As bankruptcy filings mount, attention turns again to reform

— -- Cash-strapped families are seeking bankruptcy protection at nearly the same rate and in the same manner as they did before the much-debated 2005 bankruptcy law reform, a trend critics say proves the reform was a failure.

Congress wrangled for eight years before passing a reform act aimed at curbing abuse and ending an alarming rise in bankruptcy filings. With the economy in tatters and personal fortunes often in even worse shape these days, the bankruptcy law is beginning to undergo scrutiny again.

For now, Congress is focused on efforts to stem home foreclosures by altering the law so that bankruptcy court judges will be allowed to modify certain mortgages to help people keep their homes. But once that's settled, attention will turn to the 2005 bankruptcy reform.

"There is continuing concern about the bankruptcy-reform bill and what its effects have been," says Sen. Sheldon Whitehouse, D-R.I., who leads the Senate Judiciary subcommittee that oversees bankruptcy law. "We are looking at a number of things that we can do to address the problems."

On Tuesday, Whitehouse will hold a hearing that will discuss legislation he has introduced that would allow families burdened by exorbitant credit card rates and fees to more simply discharge their debt under bankruptcy. He is considering several other proposals.

Critics of the 2005 reform say filing is more tedious, more difficult and costlier for ordinary debtors. They also believe the reform benefited banks over consumers. An independent study says the reform has helped contribute to the surge in home foreclosures. Supporters, however, say the reform has helped reduce fraud and has not trampled on debtors who really need to file for bankruptcy.

One aspect critics and supporters agree on: The national economy depends on consumer spending, and bankruptcy helps debtors rebuild access to credit so they can again contribute to the economy.

"One of the primary purposes of the bankruptcy law is to provide a way to grant debt relief to the honest-but-overextended debtor, who through no fault of his own is burdened by more debt than he can pay," says Sam Gerdano, executive director of the American Bankruptcy Institute, an independent research and education organization.

Personal bankruptcy filings started increasing dramatically in 1996 and continued to climb until 2005, when they hit a record 2 million. After the reform passed, filings dropped dramatically, as Congress had hoped, but in part because many debtors had rushed to file before the law changed. But last year, filings increased 32% to 1.1 million, according to AACER, a bankruptcy-court-data company.