As congressional efforts to reform the consumer bankruptcy system move into high gear this week, creditors have released another study to buttress their call for a needs-based system.
The study-the third this year sponsored by Visa U.S.A. and MasterCard International-finds that the proposed needs-based system would require 15% of consumers who currently eliminate debts under Chapter 7 to repay a portion of their unsecured credit under Chapter 13.
The study estimated that these filers could repay, on average, 64% of their unsecured debts over five years. That amounts to $4 billion.
"This shows that it is essential for Congress to enact needs-based bankruptcy," said William P. Binzel, vice president for government relations at MasterCard. "The current system is fundamentally flawed and allows debtors that clearly have an ability to repay to walk away from their debts."
Rep. George W. Gekas, chairman of the House Judiciary's commercial and administrative law subcommittee, has introduced a bill that would require filers earning more than 75% of the median income to repay at least some of their debts. The Pennsylvania Republican would exempt filers who, after accounting for living expenses, could not afford to repay at least 20% of their unsecured debts over five years.
Rep. Gekas plans two hearings this week on his bill. Today's session includes judges, creditors, consumer advocates, and bankruptcy experts, all of whom will discuss whether there is a need to change the law. On Thursday, the subcommittee will question witnesses on how the proposed needs-based system would work and who it would affect.
A competing bill introduced by Sen. Charles E. Grassley would give judges greater power to force high-income consumers to repay some of their debts. The Iowa Republican has scheduled a hearing Wednesday on his bill featuring 15 witnesses including the vice chairman of Household International, Robert Elliot.
The latest study is the first national analysis of consumer bankruptcy filings, said Visa chief economist Thomas A. Layman. Researchers pulled a random sample of 500 Chapter 7 petitions filed in 1997 from all 90 bankruptcy districts. They then adjusted the sample so it reflected the proportional volume of filings in each district.
The study found needs-based bankruptcy would effectively target higher- income debtors. The average filer affected by Rep. Gekas's bill earns 26% more than the national median income and twice as much as the average income of debtors unaffected by the proposed changes, the study found.
However, Richard DuBois, a staff attorney at the National Consumer Law Center, questioned the reliability of any study financed by MasterCard and Visa.
"So far all of the studies have been flawed," said Mr. DuBois, who had not yet had a chance to review the latest report. "I'd like to see the General Accounting Office get its hands on this report. An earlier study it reviewed showed serious flaws in the fundamental assumptions in the study."
Philip S. Corwin, a principal at Federal Legislative Associates who lobbies for the American Bankers Association, said he expects a bill to reach the President's desk this summer, noting that House Speaker Newt Gingrich has made passage of bankruptcy reform a priority for April.
But Mr. DuBois said he does not expect lawmakers to move that quickly. "The issue is very complicated," he said. "It will take time to sort out all the issues."
