By  on April 15, 2005

WASHINGTON — The House approved a major overhaul of the bankruptcy laws on Thursday, legislation long sought by retailers and credit card companies, which requires more people filing for Chapter 11 to repay at least a portion of their debt.

The 302 to 126 vote completes Congressional action on the measure and marks a victory for President Bush, who supported it in the face of opposition from consumer groups. It will take effect six months after being signed by the President.

The measure, known as the Bankruptcy Abuse Prevention & Consumer Protection Act of 2005, creates an income-based test that excludes living expenses, but includes child support in determining an individual’s ability to repay. It requires individuals who can afford to repay a significant part of their debt to do so under Chapter 13 of the federal bankruptcy code, which requires repayment, instead of Chapter 7, through which they can erase all of their debts. Debtors whose adjusted monthly income is more than 25 percent of their unsecured claims or $6,000, whichever is greater, would be barred from filing under Chapter 7.

The number of people seeking to wipe out debts in bankruptcy has more than doubled to 1.6 million a year in the last 10 years. Katherine Lugar, vice president of legislative and political affairs at the National Retail Federation, said an average household of four pays about $550 a year in the form of higher costs passed on by merchants absorbing bad debt. She said bankruptcy filings have been skyrocketing, notably among people making more than $100,000 a year.

Opponents said the bill would strip protection from the people who need it most.

House Minority Leader Nancy Pelosi (D., Calif.) argued during the one-hour floor debate that the bill was “rewarding irresponsible corporate behavior and fattening the already large profits of the credit card industry.”

Pelosi called the bill “harsh, punitive and mean-spirited” and noted it would be particularly harsh on women, who are the largest single group filing for bankruptcy. She argued there is no evidence of widespread abuse of bankruptcy protection.

Lugar, however, said: “After seven years of hard work, this is an enormous victory for American retailers and American consumers.”Paul Kelly, senior vice president of government affairs for the Retail Industry Leaders of America, said: “It’s fair to businesses to require people who have the means to at least pay back a portion or get on a schedule to pay back a portion of their debt. That’s what this bill will do.”

Lugar, noting that a family of four living below the median income of roughly $51,000 would not be affected by the overhaul and could still file for Chapter 7, said: “We’ve always said from the get-go the bankruptcy system is there to protect those who truly need it, those who get sick or divorced and need a safety net.”

The legislation benefits retailers by increasing the limit on purchases of luxury goods or services that can be shielded in bankruptcy. It also makes it easier for merchants to approach debtors in bankruptcy with reaffirmation agreements that allow them to keep merchandise bought on credit by renegotiating payment schedules.

There are a couple of wrinkles in the bankruptcy rule changes that could create problems for retailers who file for bankruptcy themselves. The bill sets a 120-day deadline for bankrupt tenants in shopping malls to decide whether they will terminate their lease and it can be extended once for 90 days. While tenants now have 60 days to decide about store occupancy plans, a judge may extend the period indefinitely. In addition, a shopping mall provision in the bill would bar a retailer in bankruptcy from subletting a space to a tenant that doesn’t match the mix of tenants in the center.

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