GOP bill tightens rules for bankrupt

WASHINGTON -- Republicans in Congress want to significantly tighten regulations to keep people who declare bankruptcy from ducking debts they should be able to settle, but Democrats and physicians' groups argue the move would penalize Americans who go broke because of huge medical bills they can't pay.

The bankruptcy bill, scheduled to come before the Senate Judiciary Committee today, has been on the wish list of Republican leaders and financial institutions for nearly a decade, and Senate Majority Leader Bill Frist said yesterday that the expanded GOP majority in the Senate will allow quick passage of the measure this year. The Senate could vote on the matter by the end of the month, he said.

''Congress has wasted time, and we still have a bankruptcy crisis on our hands," said Senate Finance Committee chairman Charles E. Grassley, an Iowa Republican and the measure's lead sponsor. ''The vast majority of people believe that individuals who file for bankruptcy should be required to pay back some of their debts if they have the means to do so."

But Democrats are mobilizing to stall the bill, saying that it doesn't include enough protection for some of the estimated 1 million Americans whose healthcare debts drive them into bankruptcy every year. A recent study by a group of Harvard law and medical school professors found that about half of all bankruptcies are filed shortly after people experience a serious medical problem -- and about three-fourths of those filers went bankrupt despite having health insurance.

Three Democrats on the Senate Judiciary Committee want more time to fine-tune the bill to protect people whose medical debts forced them into bankruptcy. In addition, several Democrats are trying to include a crackdown on corporations that dodge pension obligations through bankruptcy.

''In this situation, the real losers are going to be middle-income, working families, and effectively it's going to be the financial interests that are going to use the courts as collection agencies," said Senator Edward M. Kennedy, Democrat of Massachusetts, who serves on the Judiciary Committee. ''It is unconscionable to punish people because they have the misfortune to be sick."

Citing the Harvard study, more than 1,700 physicians sent a letter to Judiciary Committee members on Monday, urging them to reject the bill. The effort was organized by Physicians for a National Health Program, a nonprofit group that advocates universal healthcare.

But Senator Grassley called it a ''myth" that catastrophic illnesses and overwhelming medical bills spur most bankruptcies. At a hearing on the bill last week, he cited US Trustee's Office statistics that indicate 78 percent of bankruptcy filers reported medical debts of less than $5,000.

''Misrepresentations about this legislation have been running rampant by those who oppose any meaningful bankruptcy reform," Grassley said. ''Political criticism is never inhibited by ignorance."

Three different versions of the bill have come close to passing since 1998, but Democrats have blocked each of them. Both the House and Senate approved the bill in 2002, but Democrats held up its final passage by adding a provision that Republicans considered anathema: barring those convicted of blocking access or committing violence at abortion clinics from filing for bankruptcy to avoid paying fines.

That amendment is again being offered by Senator Charles E. Schumer, Democrat of New York. The bill's supporters say it's the main obstacle again this year.

''If the Senate passes a bankruptcy bill without the Schumer amendment, I'm certain that the bankruptcy bill can become law quickly," House Judiciary Committee Chairman F. James Sensenbrenner, Jr., a Wisconsin Republican, said yesterday.

Under current law, all consumers can file for Chapter 7 bankruptcy, which allows them to walk away from their debts after forfeiting a portion of their assets in accordance with state-specific guidelines. Credit-card companies and banks have long argued that those with higher incomes use Chapter 7 bankruptcy to avoid debts that they could have paid down, forcing financial institutions and small businesses to assume the debt, then pass it on to consumers.

''It's a weight on our whole economy," said Laura Fisher, a spokeswoman for the American Bankers Association, which is lobbying for the bankruptcy reform bill to pass. ''You have high-income filers out there who are not repaying debts when they have the means to."

Under the bill, those who earn more than their state's median income and can pay at least $6,000 of their debts over five years would have to file for bankruptcy under Chapter 13 laws, where courts can order repayment plans to settle the debt.

The bill allows bankruptcy filers to show a judge special circumstances -- including details of any outstanding medical bills -- to justify an altered or reduced payment plan or even eliminate the filer's obligation to the debt, according to the measure's backers.

''Those who are genuinely down and out will still be able to file under Chapter 7, to get their discharge and move on with their lives," Sensenbrenner said.

But critics say that, if the bill passes, a person who claims he or she can't repay a debt will have to complete a complex series of legal requirements -- something a lawyer would have to prepare and a bankruptcy filer probably couldn't afford, said Elizabeth Warren, a Harvard Law School professor who was one of the coauthors of the medical bankruptcy study.

The bill doesn't distinguish between someone who went broke by using credit cards irresponsibly and someone overwhelmed by sudden medical problems.

''Increasing the cost of a bankruptcy by a couple of hundred dollars will price some of the most desperate families out of the system altogether," said Warren, who testified against the Grassley bill at a hearing last week. ''It's intended to set up enough trip wires to toss people out of bankruptcy."

Rick Klein can be reached at rklein@globe.com.