The Senate Judiciary Committee approved legislation Thursday that would make it more difficult for consumers to eliminate their unsecured debt in bankruptcy.
In a display of bipartisanship, the committee voted 15-to-2 to give creditors the right to ask judges to force consumers to repay debts in Chapter 13 rather than eliminating them in Chapter 7. Currently, only court-appointed bankruptcy trustees may make these requests.
To prevail, the creditor must prove the debtor is abusing the bankruptcy system. Abuse is defined as attempting to eliminate debt in Chapter 7 when the consumer could afford to repay at least 20% of unsecured credit over five years.
This is the second major vote this month on needs-based bankruptcy reform. The House Judiciary Committee approved a bill last week that uses a formula based on income and living expenses to determine if consumers may eliminate their debts in Chapter 7.
"This was a very strong bipartisan vote," said Philip S. Corwin, a principal at Federal Legislative Associates who lobbies for the American Bankers Association. "This bill represents a balanced approach that has an excellent chance of Senate passage this year."
But consumer advocates vowed to block the bill on the Senate floor. "The bill ought to die this year and they should start fresh next year," said Gary Klein, an attorney at the National Consumer Law Center.
Mr. Klein said he expects Sen. Edward Kennedy, D-Mass., and others to amend the bill when it comes to the Senate floor. Most of these amendments will be aimed at credit card lenders, which could be required to make new consumer disclosures.
In a 10-to-7 vote, Senate Judiciary sweetened the bill for secured creditors by eliminating cram-downs, which occur when the value of the collateral is less than the amount of the outstanding loan. The law currently requires bankrupt consumers to repay the amount the collateral is worth. The rest of the debt is treated as unsecured credit, which may be eliminated in bankruptcy. By eliminating cram-downs, consumers would be required to repay the entire loan, even if it exceeds the value of the collateral.
Also, the committee unanimously adopted an amendment clarifying that child support payments take precedence over all other debts in bankruptcy.