Senate Passes Bankruptcy Bill

Retailers and credit card companies scored a major victory with legislation to reform the nation's bankruptcy laws that passed in the Senate.

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.

This story first appeared in the March 11, 2005 issue of WWD.  Subscribe Today.

The bankruptcy rule changes might crimp the plans of retailers who themselves file for protection from their creditors. The measure sets a 120-day deadline for bankrupt tenants in shopping malls to decide whether they will terminate their lease, and it can be extended one time for 90 days. While tenants now have 60 days to decide about their store occupancy plans, a judge may extend the period indefinitely.

“This provision makes it more difficult to determine whether a reorganization plan is going to work,” said Mallory Duncan, the NRF’s senior vice president and general counsel.

Shopping mall owners argued a more defined period for a retailer to decide whether to abandon a lease was needed. Another 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 a center.

House Majority Leader Tom DeLay (R., Tex.) has said the bill will be quickly decided in the House, where passage is considered certain.

Bush said in a statement that he will sign the bill, which would mark his second legislative victory of his second term after a measure passed last month making it more difficult to bring class action lawsuits.