April 14 (Bloomberg) -- The U.S. Congress passed legislation, long sought by credit-card issuers and championed by U.S. President George W. Bush, to force some consumers to pay part of their debts in bankruptcy.

By a vote of 302-126, the House of Representatives approved the most comprehensive overhaul of U.S. bankruptcy laws in 25 years and sent it to Bush to be signed into law. The measure is Bush's second legislative victory this year in his drive to end what he calls frivolous court cases that sap economic growth.

Republicans cited personal bankruptcy filings of 1.5 million in 2003, five times the 1980 total, as evidence consumers aren't repaying debts after borrowing beyond their means. Debt payments increased from 12.5 percent of disposable income in 1983 to 14 percent in 2003, according to Federal Reserve figures posted on the American Bankruptcy Institute's Web site.

The bill will ``stop fraudulent and opportunistic bankruptcy claims by closing various incentives'' and thwart ``those who game the system for personal gain,'' said Wisconsin Republican F. James Sensenbrenner, who heads the House Judiciary Committee.

The legislation would force consumers with incomes above their state's median to file for personal bankruptcy under Chapter 13, which requires repayment of a portion of debts. Current law allows consumers to avoid paying all debts by filing under Chapter 7. House Republicans estimated the bill would affect 3 percent to 10 percent of personal bankruptcy filers.

Lobbying for Bill

MBNA Corp., JPMorgan Chase & Co. and the finance units of General Motors Corp. and Ford Motor Co. are among the companies and credit-card issuers lobbying for the bill. Proponents argued that unpaid consumer loans cost every American $400 a year in higher prices.

``The credit-card industry bought and paid for this legislation,'' said Massachusetts Democrat William Delahunt. ``They spent north of $40 million to make sure they got what they wanted.''

``This bill seeks to squeeze even more money for credit-card companies from the most hard-pressed Americans'' and turn bankrupt consumers into ``modern-day indentured servants,'' said Democratic Leader Nancy Pelosi.

Opponents argued that the bill was unfair to consumers, particularly those bankrupted by unforeseen medical bills even if they have health insurance.

``This bill will severely curtail the ability of Americans to obtain relief'' and ``drive more Americans deeper into financial crisis,'' said Florida Democrat Alcee Hastings. Republicans noted that the bill had passed the House eight times over the last decade with bipartisan support. The Senate passed the bill 74-25 last month with support from 18 Democrats.

Georgia Republican Phil Gingrey said a means test for determining who must file under Chapter 13 takes into account a debtor's ``full range of medical expenses'' and won't be a hardship.

Legal Overhaul

In February, in an earlier victory for Bush, Congress enacted a bill to move most class-action lawsuits against companies from state courts to federal courts. Proponents said it will help stop lawyers from extorting large settlements by ``shopping'' for plaintiff-friendly judges and juries.

Under an agreement between House and Senate Republican leaders, the Senate's version of the bankruptcy bill was brought to the House floor without change. Senate Republicans defeated a series of Democratic amendments that might have scuttled House passage.

Democrats complained that House leaders refused to allow them to introduce 35 amendments, including measures to limit credit-card interest and exempt people with large medical bills from the bill's debt-repayment requirements. The House voted 227- 196 to bar any amendments.

Consumer Repayments

Consumers who can repay a lump sum of $10,000 would be forced to file under Chapter 13, and those who can pay either 25 percent of their debt or $100 a month for five years would be forced to accept a repayment schedule.

In past years, Senate Democrats amended the bill to bar anti- abortion protesters from using bankruptcy proceedings to avoid paying fines for violence outside family-planning clinics. That provision was defeated 53-46 in the Senate this year, paving the way for the bill's approval in the House.

Opponents argued the bill unfairly lets creditors demand a judicial hearing to determine whether a consumer should be forced to file under Chapter 7 or Chapter 13. The provision would create costly legal expenses for debtors, opponents argue.

Writing Off Loans

U.S. banks in recent years were forced to write off more consumer loans because of increased personal bankruptcy filings.

The 25 largest U.S. banks charged off $27.5 billion in 2003, up from $19.3 billion in 2000, according to SNL Financial in Charlottesville, Virginia. Citigroup was the leader in 2003, writing off $7.5 billion in consumer loans, followed by Bank of America Corp. with $2.3 billion and JPMorgan with $1.6 billion.

Democrats complained that the bill is the result of a well- financed lobbying campaign by credit-card issuers, who have given $25 million to federal candidates and political parties since 1999, according to the Center for Responsive Politics, a Washington-based research group. Commercial banks gave $76.2 million during the same period, and more than 60 percent of the financial industry's donations went to Republicans.

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

Last Updated: April 14, 2005 15:39 EDT