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October 11, 1999, Monday ,City Edition

SECTION: NATIONAL/FOREIGN; Pg. A1

LENGTH: 1358 words

HEADLINE: Credit card issuers seek to curb debtors' bankruptcy relief

BYLINE: By Anne E. Kornblut, Globe staff

BODY:

WASHINGTON - The banking industry has descended on Capitol Hill in recent months, begging for help recovering the $40 billion it lost when 1.4 million Americans declared bankruptcy last year.

What the industry wants: a crackdown on debtors who claim they can't pay their bills.

What it doesn't want: people like Juanita J., a 71-year-old receptionist in Philadelphia.

Juanita, who asked that her last name not be used, is about to file for bankruptcy, having lost her job as an administrative assistant in 1995. She now makes enough money to get by, but only if she could erase her $11,000 credit-card debt from buying clothes, medicine, and food. And with the help of federal bankruptcy court, she hopes to do just that. "That's the only way I could see how I could lead a decent life again," she said. "If I didn't have bankruptcy to try and help me, I just don't know where I'd end up."

Credit-card companies say they are sympathetic to personal hardships that render some clients unable to pay their bills. But they have grown increasingly impatient with the bankruptcy system, which they say lets too many debtors wipe away credit-card debt instead of attempting to pay it off.

To end that practice, Congress has drafted a massive, 350-page bill that would make it harder for debtors to escape their credit-card bills. It would also allow the government to apply a "means test" to determine if applicants are as destitute as they claim. The proposed bill, which the Senate hopes to debate this month, is described by all sides as one of the most radical bankruptcy proposals in years.

The stakes are high. Credit-card companies say they are absorbing millions of dollars from unpaid bills every year as the number of bankruptcy filers grows.

"What we want is a fundamental reform to the banking system," said Catherine Pulley, a spokeswoman for the American Bankers Association, which supports the bill. "Right now, our bankruptcy system is in serious trouble. Right now, it's often used as a first resort instead of a last."

What upsets many opponents of the measure, however, is the role they believe the banking industry has played in creating the mounting consumer debt. Consumer advocates blame the banks that issue credit cards for extending thousands of dollars in credit to many people who don't have the money to spend.

Last year, according to the Consumer Federation of America, credit-card companies mailed 3.5 billion solicitations. At any given point in 1998, the industry had extended $2.56 trillion in debt, according to Travis Plunkett, spokesman for the consumer federation.

"The problem is that as the market has become more competitive, credit-card issuers have become more aggressive and in many cases just plain reckless in who they extend credit to," Plunkett said. "Bankruptcy has risen as the extension of credit has risen, and for the consumer credit industry to then go to Congress and complain about the number of bankruptcies seems illogical to us." But the pending Senate bill focuses on what should happen to debtors who spend too much, not why they do it. The bill, sponsored by Senators Robert Torricelli, Democrat of New Jersey, and Charles E. Grassley, Republican of Iowa, would address several broad concerns, all designed to boost the advantage of credit-card companies in bankruptcy court.

One concern is how easy it is for average people to erase their credit-card debt by filing for bankruptcy under Chapter 7, known as the "clean slate" provision because of its forgiving nature by often erasing thousands of dollars in "dischargeable" debts.

Here's how it works: Debtors who file under Chapter 7 are required to liquidate most of their assets to be distributed among their creditors, who are ranked by priority. "Secured" debts, like mortgages, are top priority. So are "public debts" - back payments to the Internal Revenue Service, student loans, and child-support payments. People keep paying those even after filing for bankruptcy.

But credit-card debt is usually considered "dischargeable," immediately erased after someone files for Chapter 7. There are exceptions; people are prevented from charging a diamond necklace, then declaring bankruptcy. But in almost every other case, credit-card debt is wiped away.

Under the new plan, however, it would be much easier for credit-card debt to survive bankruptcy proceedings. Any debt accrued 90 days before filing, including interest, would have to be repaid. Someone like Juanita, for example, could end up still owing $1,000 on a credit card, just by charging her medicine and the accumulating interest in the three months before filing for bankruptcy.

A second provision would stiffen the qualifications for Chapter 7, forcing more debtors to file under Chapter 13, where they must submit a plan to repay creditors within a specific time frame instead of having debt erased.

Debtors would have to undergo a "means test" based on a formula determined by the IRS. Currently, bankruptcy judges can use their discretion to decide who qualifies by factoring in financial burdens like medical bills and caring for elderly relatives.

"This really would be a significant difference in the code," said Elizabeth Warren, a Harvard Law professor and bankruptcy specialist.

Opponents say the "means test" would be too inflexible and harsh. For single mothers reliant on child support payments, it could mean new obstacles in getting paid if the father files for bankruptcy. "It means alimony and child support recipients would now have to compete with credit-card issuers for those same dollars," Warren said.

"The problem is, the bill takes 1,000 cuts, all of which are aimed at giving credit-card companies new leverage," said Gary Klein, a consumer credit specialist at the National Consumer Law Center in Boston.

The credit industry disagrees, saying the bill closes loopholes for the rich. And support for tougher bankruptcy laws is not limited to Republicans. Representative Barney Frank, Democrat of Newton, voted in favor of a similar version in the House.

"I think people should have to pay their bills," said Frank, a member of the House Banking Committee. "I am for toughening bankruptcy laws. It's only a minority who ever go bankrupt, and those costs get passed on to the majority who pay their bills."

Supporters had hoped the Senate bill would come to a vote in late September, but Democrats blocked it, saying it "lacked balance" - too many restrictions on consumers and not enough on the banking industry. Now, according to Senate aides involved in the negotiations, a main stumbling block is a proposal that would add a warning on credit-card bills spelling out the total bill - calculating how long it would take to pay off the bill by paying only the monthly minimum and listing what the total tab would be with interest. The banking industry has largely opposed this proposal.

According to Juanita, however, such a warning could have helped her. After being laid off at age 66, she spent two years living on Social Security and credit cards, unaware the cards carried interest rates as high as 19.24 percent.

She used the cards to buy food and pay medical bills, freeing up cash to cover her $400 rent. Two years after losing her job, Juanita reached the limit on her cards, leaving her with $11,000 in debt. After getting a minimum-wage job, she tried cutting unnecessary expenses, but even then she just barely made the minimum monthly payment. After seeking credit counseling - and after months of what she described as harassing phone calls from creditors - Juanita decided to file for bankruptcy.

Under the new legislation, she might not qualify to file under Chapter 7 because she has a job. Juanita can't imagine being able to handle a repayment plan required under Chapter 13 since now she can cover only her expenses. So she wants to file for bankruptcy before the legislation is voted on.

"I wanted to pay the bills off. But the way they were adding up and going on . . . I would have never gotten out of it. There's just no relief."

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