WASHINGTON - Capping one of his biggest legislative victories of his second term, President Bush yesterday signed a major overhaul of federal bankruptcy law, making it more difficult for Americans to wipe out their debts.
But until the new law goes into effect in six months, bankruptcy lawyers are expected to be filing about twice as many cases as normal, according to the American Bankruptcy Institute. That is because many people are rushing to file before the law changes.
The law says some of those who currently are able to file Chapter 7, which would allow them to wipe out debt they say they can't repay, will be pushed into Chapter 13, which means they will be given a judge-ordered monthly schedule for repaying their debt over three to five years.
The new law will make bankruptcy more costly, requiring those contemplating bankruptcy to pay for credit counseling before they go to court.
Prodded by the consumer credit-card industry and retailers, Congress has been toying with changing bankruptcy regulations for nearly a decade, but Mr. Bush made it a priority. The industry-sponsored provisions overwhelmingly passed the Senate and the House.
As Mr. Bush signed the bill, he said, "By restoring integrity to the bankruptcy process, this law will make our financial system stronger and better. By making the system fairer for creditors and debtors, we will ensure that more Americans can get access to affordable credit."
But consumer organizations overwhelmingly criticized the bill as unfair and harsh toward low-income families forced into bankruptcy by unplanned medical bills, job loss, or divorce. They especially criticized the move to force debt-ridden consumers into credit counseling.
The National Consumer Law Center and the Consumer Federation of America recently did a report on the large increase in credit counseling and found what it called an alarming rise in deceptive practices, excessive fees, improper advice and abuse of nonprofit status.
But the National Retail Federation said it welcomed the signing of the "long-awaited bankruptcy reform legislation." The federation complained that bankruptcy has changed from a stigma to a financial planning tool. "Every one of those filings means more bad debt that gets passed on to consumers, and consumers are tired of picking up the tab."
Mr. Bush agreed. "Bankruptcy should always be a last resort in our legal system. If someone does not pay his or her debts the rest of society ends up paying them." He added, "The act of Congress I sign today will protect those who legitimately need help, stop those who try to commit fraud, and bring greater stability and fairness to our financial system."
The new law imposes a means test that will make more families ineligible for the Chapter 7 plan to wipe out their debt and start over. A family with too much debt would have to file Chapter 13 - and pay off its debts - if it has income above the mean for their state, ranging from $45,867 in New Mexico to $82,561 in Massachusetts.
The number of bankruptcy filings is not insignificant, totaling 1.6 million a year. The bankruptcy institute has estimated that the new law may disqualify up to 200,000 from filing Chapter 7 and thus wiping out most of their debts in exchange for their assets, such as their homes. Others say it will keep as few as 30,000 families from wiping out their debts and starting over.
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