WASHINGTON — Congress has failed for six years to reform bankruptcy. But Rep. Chris Cannon, R-Utah, on Tuesday launched a new drive for reform that would make it tougher to file for bankruptcy.
As his first act as new chairman of the House Judiciary Subcommittee on Commercial and Administrative Law, he held a hearing on a bankruptcy reform bill by full House Judiciary Committee Chairman James Sensenbrenner, R-Wis.
And he said it is time to finally fix flaws in bankruptcy law after too-long debate.
"For too long, some people have been using bankruptcy as an easy 'out,' abusing the system to intentionally avoid debts," said Cannon, whose home state of Utah has the highest per capita rate of bankruptcies filed in America.
"This hurts businesses, their employees and consumers who end up paying higher prices" because of debts escaped through bankruptcy, he said.
Cannon added that $44 billion of debt was erased by bankruptcy courts last year, amounting to $400 in higher costs for every household in America. He said the Republican proposal would make more people pay their debts over time if they have the means — but still allow bankruptcy protection for the truly needy.
Cannon said the House has passed varying forms of bankruptcy reform six times in the past six years, and held hearings with more than 130 witnesses on the topic. But the Senate has sometimes blocked final passage, and former President Bill Clinton once vetoed a bill that did manage to pass both houses.
Rep. Mel Watt, D-N.C., the ranking Democrat on the subcommittee, agreed that reform of the system is needed but said the Republican proposals would hurt the poor. He said its provisions would likely require hiring lawyers to win full erasure of debts — which he said only the wealthy could afford.
Lawrence A. Friedman, director of the Justice Department's Executive Office for U.S. Trustees, testified that the Bush administration strongly supports the GOP bankruptcy reform proposals because they would help it prosecute "misconduct by debtors and others who misuse the bankruptcy system."
George J. Wallace, representing the Coalition for Responsible Bankruptcy Laws, said the current system has many loopholes that allow people to abuse the system, which creates huge losses for businesses.
For example, he said, if someone had, say, $40,000 in debt but a steady income that could allow them to pay it off over several years, they now can file for Chapter 7 bankruptcy and avoid repaying anything to creditors without a review of their ability to repay.
He said even debts incurred by fraud — or even to escape agreed-to payments to a former spouse and children — can now be erased, but changes would block those cases.
Lucile Beckwith, representing the Credit Union National Association, said a small credit union she oversees lost $20,000 when two members played loopholes in the system against it.
"They were a couple with a six-figure income, each of which qualified for $10,000 Visa cards," she said. "During one month they maximized all these credit cards with cash advances. They never made a payment on any of them, waited the required time, and then filed for a Chapter 7 bankruptcy.
"An appeal to the court for 'loading up' was denied. Our small credit union lost $20,000. What did they do with the cash? Their daughter had a very large, beautiful and expensive wedding in Hawaii," she said.