March 10 (Bloomberg) -- The U.S. Senate gave credit-card issuers long-sought relief from unpaid loans by approving legislation to force some consumers to pay off part of their debts in bankruptcy.

The legislation, part of President George W. Bush's pro- business revisions to the legal system, was passed 74-25 with support from 18 Democrats, the Senate's lone independent and all 55 Republicans. It was sent to the House of Representatives, where leaders say a vote on final passage may come as early as next month.

Republicans say the bill will curb abuses in personal bankruptcy filings, now numbering almost 1.6 million a year -- more than five times that of 1980. Some Democrats called it a harsh attack on working families who suffer financial hardships beyond their control.

``There has been an explosion of bankruptcy'' said Iowa Republican Charles Grassley, the bill's sponsor. ``We preserve the principle of a fresh start, but we also establish a principle that if you have the ability to repay some of your debt you are not going to get off scot-free.''

Credit-card issuers such as MBNA Corp., JPMorgan Chase & Co. and the finance units of General Motors Corp. and Ford Motor Co. lobbied for the bill. Proponents say people who walk away from consumer debt costs every American $400 in higher prices annually.

Means Test

The bill would impose a means test, barring some consumers with incomes above their state's median from wiping out their unsecured debts by filing for bankruptcy under Chapter 7.

``This legislation makes the bankruptcy courts of the United States the collection agency for the credit-card industry,'' said Massachusetts Democrat Edward M. Kennedy.

Some consumers would be forced to file under Chapter 13, which empowers creditors to require repayment of some debt. Those who could repay a lump sum of $10,000 would be forced into Chapter 13. Those who could pay 25 percent of what they owe or $6,000 in monthly payments would also be barred from discharging their debts.

``The bankruptcy courts are filled with the cases of hard- working people who are pushed over the financial brink'' by illness, divorce or other unforeseen crises, Kennedy said. ``This bill would turn the screws'' on them ``to squeeze out a few more dollars for the credit card companies.''

The bill would discourage many debtors from filing under Chapter 7 by letting creditors demand a hearing before a judge to determine whether the case should be governed by Chapter 13, experts say. The cost of hiring an attorney to fight that battle might be prohibitive for many consumers, they say.

Democratic Amendments

The Senate rejected more than 25 Democratic amendments to soften the bill's impact on bankrupt Americans. They approved, 99- 0, one change that exempts from the bill's means test disabled veterans who went bankrupt while in combat or defending U.S. homeland security.

One of the rejected amendments would have helped people keep their homes when they are driven into bankruptcy by medical expenses.

Earlier today, the Senate lifted a rule that prevents banks such JPMorgan Chase & Co. and Goldman Sachs Group Inc. from participating in the bankruptcy reorganization of their corporate underwriting clients. Securities and Exchange Commission Chairman William Donaldson warned against the move.

After rejecting a proposal to prevent wealthy people from creating trusts under the laws of five states to shield assets from bankruptcy, the Senate passed a Republican version. The amendment, proposed by Missouri Senator Jim Talent, defines a class of fraudulent transfers to the asset-protection trusts allowed in Alaska, Delaware, Utah Rhode Island and Utah.

Lopsided Majorities

In the last eight years, the bankruptcy bill has won Senate approval by lopsided majorities only to die because the House and Senate couldn't reconcile their differences.

The Senate this week removed the biggest political obstacle to enactment by refusing to bar anti-abortion protesters from using bankruptcy to avoid paying fines or judgments for violence outside abortion clinics.

The Senate's adoption of that provision in 2003 was opposed by House members, creating a stalemate. Republicans argued that its inclusion again this year would scuttle enactment.

Kennedy cited a Harvard University study that half the people who file for bankruptcy blamed medical expenses for their financial difficulties.

``If your family is touched by cancer, by definition you are going to have $35,000, $40,000 minimum in out-of-pocket expenses. That situation is enough to drive a family into bankruptcy,'' he said.

Unsecured Debt

Utah Republican Orrin Hatch called the study ``pure bull'' and cited a survey of 5,203 bankruptcy cases between 2000 and 2002 that found ``slightly more than 5 percent of unsecured debt was medically related.''

U.S. banks have been charging off more consumer loans in recent years as consumers stopped repaying or had debts discharged through bankruptcy.

The 25 largest U.S. banks charged off $19.3 billion in loans in 2000 and $27.5 billion in 2003, according to SNL Financial in Charlottesville, Virginia. In 2003, Citigroup led the pack with $7.5 billion in charged-off consumer loans, followed by Charlotte, North Carolina-based Bank of America Corp., with $2.3 billion, SNL said. JPMorgan was next, with $1.6 billion.

The credit card industry has given $25 million to federal candidates and the political parties since 1999, and commercial banks have given $76.2 million, according to the Center for Responsive Politics, a Washington-based research group. More than 60 percent of the donations went to Republicans.

To contact the reporter on this story: James Rowley in Washington at jarowley@bloomberg.net

Last Updated: March 10, 2005 18:44 EST