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Grassley Renews Effort to Reform Bankruptcy Code

By: Chuck Grassley

Date: Feb. 2, 2005

Location: Washington, DC

Issues: Agriculture and Food

Grassley Renews Effort to Reform Bankruptcy Code

Bill Includes Permanent Chapter 12 Protection for Farmers, New Consumer Protections, Child Support Provisions

Sen. Chuck Grassley late yesterday introduced legislation to overhaul the nation's bankruptcy code.

"It's time to promote responsible borrowing while also ensuring the safety net offered by bankruptcy. It was not intended to be a convenient financial planning tool where deadbeats can get out of paying their debt scott-free while honest Americans who play by the rules have to foot the bill," Grassley said. "Someone has to pick up the tab when people get out of repaying their own debts. When losses are frequent and the economy is weak, businesses are more likely to raise prices for other consumers to offset those losses."

Grassley's bill cuts down on abusive and frivolous bankruptcy filings that hurt the economy. The bankruptcy system currently allows anyone to get full debt cancellation in Chapter 7 with no questions asked, even if they have the means to pay off their debts. The Bankruptcy Reform bill requires that if repayment is possible by an individual, then that individual would be channeled into a repayment plan under Chapter 13 of the bankruptcy code.

Grassley said the bill contains several provisions that help people in unfortunate situations get the fresh start they need.

The bankruptcy bill addresses the problems caused by irresponsible consumerism and lax bankruptcy laws by setting up a flexible means test to assess an individual's ability to repay his debts. The formula takes into account whether a filer earns more than the state median income and can repay at least $6,000 of his or her unsecured debt over a period of five years. In calculating a debtor's income, living expenses are deducted as permitted under IRS standards for the state and locality where the debtor lives. Legitimate expenses such as food, shelter, clothing, medical, transportation, attorneys' fees and charitable contributions, are also taken into account in this analysis as provided under the IRS guidelines.

The means test allows every consumer to show "special circumstances" to justify adjustments to the means test and/or to avoid a repayment plan. The means test permits every person to deduct, among other things, 100 percent of medical expenses; expenses for support/care of elderly parents, grandparents and disabled children; and private school tuition. The test also permits battered women to deduct domestic violence expenses and protects their privacy.

The bankruptcy bill also provides a safe harbor for the poor - it exempts entirely people who earn less than the median income for their state. That means that people who earn below the median income can still file under chapter 7.

The bill also provides unprecedented protection for child support and alimony payments by elevating family support obligations a higher priority in bankruptcy.

The bankruptcy bill also creates important new consumer protections. The bill:

-requires credit card companies to disclose the dangers of making only minimum payments and prohibits deceptive advertising of low introductory rates

-strengthening enforcement and penalties against abusive creditors for predatory debt collection practices

-requires credit card companies establish a toll-free number for consumers to get information on how long it will take to pay off their balance.

-establishes new education and counseling programs to teach financial management

-punishes creditors who refuse to negotiate out-of-court repayment plans

Grassley also included a provision to make a Chapter 12 a permanent section of the bankruptcy code. Chapter 12 is tailored to help farmers reorganize debt and stay in the business of farming.

Chapter 12 was first written to help family farmers survive the Great Depression. The law expired in the early 1950s. During the farm crisis in the mid-1980s, Grassley worked to bring back this safety net for family farmers facing economic collapse.

It addresses the unique risks associated with a family farming operation. Chapter 12 gives financially-strapped farmers a cushion to reorganize debt without the consent of creditors. And unlike Chapter 7, which is a form of liquidation under the bankruptcy code, a farmer seeking bankruptcy protection doesn't have to surrender the farm to creditors if he is able to make rental payments.

The bill would also expand family farmer eligibility for Chapter 12 bankruptcy protection and reduce the capital gains tax burden for farm assets sold as part of a reorganization plan. This would allow farmers to sell grain, livestock and other farm assets to generate cash flow which is essential to maintaining a farm operation.

The Iowa senator began his effort to reform the bankruptcy system in the mid 1990s when he held hearings on the relationship between credit card debt and consumer bankruptcy. The comprehensive bankruptcy reform bill has garnered broad support during previous Congresses. Grassley expects the bill to be one of the first to be considered by the Senate this Congress.

Grassley is a senior member of the Judiciary Committee.