Seeking a new intervention for financially distressed consumers, a Senate Judiciary subcommittee on Tuesday heard debate on a measure that...

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WASHINGTON — Seeking a new intervention for financially distressed consumers, a Senate Judiciary subcommittee on Tuesday heard debate on a measure that would wipe out credit-card debt for people in bankruptcy.

Under current law, people filing for chapters 7 and 13 bankruptcy protection are obligated to pay credit-card balances along with secured debts, such as house and auto loans.

The measure is aimed at punishing credit-card companies that raise their interest rates to a high level and at giving consumers who may be on the verge of bankruptcy more leverage with those lenders to negotiate better deals.

The bill, introduced in January by Sens. Sheldon Whitehouse, D-R.I., and Richard Durbin, D-Ill., is another weapon the government is wielding against exorbitant rates charged by credit-card companies.

New regulations issued by the Federal Reserve targeting predatory-lending practices are scheduled to go into effect next year.

“The standard credit-card agreement gives the lender the power to bleed their customer through evolving and ever more crafty tricks and traps,” Whitehouse said at the hearing.

“Under this business model, the lender focuses on squeezing out as much revenue as possible in penalty rates and fees, pushing the customer closer and closer to the edge of bankruptcy.”

The bill would apply to companies that raise rates higher than 15 percent plus the current yield on the 30-year Treasury bond. That combined rate currently is 18.5 percent.

Douglas Corey, a salesman from North Scituate, R.I., who was unemployed for several months, asserted that despite six years of on-time payments, Bank of America increased his rate to 29 percent from 13 percent after he inadvertently paid less than the minimum on his outstanding balance for two months. Corey said his interest payments shot up to $792 a month from $360.

Instead of rolling back the rate, Corey said, the bank offered him loans that would have pushed him further into debt.

“There are many of us in the middle class — the unemployed — who may have overstepped our budgets, but although we struggle to make our payments, we make them,” Corey told the subcommittee on administrative oversight and the courts.

“Bank of America has come before you asking for help, understanding and with both hands open for financial support. Yet when we the consumers go to these institutions looking for the same help, understanding and financial support, we get roughed up and receive no compassion.”

But in a letter to the subcommittee, the American Bankers Association opposed the measure. If the bill passes, “the market response would simply be to restrict credit, raise interest rates and fees or both,” wrote Kenneth Clayton, senior vice president and general counsel of the organization’s Card Policy Council.

“This would significantly hurt tens of millions of Americans at the very time they can least afford it.”

David John, senior research fellow at the Heritage Foundation, agreed.

Consumer bankruptcies rose nearly 33 percent in 2008 to more than 1 million filings, according to the American Bankruptcy Institute. They were up 29 percent in February compared with the same period a year ago.

The bill also would remove a provision in the bankruptcy law that forces consumers meeting a certain income requirement to file for Chapter 13 bankruptcy protection rather than Chapter 7.

In Chapter 13, consumers are required to use their future earnings to pay off their debts. In Chapter 7, they use only their liquidated assets to pay debt.

The regulations issued by the Fed, the Office of Thrift Supervision and the National Credit Union Administration in December ban “unfair and deceptive practices.”

The rules prevent banks from raising rates on existing balances unless a payment is more than 30 days late, charging late fees without giving a borrower a reasonable amount of time to pay and applying payments so that debts with higher interest rates are repaid last.