A sharply di-vided government panel today will recommend overhauling bankruptcy laws to make it easier for consumers to eliminate their debts.

However, four of the nine National Bankruptcy Review Commission members will attach a fiery dissent to the report due to Congress this afternoon.

While lenders disagree with most of the report's recommendations, the strong dissent could bolster their case with lawmakers that people in bankruptcy should have to repay what they can.

"The dissent demonstrates that there is a lack of credibility in what the commission did," said William P. Binzel, vice president for government affairs at MasterCard International. "This sets the stage for fundamental reform of the bankruptcy code along the lines of the legislation that has been introduced."

A bipartisan bill now pending in the House would peg a debtor's repayment obligation to his earnings.

"The fact that they were so vehement in their opposition shows not just the folly of the majority report but the intellectual might that is behind the minority dissent," said David Sandor, director of public affairs for Visa U.S.A.

The commission preliminarily adopted most of its recommendations in June. Key among them: most credit card debt could be discharged, reaffirmation agreements with lenders would be barred, and the amount of property consumers may shield from creditors would be expanded.

Led by Judge Edith H. Jones of the federal appeals court in Houston, the dissenters charge the recommendations would increase bankruptcy filings and raise the cost of credit. "Significant parts of the framework are flawed and should be rejected," they said.

The dissenters also questioned the integrity of the majority's work.

"The report contains many interpretations and characterizations which often do not reflect the commissioner's work," they wrote. "The report, forinstance, does not reveal that commission ... split five to four on most consumer recommendations or that meaningful debate on many significant issues was very limited or nonexistent."

Instead, they urge Congress to adopt needs-based bankruptcy, which means consumers with high incomes must repay at least some of their unsecured debts.

The 173-page dissent recommends allowing any debt to be reaffirmed, or removed from a bankruptcy filing and repaid.

They also identified five ways to implement needs-based bankruptcy. One would let judges decide whether a debtor uses Chapter 7 or Chapter 13 bankruptcy. Under the former, all unsecured debts are eliminated. With Chapter 13, some debt must be repaid.

The dissenters also said debtors who fail to complete Chapter 13 repayment plans should be penalized.

They also suggested subjecting people who file for Chapter 7 to audits, barring those who earn more than $40,000 annually from filing for Chapter 7, and forcing those whose income exceeds the government-calculated average cost of living to repay some debts.

Besides Judge Jones, lawyers James I. Shephard of Fresno, Calif., John A. Gose of Seattle, and Jeffrey J. Hartley of Mobile, Ala., dissented.

Congress created the commission three years ago to recommend improvements to the bankruptcy code. The commission said consumers should be able to escape all credit card debt incurred more than 30 days before filing bankruptcy. The current cutoff is 90 days.

The report also suggests banning the reaffirmation of unsecured debts. For secured debts, consumers could only reaffirm the fair market value of the property regardless of the amount left on the loans.

The commission also said a married couple should be able to shield up to $140,000 in real estate and personal property from creditors. The current exemption varies by state, although most are less than $50,000.

Also, the commission would permit the discharge of student loans and it would cap at 7% of income the amount that consumers who earn more than $70,000 annually must pay to unsecured creditors.

"This would tilt the bankruptcy code to the side of debtors," said Sarah B. Cummer, regulatory staff attorney at the Credit Union National Association. "Ultimately all consumers have to pick up the costs for those in bankruptcy."

Congress is expected to hold hearings on the report in early January.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.