Congress Passes Bankruptcy Reform Bill

A bill making it harder to declare bankruptcy has made it through Congress and goes to President Bush, who has indicated he will sign.

Congress Passes Bankruptcy Reform Bill (AP)

Tens of thousands of people who want to wipe out their debts in bankruptcy court would have to work out repayment plans instead under legislation Congress approved Thursday. A 302-126 vote by the House sent the legislation to President Bush, who said he was eager to sign the measure, the biggest rewrite of the bankruptcy code in a quarter-century. It marks the second major change in law to benefit business since Republicans increased their House and Senate majorities in last fall’s elections.

Debate in the House was acrimonious as Democratic opponents warned that the measure would hurt the economically vulnerable while failing to restrain aggressive marketing and high rates charged by credit card issuers. After eight years of strenuous efforts by congressional backers, banks and credit card companies, the legislation was catapulted toward enactment starting earlier this year. The legislation, which garnered some Democratic votes, cleared the Senate last month on a 74-25 vote.

The measure would require people with incomes above a certain level to pay credit-card charges, medical bills and other obligations under a court-ordered bankruptcy plan. Opponents say the change would fall especially hard on low-income working people, single mothers, minorities and the elderly and would remove a safety net for those who have lost their jobs or face crushing medical bills.

Megan McArdle has a superb roundup of informed posts around the blogosphere on the topic, noting that, “ontrary to what you might think, opinions on bankruptcy reform aren’t uniform across conservatives and libertarians.” While she’s torn on the issue at hand, she thinks the bill a bad idea:

I’m against the bankruptcy reform not because I think that one side or the other is getting shafted, but because I think that easy bankruptcy is one of the great unrecognized strengths of the American economic system. Easy bankruptcy is what frees people to be entrepreneurs, to take risks without fearing that one wrong move will destroy them forever.

I understand that bankruptcy reformers think that they can target the deadbeats without touching the merely excessively daring, but I’m not so sure. And while the abuses of the system may be morally outrageous, I don’t see that they’re particularly damaging. Capital One and its ilk seem to be getting along pretty well without our help. I’d be happy to leave it that way.

The libertarian in me agrees with this although my conservative side chafes at the idea of people going unpunished for bad behavior. While I find credit card companies’ practices offensive–and would have no problem with tighter regulation of hidden fees, exhorbitant late charges, and so far–the bottom line is that people enter into these agreements voluntarily. People who engage in profligate spending knowing they don’t have the money to pay for it should not simply be let off the hook.

I’d prefer to see a law crafted with those considerations in mind. That is, people who borrow to finance a small business that fails or whose earning power is suddenly crippled by a serious injury or layoff should be treated much more sympathetically than those most of us would consider “deadbeats.”

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.


  1. Bill K says:

    Or returning war vets and victims of identity theft. Protecting those parties was brought up in an amendment, but a vote on the issue was refused.

    The lack of debate on the floor and among the members of Congress is what makes this so sad. Right or wrong, it is something that should be discussed not forced through.

    On a side note, the administration claims that the bill will actually save families an average of $400 a year because of lower interest rates. Has ever a more ridiculous statement been made? All it will do is lead to $400 more in profit per family, per yer, for the companies involved.

    Just because one man makes an extra $500 million due to a law change doesn’t mean you can fairly state that on average Americans make an extra $2.

  2. bryan says:

    I’m always skeptical that any such savings will ever sift down to consumers. I think there’s a point at which the agreements in these card contracts are so convoluted, along with the almost universal mantra that you have to “establish credit” that the idea that everyone is walking into credit fully aware of the details is naive. I’d be curious to see a breakdown of how much is “profligate spending” and how much is bad luck, bad timing and just plain ignorance.

    There’s also the fact that at some point, the credit card begins to become a self-fulfilling prophecy. It doesn’t require any more spending at all to eat up significant money.

    Personally, I could save every family $400 without changing bankruptcy if the credit card companies would quit sending the same people two solicitation letters every week, year after year!