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Tougher times for debtors

Dameon and Sabine Rhodes didn't worry too much about their $20,000 in credit card debt when they were both working and bringing in about $85,000 a year.

Then Dameon, 32, lost his technician job at Nextel Corp. in Houston, and was only able to find part-time work. In September, the couple filed for protection from creditors under Chapter 7 of the U.S. bankruptcy code, allowing them to forgo their credit card debt.

"We needed to get things under control," Dameon Rhodes said. "We just weren't able to handle all the debt."

Middle-income consumers like the Rhodeses, and higher-earning ones too, may soon find it harder to wipe the slate clean. After six years of effort, credit card issuers such as JPMorgan Chase & Co. in New York and HSBC Holdings PLC in London think they finally may be able to win congressional passage of legislation limiting individuals' use of bankruptcy to avoid repaying unsecured loans.

The stakes are high for creditors and debtors alike. Personal bankruptcy filings have almost doubled in the past decade, reaching 1.58-million for the past 12 months, compared with about 800,000 in 1995, according to the Administrative Office of the U.S. Courts. The Bankruptcy Coalition, a lobbying group that includes JPMorgan Chase and HSBC, says those bankruptcies cost them $40-billion each year.

The law the banks want would apply a means test to individuals seeking bankruptcy. Those, like the Rhodeses, whose family income is above the median for their state, would be subject to the test, and might not be able to file for the kind of debt-canceling protection known as Chapter 7. Instead, they'd have to file a Chapter 13 bankruptcy, in which they would be required to repay some debt while being allowed to retain assets.

About 11 percent of those who filed for Chapter 7 would have failed the means test, according to a 1998 study funded by credit card servicer Visa International Inc. in San Francisco.

Some Democrats and consumer groups who oppose the legislation say credit card companies are partly at fault for the rise in bankruptcies because they have targeted so much of their marketing to households that can't afford to repay their debts. The new law, they said, mostly would affect struggling middle-income families.

"It's very likely we're going to see another attempt to make it harder for middle-income Americans who have suffered genuine financial misfortune to have the protections of bankruptcy court," said Travis Plunkett, legislative director for the Consumer Federation of America.

Ralph Nader, the consumer advocate and former presidential candidate, said the bill aims to punish consumers without addressing more egregious abuses in corporate bankruptcies.

Passing on costs

The Financial Services Roundtable, which represents major banks in lobbying for the measure, said the rising costs of unpaid loans to banks hurt all consumers, because the industry is forced to pass costs on to their customers in the form of higher fees and interest rates.

"Abuse of the bankruptcy system by those debtors who have demonstrated ability to repay their debts has a negative impact on our economy," Steve Bartlett, president of the Washington group, said in a 2003 letter to Republican Representative Michael Oxley of Ohio, chairman of the House Financial Services Committee.

Bankruptcy bills have passed both the House and Senate three times since 1998, only to die in the final stages of compromise. Proponents are more optimistic this time. "The election outcome has brightened the prospects for bankruptcy reform," said Rick Lazio, a former U.S. representative from New York who is now executive vice president for global government relations at JPMorgan.

Republicans gained four Senate seats in the election, giving them 55 out of 100; three former House Republican lawmakers who won Senate seats _ John Thune of South Dakota, Jim DeMint of South Carolina and Richard Burr of North Carolina _ voted in favor of the bill in the past. In addition, a long-time supporter of the legislation, Sen. Harry Reid of Nevada, was elected Senate Democratic leader; Citigroup Inc. of New York has a credit card processing center in his home state.

Republican Sen. Charles Grassley of Iowa, a chief sponsor of the bill, said Senate Republican Leader Bill Frist of Tennessee promised to bring the legislation to a vote in 2005, after declining to bring it up for the past two years.

"I've been assured by Sen. Frist that it will have time early in the year," Grassley, chairman of the Senate Finance Committee, said in an interview. "And I think the enhanced Republican majority will help our effort to get it passed." The legislation will be brought up for a vote sometime in 2005, said Amy Call, Frist's spokeswoman.

Nader said in an interview that the Republicans would pass the law next year because "there's no one to stop them."

Rising rates

U.S. banks have been charging off more consumer loans in recent years after consumers stopped repaying or had their debts discharged through bankruptcy proceedings, and that likely will increase as interest rates rise, said John McCune, a banking industry analyst with SNL Financial in Charlottesville, Va. The top 25 largest U.S. banks charged off $19.3-billion in loans in 2000; that grew to $27.5-billion in 2003, SNL data show.

In 2003, Citigroup led the pack with $7.5-billion in charged-off consumer loans, followed by Bank of America Corp. in Charlotte, N.C., with $2.3-billion, according to SNL data. JPMorgan was next, with $1.6-billion.

The biggest boon to creditors from the proposed legislation is that many consumers will be discouraged from filing under Chapter 7, said Edward Janger, a professor at Brooklyn Law School. The bill allows creditors to demand a hearing before a judge to determine whether a person filing for bankruptcy would fail the means test and should instead file under Chapter 13. The cost of hiring an attorney to prepare for and attend the hearing would deter many applicants, he said.