The House was poised late Wednesday to adopt a bill making it tougher for consumers to eliminate unsecured debts in bankruptcy.

The bill uses a formula based on income and living expenses to determine whether consumers may discharge unsecured debts in Chapter 7 or must repay them in Chapter 13.

"This bill makes bankruptcy applicable to those who need it and takes it out of the reach of those who use it for convenience," said Rep. Scott McInnis, R-Colo.

Bankruptcy reform is on a fast track for enactment. The Senate is expected to vote on the issue next month. The Clinton administration supports reform overall but has questioned using a formula to decide whether consumers may file for Chapter 7.

Key votes in the House occurred early in the afternoon when opponents failed 183 to 236 to kill the rule governing debate and 172 to 251 to table the bill.

During debate, the bill's leading antagonist, Rep. Jerrold Nadler, D- N.Y., conceded defeat. "I know the majority has the votes to pass this," Rep. Nadler said. "I have no illusions about the outcome."

Late Wednesday lawmakers were still debating several amendments, including a proposal by Rep. Nadler to replace the bill with a Democratic substitute that would let judges decide whether consumers file for Chapter 7 or Chapter 13. The amendment was expected to fail. (For an update, visit American Banker's www.americanbanker.com Web site.)

Lawmakers adopted several measures requiring debtors to make child support payments before repaying unsecured debts. It also rejected an amendment that would have forced credit card companies to pay for new judges.

Lenders, who watched bankruptcy filings soar to a record 1.3 million last year, back the bill because it would implement the industry's long- sought goal of creating a needs-based bankruptcy system.

"This is a good bill because it will fix the fundamental flaw in the current bankruptcy system," said William P. Binzel, vice president of government relations at MasterCard International. "This flaw allows debtors who have an ability to repay their debts to walk away from their debts and pass the costs on to other consumers."

"This bill will restore fairness to the bankruptcy system," agreed Michael J. McGarry, director of public affairs at Visa U.S.A. "It will bring back common sense and actually create a bankruptcy system that is based on need."

But consumer advocates blasted the legislation. "The bill has become a Christmas tree," said Gary Klein, an attorney at the National Consumer Law Center. "Anything the industry wants is included in the bill regardless of whether it makes sense for the legal system."

The bill would bar consumers who could afford to cover their living expenses and repay all secured debt and at least 20% of unsecured debt from filing for Chapter 7. Exempted would be those earning less than the median income, which is about $51,000 for a family of four.

It also would let creditors and trustees ask bankruptcy judges to dismiss fraudulent bankruptcy petitions. Currently, only trustees may make such requests.

The bill also would make it harder for consumers to repeatedly file for bankruptcy. Consumers would be able to file for Chapter 7 only once every 10 years and for Chapter 13 only once every five years.

The bill also would make small businesses use an expedited bankruptcy process, force regulators to audit bankruptcy filings, and require consumers to enroll in debtor education programs.

During more than five hours of debate, Republicans generally lauded the bill for returning personal responsibility to the bankruptcy system while Democrats said the measure would jeopardize child support payments by giving creditors more power to recoup debts.

Rep. Nadler called the measure "one of the worst special interest bills" considered by Congress in years. It would take money away from poor families receiving child support payments and give it to credit card companies, he said. He also criticized using a formula to determine who may file for Chapter 7, saying the decision should be left up to a judge.

"This is nothing more than a special favor for credit card companies and big banks," he said.

But Rep. Bill McCollum, R-Fla., said the bill would protect consumers from others who shirk their debts. "People are not exercising personal responsibility," he said. "They are not going to a repayment plan even if they could afford to do so."

The Senate version would let creditors ask bankruptcy judges to force debtors to repay unsecured debts. The judge would have to grant the request if debtors could afford to repay at least 20% of their unsecured credit over five years. Senate Majority Leader Trent Lott and Senate Minority Leader Thomas A. Daschle both have expressed support for the measure.

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