Senate Passes Grassley Overhaul of Bankruptcy System


Bipartisan Plan Includes Protection for Farmers; Residents of Bankrupt Nursing Homes


? Sen. Chuck Grassley today won Senate passage ? by a vote of 83 to 15 ? of landmark legislation he authored to overhaul the nation's bankruptcy code.

The reform measure is aimed at reducing the number of bankruptcies filed each year by fixing weaknesses in the code and designing a more balanced, fair approach for debtors and creditors. The number of bankruptcies have soared during the last decade despite a historically strong economy. And, according to a study released late last year, experts are predicting a 15 percent increase in bankruptcies in 2001.

The legislation advanced by Grassley includes permanent status and an expansion of Chapter 12, which is tailored to help farmers reorganize debt and stay in the business of farming. It also includes a patients' bill of rights for residents of nursing homes and hospitals that declare bankruptcy. Another key provision helps to strengthen the Medicare Trust Fund by prohibiting the discharge of debts arising from inflated bills and fraudulent claims.

Grassley said "reforming the system will be good for consumers and families. It would bring more fairness for those who work hard to pay their bills. Every bankruptcy filed puts upward pressure on interest rates, so decreasing the number is good for people trying to buy a new house or pay for a car."

The Iowa senator began his effort to reform the bankruptcy system in 1997, when he held a hearing on the relationship between credit card debt and consumer bankruptcy. The resulting bill is the most comprehensive reform of bankruptcy law since 1978 and has earned strong bipartisan support.

The bill addresses the problems caused by irresponsible consumerism, an aggressive credit industry, lax bankruptcy laws and lawyer-run bankruptcy mills. It sets up a flexible formula for bankruptcy judges to channel those with repayment capacity to Chapter 13. Currently, the overwhelming majority of debtors file under Chapter 7, which effectively wipes away their debts. Only about one-third of debtors opt to file under Chapter 13, which requires some repayment plan to reimburse creditors.

"Reforming the bankruptcy system will help usher in a new era of greater personal responsibility," Grassley said. "This bill doesn't keep debtors who need a fresh start from getting one. Instead, it ensures that people who can repay their debts will no longer get off scot-free."

The measure also seeks to improve the bankruptcy system for consumers by promoting credit counseling services and educational courses for debtors prior to filing a bankruptcy petition. The plan strengthens enforcement and penalties against coercive tactics by creditors. It penalizes creditors who seek a double-payment and establishes tough penalties for creditors who use threats to coerce debtors into voluntarily agreeing to pay a debt which could be wiped away in bankruptcy.

The legislation will minimize court dockets and keep costs down. It promotes the alternative dispute resolution process by saying that if someone in financial trouble tries in good faith to work out a reasonable repayment plan, but a creditor rejects this, then the ability of the creditor to collect in bankruptcy will be sharply curtailed.

The bill also would make Chapter 12 for farmers a permanent part of the bankruptcy code. The package strengthens this tool for farmers by making an increased number of farmers eligible for Chapter 12 protections and making the federal government last on the list of creditors when a farmer sells farm assets during reorganization. Changing the treatment of capital gains taxes under Chapter 12 would give farmers greater flexibility in reorganizing their financial affairs.

Finally, the reform proposal includes:

- a provision to protect quality of care for patients ? especially nursing home residents ? when a health care provider is in bankruptcy. Current law does not guarantee the well-being of patients in a bankruptcy case. Two years ago, residents of a California nursing home were literally evicted onto the street by a bankruptcy trustee.
- a provision setting new requirements for credit card companies and protect consumers. These provisions reflect some of the most significant pro-consumer legislation considered by the Senate in a decade.
- Under the measure, creditors are required to display prominently a minimum payment warning on every credit card statement. This feature would include a toll-free number for credit card holders to learn how many months it would take to repay a certain balance with minimum monthly payments. It also requires credit card solicitations to disclose when a low introductory rate ends and what the subsequent rate will be. And, it requires credit card solicitations via the Internet to comply with the Truth in Lending Act.
- unprecedented new protections for child support claimants. The reform bill allows claimants to access otherwise off-limits property and has the support of key child support advocates.
- limits on the ability of individuals to protect assets by purchasing an expensive home. Right now, there are no limits on the value of a homestead that is off-limits to creditors. Although the General Accounting Office found only scant evidence of systemic abuse of the homestead exemption, the bankruptcy reform bill includes changes long-advocated by Sen. Herb Kohl of Wisconsin and Sen. Jeff Sessions of Alabama to put a $100,000 cap on home equity acquired within two years prior to declaring bankruptcy. The Kohl-Sessions proposal requires that an individual establish residency for two years prior to bankruptcy in order to claim the homestead exemption of a particular state. The bill also allows creditors to seize any home equity acquired with the intent to delay or hinder collection efforts within seven years prior to declaring bankruptcy. And it says the home equity built up applies to the $100,000 cap even if an individual relocates from one state to another.

The House of Representatives passed its version of bankruptcy reform on March 1. The bill sponsored by Rep. George Gekas of Pennsylvania passed by a vote of 306 to 108. The Senate and House proposals now must be reconciled by a conference committee.

Since 1990, the rate of personal bankruptcy filings has increased almost 100 percent. Since 1980, the number of Americans declaring bankruptcy has exploded from 331,264 to just under 1.4 million last year. Filings began to increase dramatically after 1985, despite the strong economy.