last year, while Chapter 13 filings were up 7.2%.

Regionally, bankruptcy rates continue to be high in the Southeast and parts of the West. States with the lowest bankruptcy rates per household were Alaska, Vermont, Massachusetts, New Hampshire and Maine.

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