Providing a new angle on bankruptcy reform, Sen. Charles E. Grassley unveiled legislation Tuesday that would let judges force high- income consumers to repay, rather than cancel, their debts.
"The bill would discourage casual bankruptcies by sending a clear signal that a person can't file for bankruptcy and walk away from debts if he or she has the ability to repay," the Iowa Republican said.
Current law permits judges to intervene only when they suspect "substantial abuse," and it bars lenders from challenging any filing.
"This is a step in the right direction," said David Sandor, vice president of public affairs at Visa U.S.A. "But it is not quite sufficient and would be more costly than other needs-based proposals."
One such plan, introduced in the House last month by Reps. Bill McCollum and Rick Boucher, would prevent consumers from eliminating unsecured debts under Chapter 7 bankruptcy if they could afford to repay at least 20%.
After introducing his bill, Sen. Grassley was chairman of a hearing of the Senate Judiciary Committee's administrative oversight subcommittee featuring the nine members of the National Bankruptcy Review Commission.
Monday, the sharply divided commission released a 1,300-page report on bankruptcy reform that lenders and some lawmakers criticized as too soft on borrowers.
The report suggests making it easier for consumers to eliminate credit card debt, allowing more property to be protected from seizure by creditors, and severely restricting reaffirmations, which occur when a consumer agrees to remove a debt from bankruptcy and repay it.
At the hearing, commission Chairman Brady C. Williamson said the panel at least scoped out the problem for lawmakers.
"Congress will face those issues with the benefit of a series of recommendations and a report that comprehensively reviews the bankruptcy system and the controversy that engenders it," he said.
Still, lawmakers blasted the report.
"To even think about lowering bankruptcy standards instead of making them tougher is bad business," said Sen. Lauch Faircloth, R-N.C., who added that Senate Banking's financial institutions subcommittee will hold hearings on the commission's work.
"The commission's recommendations do not address the core of the current problem," said Rep. Boucher, D-Va. "Individuals are abusing the bankruptcy law by filing Chapter 7 liquidation petitions when they could repay a large part of their debts."
"You can't have true bankruptcy reform without having some type of needs-based approach," said Rep. McCollum, R-Fla.
Rep. McCollum said he expects a House Judiciary subcommittee to hold hearings on his bankruptcy bill in February or March and the full House to vote by fall. Republican leaders support the bill, which has 30 co- sponsors, he said.
"We can't do it in the limited time left this year," Rep. Boucher agreed. "But the chance for reform is good."
Congress created the commission three years ago after bankruptcy filings started to rise. Filings hit a record last year at 1.1 million and are on track to top that total this year.
The commission's work was attacked by all sides of the private sector.
Paul A. Schosberg, president of America's Community Bankers, called the report "seriously flawed and too one-sided."
Norma Hammes, president of the National Association of Consumer Bankruptcy Attorneys, said the recommendations "would shift the delicate balance between the debtor and the creditors' interests clearly in favor of creditors."