Industry officials are vowing to fight proposed changes to the consumer bankruptcy laws that would make it easier for borrowers to discharge their debts without repaying.

The proposal, which will be debated at an April 16 meeting of the National Bankruptcy Review Commission in Seattle, would allow consumers who file under Chapter 13 to eliminate all their debts even if they fail to make any of their promised payments.

The plan, proposed by one of the commission's working groups, angers lenders who charge it would make Chapter 13 worthless.

"The effect would be to increase lender losses by billions of dollar per year," said Phil Corwin, a lobbyist at Federal Legislative Associates who represents several trade groups on bankruptcy issues. "It just cannot be supported."

"The proposal is a step backward," agreed Lamar Smith, senior vice president for government relations at Visa U.S.A. "It would take away the incentive to complete a Chapter 13 repayment plan."

Under Chapter 13, consumers must file a plan to repay their debts while Chapter 7 allows them to emerge debt-free from bankruptcy.

Mr. Corwin noted that 40,000 consumers a year who file for Chapter 7 could afford to repay all their debts within six months.

Lenders prefer a needs-based system that requires consumers to repay as many of their debts as possible.

"The amount of relief you get in bankruptcy should be determined by your need," Mr. Smith said.

Several officials said they expect the commission, which comprises judges, lawyers, and bankruptcy trustees, to be receptive to the industry's objections. "There are very good prospects that the final proposal will be more in tune with the needs of lenders," one official said.

In its draft, the working group said the proposal "is not designed to further the interest of either debtors or creditors, but rather to improve the circumstances for both."

It would prevent debtors from filing for bankruptcy more than once every six years, require periodic audits of financial data borrowers submit to the court, and limit the ability of consumers to shield millions of dollars by purchasing expensive homes that cannot be seized by creditors.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.