Bankruptcy reform

When Congress took up legislation this session to combat a free-spending nation’s shameful surge in personal bankruptcy, it looked as though it also was setting up an unfair fight between child support and credit-card banks. Surprisingly, at least in the House version, the kids have held their own.

The House bill that passed by a wide margin last week does a lot to reverse a string of record-breaking years in insolvency. It sets a higher standard for Chapter 7, in which some or even all debt debt is erased, thus forcing more middle-income and up debtors into Chapter 13, in which debt is restructured and eventually repaid. It makes repeat filing harder. It holds debtors more responsible for credit-card debt incurred in the 90 days before filing.

But it does not, as the early version of this legislation suggested, put that last-minute spending spree on par with child support as debt that cannot be erased in Chapter 7. The final amended version makes it tougher for debtors to walk away from that late borrowing, but it gives child support priority in repayment plans.

This combination of common-sense and compassion is especially remarkable given how badly the consumer-credit industry wanted to move the front of the line — the $6.7 million it gave to politicians (mostly Republicans) in the last election cycle dwarfed even the generosity of Big Tobacco. Big Plastic gets some new protection from fraudulent borrowers, but it also must make certain single parents owed child support get paid first.

The explosion in personal bankruptcy is a national digrace. While business filings have remained constant, while the economy has boomed, personal filings have increased by roughly 20 percent a year since the start of this decade to 1.4 million last year. Maine is a full partner in this infamy; its 4,200 filings last year were up 38 percent from 1996, which were up 42 percent from 1995. Nationwide, an estimated $50 billion in bad debt was passed on to responsible bill-payers last year in the form of higher prices and interest rates.

Now the Senate, which has been reluctant to face the issue of child support vs. credit-card debt, must pass its version. It would do well to follow the House’s lead. Reform of bankruptcy law is crucial — bankruptcy is a vital life-support system for those truly facing hard times. Properly done, it allows those stricken by catastrophic illness or injury, job loss or other unanticipated calamity to keep their homes, the tools of their trade, a vehicle and other essentials.

The system has been severely abused and certainly banks are partially to blame for flooding the nation with unsecured debt. The House version of reform puts the banks where they belong; in line behind the kids.