Bring Fair Balance to U.S. Bankruptcy Laws

For nearly 10 years, I have led an effort in Washington to tighten the federal bankruptcy laws. Today policymakers are dealing with a number of troubling deficits, from the federal budget to U.S. trade receipts. Unfortunately, we are running a hefty surplus when it comes to personal bankruptcies. Last year 1.6 million American households declared bankruptcy. The lion’s share of those chose to file under Chapter 7, which wipes away their debts and leaves small businesses and other consumers holding the short end of the stick. According to some estimates, American consumers today pay up to $550 extra each year on goods and services to make up for unpaid debts lost through bankruptcy. It’s high time for Congress to reform the bankruptcy system. We need to update the laws to make sure the big spenders, especially upper-income debtors, aren’t unfairly dodging their creditors and shirking their financial obligations by using the bankruptcy code as a financial planning tool. My bipartisan bill, S. 256, was reported favorably this month out of the Senate Judiciary Committee. Needless to say, with overwhelming bipartisan support since the 105th Congress – 11 nods of approval from successive Congresses since 1997 – I’m hopeful the stars are aligned for the federal government to enact reasonable bankruptcy reform once and for all. That includes steering debtors with the ability to repay into Chapter 13, where filers must commit to pay back even a portion of their debts to reimburse their creditors. It is not unreasonable to require people with the ability to pay their bills to do so. Paying your own way is the American way. At the same time, America also rewards risk-takers. And we believe in giving second chances. Many Americans could be a paycheck or two away from financial disaster if they are faced with an unexpected job loss, natural catastrophe, illness or divorce. It’s important to keep the bankruptcy safety net intact, but only as an option of last resort. The Depression-era safety net was designed to help those who had fallen on hard times to get a fresh start. But we need to update the bankruptcy safety net for the 21st century by designing a fairer approach for creditors and debtors. My bill would create a flexible means test to ensure those with the genuine ability to repay a portion of their debts do so. Filers who can show “special circumstances” would be given due consideration and not forced to file under Chapter 13. For example, 100% of medical expenses, caregiving, and child support are deductible. Contrary to popular myth, not every bankruptcy filed by those with moderate incomes is caused by mounting medical bills. A statistical analysis by the U.S. Trustee’s office recently examined more than 5,000 bankruptcy cases. Under half listed any medical debts whatsoever. And those who did listed less than $5,000 in medical bills. Under the means test in my bill, deductible expenses also would include food, shelter, clothing, transportation, attorneys’ fees and charitable contributions, as provided under IRS guidelines. A formula would take into account whether a filer earns more than the state median income and can repay at least $6,000 of his or her unsecured debt over a period of five years. The bill also would create a safe harbor for low-income debtors, exempting entirely from the means test those consumers who earn less than the median income for their state. To help consumers get their financial affairs in better order, my bill also would create pro-consumer tools to help Americans better manage their money. New consumer protections would require credit card companies to disclose in plain language the consequences for consumers who make only minimum payments and establish a toll-free number for consumers to check how long it would take them to pay off their balance. The bill also would ban deceptive advertising of low introductory rates. Abusive creditors would face stiffer penalties and beefed up enforcement of predatory debt collection practices. New education and counseling programs would teach financial management and promote out-of-court repayment plans negotiated by debtors and creditors. It is due time for Congress to usher in a new era of accountability and rein in reckless big spenders. That also goes for lawmakers holding the federal pursue strings. For those deadbeats who have been gaming the system off of the backs of hard working Americans, don’t count on the bankruptcy rules to bail you out anymore. At long last, the 109th Congress has a good opportunity to see that reasonable bankruptcy reforms will be signed into law this year by the president. Remember, my bill does not deny access to bankruptcy relief. It simply seeks to ensure that those with the ability to pay their bills aren’t allowed to walk away from their debts scot-free.