Senate passes divisive bankruptcy bill

Credit card companies and lenders have been lobbying the Senate for several years to pass bankruptcy reform.     WEB EXCLUSIVE Kate Snow: Significant changes in bankruptcy law

In this story: Grassley tastes victory Credit practices questioned Sharp increase in filings RELATED STORIES, SITES

WASHINGTON (CNN) -- The Senate voted as expected Thursday evening and approved a controversial bill that would overhaul the federal bankruptcy code to make it harder for people of means to get government protection while avoiding their debts.

The bill was approved 83-15 after a full day of debate. One senator voted present.

Detractors said the legislation is unfair to the poor and newly unemployed, and characterized it as an elaborately wrapped gift to the financial services industry courtesy of the Congress' majority Republicans.

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Proponents said the bill would go a long way to end what they described as rampant abuse of the bankruptcy protection system.

Should the legislation become law, the result will be the most sweeping overhaul of the federal bankruptcy protection regime in 20 years.

To bring the bill to a vote, Republicans had to first thwart Democratic attempts to curb the lending practices of credit card issuers. A "cloture" vote had to be taken to limit debate before floor arguments wound down.

A similar bill passed the House overwhelmingly on March 1. President Bush has pledged to sign the final House-Senate compromise version when it is available to him.

There is one caveat.

Bush is opposed to a provision reducing homestead exemptions to $125,000 that was added as an amendment Thursday afternoon.

The amendment, drafted by Sen. Herb Kohl, D-Wisconsin, seeks to diminish the effects of unlimited homestead exemptions in states such as Texas and Florida, where debtors are allowed to keep their homes -- no matter how valuable those homes might be.

Millionaire debtors, Kohl said, habitually sink millions of dollars into expansive houses, then stay on the property while their bankruptcy cases are worked out.

Sen. Kay Bailey Hutchison, who like Bush is a Texas Republican, blasted the amendment on the Senate floor Thursday, saying it was a direct violation of states' rights.

"We're very encouraged by the direction of the bankruptcy legislation," White House spokesman Ari Fleischer said. "However, we continue to work with leaders on the Hill. The president is looking forward to the presentation of the bill that he can sign."

Grassley tastes victory

Sen. Charles Grassley, R-Iowa, had been trying for at least four years to pass the measure.

Bankruptcy-overhaul bills passed the Senate in each of the past three years, and one even made it to President Bill Clinton for signature last December. Clinton vetoed the measure, arguing it did little to protect needy debtors.

This year looks to be Grassley's year, with many Democrats supporting the bill and a friendly Republican in the White House.

"I have pursued this because I believe when you are right you will eventually win out," Grassley, chairman of the Senate Finance Committee, said on the Senate floor Thursday morning.

Republicans and many Democrats said too many Americans are taking advantage of the system.

"There's people that have the ability to repay," Grassley said. "They go into bankruptcy, they go into Chapter 7. Everything would be wiped clean. They're not paying their bills."

Chapter 7 bankruptcy allows debtors to rebuild their personal finances while forgiving most of their high-interest debt -- and, in some cases, all of their debt.

Chapter 13 bankruptcy establishes a steady payment scheme for debtors to repay their obligations. Under the Grassley bill, individual creditors now eligible for Chapter 7 would be steered by a bankruptcy court into Chapter 13.

"It was from the small business people of 'Main Street USA' that I heard about people declaring bankruptcy," Grassley said Thursday morning, saying small business owners in Iowa told him they were often stuck footing the bill for customers who declared themselves insolvent.

"Months later, these business owners would see these people driving down the street in a new car," Grassley said. "We were impressed with the number of small businesspeople who would tell us about the abuse of bankruptcy laws, people not paying their bills, and then the small business owner being stuck with it."

"The moral of this bill is if you have some money to pay off your debt, you're not going to get off scot-free," Grassley told CNN On Thursday.

Sen. Jeff Sessions, R-Alabama, continued the GOP charge later in the day.

"This legislation will be used on a relatively small amount of people filing for bankruptcy who have the income to cover their debts," he said. "There ain't no such thing as a free lunch. Somebody is going to pay this debt if you don't."

Sessions suggested that average American is forced to pay roughly $450 annually to cover defaults, bankruptcies and credit fraud.

Credit practices questioned

Sen. Paul Wellstone, D-Minnesota, who led the opposition to the bill on the Senate floor, charged that passage of the bill was a form of payback to corporate America.

He and other Democrats argued that too many people would be saddled with debt and be required to pay off credit cards and car loans as the economy turns sour and many people find themselves out of jobs.

Wellstone argued that credit card companies have too much leeway in offering high-interest credit lines to those who can least afford them. Democrats have attempted to place restrictions on the card companies, but those attempts have been turned back.

"Why don't we call on the credit card companies to be accountable?" Wellstone said. "They need to be held accountable for their predatory lending practices."

Sen. Robert Torricelli, a New Jersey Democrat who supported the legislation, agreed with the opposition on the subject of credit industry practices.

"There are 3.5 billion credit card solicitations sent out every year," Torricelli said. "That's 41 for every man, woman and child."

Both argued that there was little chance that all of those solicitations were sent only to people who could afford to take on a high level of unsecured, high-interest debt.

"This is a class issue, these are poor people we are talking about," Wellstone said. "None of us was ever put in this situation. President Bush, whatever happened to compassionate conservatism?"

Wellstone, debating Grassley on Thursday morning, said he understood that bankruptcy fraud is a problem that must be addressed, but said the bill "goes too far" and cited studies indicating that only 3 percent of those who file for Chapter 7 abuse the system.

"Bankruptcy has been a safety net not just for low-income people, but for middle-income people as well," Wellstone said. "It is being shredded. I think all I can say is, we'll just have to see how history judges us.

"I think there has been abuse. I just think we lost our way and we went way beyond dealing with the abuse, and we have written a bill that basically is for the credit card companies," he said.

Grassley acknowledged on CNN that "we have a lot of protection in there for creditors. But we also have a lot of education information on interest in there for debtors."

Sharp increase in filings

The number of personal bankruptcies has nearly doubled over the last 10 years -- in 1990, the number of filings was a little more than 700,000 per year; in 2000, more than 1.2 million were filed.

Grassley's bill is meant to reduce the incentive to file for bankruptcy with the introduction of a means test -- on average, a family of four making $52,000 a year would no longer be able to "wipe the slate clean" by filing under Chapter 7.

"The idea here is that people are entitled to only the relief that they need but no more," said Samuel Gerdano of the American Bankruptcy Institute. "So the bill sets up an elaborate screening mechanism with an arithmetic test to determine the debtor's incomes and their expenses -- after which if they can repay some part of their debts."

Credit card companies, banks and even the big automakers have been lobbying for the reform and contributing to Republican candidates.

CNN's Kate Snow and Ian Christopher McCaleb and The Associated Press contributed to this report.

Senate rejects limits on credit for minors
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Bankruptcy overhaul bill bogged down in Senate
March 9, 2001
Senate rejects bankruptcy exemption for medical bills
March 8, 2001
Gephardt declares 'end' of bipartisanship
March 7, 2001
House passes bill to overhaul bankruptcy laws
March 1, 2001

American Bankruptcy Institute
U.S. Senate Finance Committee
Bankruptcy In Brief
U.S. Senator Chuck Grassley from Iowa
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