A government panel on Thursday debated but could not decide whether lenders may collect credit card debt taken on just before a bankruptcy filing.
The National Bankruptcy Review Commission did agree, on a 5-to-4 vote, that consumers should be allowed to eliminate student loans when they declare bankruptcy.
The commission, meeting here, put off until today a vote over broader reform of the consumer bankruptcy laws that would make it harder for lenders to collect debts and seize collateral.
The panel, ordered by Congress to recommend wholesale changes to the bankruptcy code, has only one more meeting scheduled before its October deadline for submitting a report to Congress. The report is to serve as a blueprint for lawmakers rewriting the bankruptcy code.
But industry officials who witnessed the meeting today said deep divisions among the commission's nine members make it unlikely that its report will carry much weight.
"They will reach consensus on a number of issues, but there will also be a number of issues where they won't reach a consensus and Congress will have to decide," said William P. Binzel, vice president for government affairs at MasterCard International. "That is what we have been seeing."
"At the end of the day it doesn't matter that the commission bogged down, because it will be Congress that makes the final decision," said Kenneth R. Crone, senior vice president at Visa U.S.A. "It is obvious that there are separate camps here."
For example, Commission member James I. Shepard said funding for student loans would evaporate if consumers are allowed to discharge these loans.
"If we allow these to be discharged, there will be fewer student loans made," he said. "That is counterproductive."
Commission member M. Caldwell Butler, a former congressman who is now a partner at the Roanoke, Va., law firm of Woods, Rogers & Hazlegrove, said it is unfair that people who don't educate themselves can absolve themselves of debt while those who try to improve themselves cannot.
"I can't imagine Congress will ever consider this," said Philip S. Corwin, a lobbyist at Federal Legislative Associates, which represents the American Bankers Association. "This is one nail in the credibility of the commission."
The consumer issues on tap for today would:
Treat as unsecured debt the portion of a second mortgage that exceeds the value of the home. Currently all home equity loans are treated as secured debt that must be repaid by the debtor.
Eliminate the ability of consumers to reaffirm debts, which means they essentially remove the debt from bankruptcy and agree to repay it according to the terms of the loan. Instead, consumers could keep the property, such as a car, provided they are current on the payments. Lenders criticize this recommendation because the borrower could crash the car and then avoid repaying the rest of the loan.
Ban secured loans of less than $500 used to buy personal or household goods.
Require consumers who file Chapter 13 to make at least a minimum payment to unsecured creditors. The minimum payment would be set after adoption of the law.
Prevent consumers from filing for Chapter 7 more than once every six years and from filing for Chapter 13 more than once every two years.
Provide for an automatic conversion from Chapter 13 to Chapter 7 for consumers who stop making payments to creditors. Lenders could block the conversion if the borrower had filed for Chapter 7 within six years.