By  on March 11, 2005

WASHINGTON — The U.S. Senate on Thursday passed legislation sought by department stores and credit card companies that would overhaul bankruptcy laws for the first time in 27 years. The measure is likely to be approved by the House, and President Bush has promised to sign it.

The legislation requires more people filing for bankruptcy to repay at least a portion of their debt. It creates an income-based test that excludes living expenses, but includes child support in determining an individual’s ability to repay. The test would generally bar from Chapter 7 a debtor whose adjusted monthly income is more than 25 percent of their unsecured claims or $6,000, whichever is greater. Thousands of bankruptcy filers are expected to be affected.

The measure, which passed 74 to 25, also had some benefits for shopping mall owners and was criticized by some Democrats and consumer advocates. It would take effect six months after being signed by the President.

“Some of these bankruptcies have been occurring among those who clearly have an ability to repay,” said Katherine Lugar, the National Retail Federation’s vice president of legislative and political affairs.

Lugar said merchants pass along the cost of absorbing bad debt at the rate of $550 a year per household. 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.

“There has been an explosion of bankruptcies,” said Sen. Charles Grassley (R., Iowa), the bill’s key sponsor.

Opponents said the number of new personal bankruptcy filings declined slightly last year, and about half of those filing continue to be saddled by health care bills. They also said multiple and compounding credit card fees for late or delinquent payments were central to bankruptcy filings by lower and middle-income people. Sen. Edward Kennedy (D., Mass.), derided the bill for its “entire lack of balance and fairness.”

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

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