Over the past several years, the ABA has strongly supported efforts by Congress to enact meaningful reform of our bankruptcy laws and will do so again in the 109th Congress. The Chairmen of the Senate and House Judiciary Committees, which have jurisdiction over this issue, as well as high-ranking officials within the Congressional leadership, are committed to early passage of bankruptcy reform legislation by the House and Senate in 2005 and enactment into law.
Under current law, bankruptcy protection has increasingly become an easy option – a "first stop" rather than a "last resort" – for many borrowers who can afford to meet at least some portion of their financial responsibilities. Abuse of the bankruptcy code undermines the efficiency and effectiveness of our credit markets. Moreover, it raises the cost of credit to millions of responsible borrowers who pay their bills.
Consumer bankruptcies fall under two main categories: Chapter 7 and Chapter 13. Chapter 7 filers have almost their entire debt erased, often even when they have the capacity to repay some of it. Under Chapter 13, creditors are repaid, in full or in part, in installments over a three- to five-year period.
Figures from the Administrative Office of the U.S. Courts show the number of federal court bankruptcy filings remained at high levels in fiscal year 2004, with over 1.6 million cases filed in U.S. District Courts. Bankruptcies remained at "historic highs," the Administrative Office said, well above the 1.5 million record first set in 2002.
The fundamental flaw in the current system is that there are no rules to determine whether Chapter 7 filers have the "means" to repay some of their debts. In fact, many debtors who can meet some of their financial obligations escape such debts by filing for Chapter 7. This choice of Chapter 7 by wealthier debtors, in turn, increases costs to all consumers. This demonstrates the need for enactment of "needs-based" reform that will direct filers into one chapter or another based on their ability to repay.
Bankruptcy reform legislation considered by the 107th and 108th Congresses contained this needed reform. Strong bi-partisan majorities have supported these efforts in both the House and Senate in prior Congresses, only to be stymied by disputes over highly peripheral language dealing with discharge in bankruptcy of penalties imposed for felony convictions such as for violence directed at abortion clinics.
Sen. Charles Grassley (R-IA) introduced bankruptcy-reform legislation, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S. 256), in the Senate on February 1, 2005. The legislation is similar to bankruptcy-reform legislation offered in previous years, and in particular is the same as the version of S. 1920 that passed the House, by a vote of 265-99, in 2004 but stalled in the Senate. As in past legislation, it contains a "needs-based" formula that would require consumers above a certain income level to repay their debts under Chapter 13 rather than Chapter 7.
Some of the other important reforms included in S. 256 that are strongly supported by the ABA include: limits on a debtor's ability to run-up significant debt just prior to bankruptcy; caps on the value of a primary residence eligible to be shielded from bankruptcy creditors under a state's homestead provisions; protections for the rights of secured creditors to continue to receive payments on certain secured loans (e.g., auto loans) during the pendency of the bankruptcy proceeding; and, financial instrument netting provisions that provide legal certainty where the issuer of, or counterparty to, swaps, derivatives, and other similar instruments becomes insolvent.
Chapter 12, which is used by farmers, has been extended on a number of occasions. Provisions to permanently extend Chapter 12 are included in S. 256.
The Senate passed S. 256, by a vote of 74-25, on March 10, after adopting amendments related to a triennial inflation adjustment, fraudulent involuntary petitions, disabled veterans, corporate fraud, and a narrow credit counseling exception. The House passed S. 256, by a vote of 302-126, on April 14, 2005, without amendment. ABA is pleased with the strong bipartisan votes, and applauds the Senate and House for passing this vital legislation.
President Bush signed S. 256 into law on April 20, 2005. Most of the bill's provisions became effective in October 2005.
