Two lawmakers introduced a bill Wednesday that would make it substantially tougher for borrowers with high incomes to eliminate their debts in bankruptcy.
The legislation, sponsored by Reps. Bill McCollum, R-Fla., and Rick Boucher, D-Va., essentially would create the "needs-based bankruptcy" concept that lenders have been advocating.
It would severely limit who can file for Chapter 7, which allows insolvent consumers to wipe out unsecured debt. Under the bill, Chapter 7 would not be an option for consumers who could afford to repay at least 20% of their unsecured debts. They would have to use Chapter 13, which requires submitting a plan to repay at least some unsecured creditors.
"This is an open-and-shut bill," said David Sandor, director of public affairs at Visa U.S.A. "It leaves the courthouse open to all who seek relief, but it shuts down loopholes in the bankruptcy code that have allowed people to avoid debts that they have the ability to repay."
Industry officials vowed to lobby hard for the bipartisan proposal.
"There is a reasonable chance that major provisions of this bill can be enacted before the end of the 105th Congress," said Philip S. Corwin, a lobbyist at Federal Legislative Associates who represents the American Bankers Association. "Most members of Congress will regard the thrust of these proposals as common sense and requiring individuals to act with some personal responsibility."
The bill would prevent consumers from shedding credit card debts incurred within 90 days of declaring bankruptcy. The current threshold is 60 days.
It also would prevent consumers from discharging credit card debt incurred to make alimony payments or to pay off secured debt.
Court officials would have to inform debtors when they file for bankruptcy about out-of-court options such as credit counseling services.
Finally, the bill would streamline bankruptcy, making it harder for consumers to make repeated filings and giving Chapter 13 debtors only 90 days to file repayment plans with the court.
To impose needs-based bankruptcy, the bill would require the court to determine a debtor's monthly after-tax income. It then would subtract monthly payments for secured debts, such as mortgages and car loans, and priority debts, such as alimony and back taxes. It also would subtract living expenses, which would be calculated by multiplying the Internal Revenue Service cost-of-living index for the debtor's region by 115%.
The amount of cash remaining would be monthly net income.
The court then would calculate the monthly payment on unsecured debt. The consumer could file for Chapter 7 relief only if his monthly net income was less than 20% of the monthly unsecured credit payments.
The bill comes just a month before the National Bankruptcy Review Commission is expected to submit to Congress its recommendations for overhauling the system. The commission already has rejected needs-based bankruptcy, voting instead to make it easier for consumers to discharge credit card debt.