Lawmakers aim to force bankrupts to repay debts.

With a sharp rise in the number of consumers seeking the protection of bankruptcy courts, Congress is taking steps that bankers and other lenders hope will encourage debtors to repay loans.

Bills under consideration would force more individuals to agree to repayment plans with creditors. Currently, about 70% of consumer bankruptcies are filed under Chapter 7, which permits individuals to simply discharge their debts.

The Senate voted 97 to 0 late last Wednesday for a bankruptcy reform bill that encourages the use of Chapter 13 repayment plans by people who have the ability to repay their debts relatively quickly.

The bill would raise the debt dollar limitations for filing Chapter 13 from $350,000 to $1 million, making this option available to higher-income, higher-debt individuals.

The American Bankers Association applauded the Senate for passing the bill.

"The Senate's overwhelming support demonstrates an understanding of the urgency of redressing current problems in the overloaded bankruptcy system," said ABA president Alan R. Tubbs. "These changes will stop delays and abuses and will encourage leaders to make more credit available."

Consumer bankruptcies are exploding, according to the ABA. Filings rose 21% in 1991, and are expected to exceed one million this year.

The ABA contends that this sharp increase in bankruptcy filings is partly due to the inconsistencies in the interpretation and application of the current laws.

Bankruptcy now accounts for more than half of all bank losser on credit cards, and these heavy losses lead to higher credit costs and lower credit supply, the ABA reports.

Lenders are supporting a similar bill in the House, which was introduced by Rep. Mike Synar and has been referred to the House Judiciary Committee.

Rep. Synar's bill, like its Senate counterpart, also raises the dollar amount for filing under Chapter 13, and clarifies the definitions of fraud and abuse, thus making a discharge of debts more difficult for fraudulent filers. The Synar bill would also eliminate the need for a bankruptcy petitioner to go before a judge to reaffirm a debt when the debtor has a lawyer.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER