A BANKRUPT BILL

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Mon, 14 Mar 2005 16:32:00 -0800 (PST)

A BANKRUPT BILL

 

 

http://www.newdemocracyproject.org/newsletter.cfm?nl_id=144 & nla_id=267

 

 

 

A BANKRUPT BILL

 

By Mark Green

 

If there's any doubt that the business community is engaged in a

post-election power grab, consider the bankruptcy bill that passed the

Senate yesterday.

 

Under existing bankruptcy law, courts consider all the facts of a case

-- including the circumstances that led to default and the debtor's

ability to pay -- before deciding whether the debt can be erased. The

new law will instead institute a strict means test requiring every

household above a certain income to repay the remaining debt on a

court imposed schedule, regardless of circumstance. As Harvard law

professor and bankruptcy expert Elizabeth Warren explained in Senate

testimony, " A family driven to bankruptcy by the increased costs of

caring for an elderly parent with Alzheimer's disease is treated the

same as someone who maxed out his credit cards at a casino. "

 

Why make this change now? It can't be the financial distress of banks

and credit card companies. Over the last eight years, bankruptcy

filings have increased 17 percent yet credit card profits increased by

163 percent. That's because in the 1990s the industry joined some

loan sharks and other predatory lenders in offering poor and

middle-class consumers unfavorable (and often misleading) terms. In

1994, for example, total sub-prime lending -- the most expensive

credit reserved for those who can least afford it -- was a $37 billion

dollar industry. By the end of the decade it had exploded to $370

billion according to Consumer Reports -- it's now one of the most

profitable sectors in banking. Penalty fees on credit cards have gone

from around $5 to around $30, raking in $11.7 billion in 2003 alone;

the practice of " universal default " allows creditors to jack up your

interest rates -- often to between 20 and 30 percent -- if you've

missed a payment on another account.

 

Creditors defend such practices as necessary to cover their losses

when high-risk consumers default. Yet experts say that most accounts

that end in bankruptcy have already made a profit for the lender.

" It's as if a life insurance company took premium payments for years

and then asked the government to pass a law prohibiting death, " argued

Corrine Cooper, a retired law professor closely following the bill.

 

Supporters argue that bankrupts are " gaming the system, " maxing out

their credit cards on frivolous purchases and lavish getaways then

crying broke to avoid the bill. " Bankruptcy has become so common that

it has lost the stigma it had even a short generation ago, " observed

Senate majority leader Bill Frist. " Some folks have even been known

to plan their bankruptcy… They figure they can get the big ticket

items up front, and for everything else they will use cash. " Indeed

bankruptcies have expanded from 600,000 in 1990 to 1.6 million last

year, but 90 percent occurred in the wake of major medical expenses,

job loss or divorce. And with consumer credit exploding from $250

billion in 1990 to $791 billion last year, one has to wonder if the

tail isn't wagging the dog.

 

While the mistitled Bankruptcy Abuse Prevention and Consumer

Protection Act of 2005 makes it harder for low-income and middle-class

families to declare bankruptcy, it does little to stem the abuses of

wealthy individuals who would still be able to protect their money in

asset protection trusts and homestead protections. It doesn't change

those bankruptcy rules that allow businesses to protect their assets

from employees and consumers. So corporations can be protected from

consumer lawsuits and from being compelled to pay wages and benefits,

but workers and consumers who've suffered a job loss or a personal

injury aren't similarly protected. And, of course, it does nothing to

protect consumers from predatory lending practices and bloated

hospital bills that hit the uninsured with rates four times higher

than those charged to insurance companies.

 

What the bill cruelly does do is raise the cost of filing, forcing

bankruptcy out of reach of many families who qualify and need it most.

David Shipler, in The Working Poor, brilliantly documents the plight

of those who, ironically, simply can't afford to go bankrupt. A

middle-class mother, financially blindsided by divorce, had to take

money out of her food budget for seven months before saving the $900

she needed to declare bankruptcy. This bill it will make it even harder.

 

The zeal of Senate Republicans to pass this bill without bipartisan

cooperation betrays their true interests of delivering for their

business supporters. A coalition of credit companies, led by the

behemoth MBNA, has pushed this law for more than a decade -- spending

over $40 million in lobbying and campaign contributions, mostly to

Republicans.

 

They got what they paid for. Republicans voted unanimously against

Democratic amendments to protect military families from predatory

lenders and loan sharks who flock to military bases; to protect

seniors and families with extreme medical debt; to allow seniors to

keep their homes; to cap interest rates at 30 percent; to raise the

minimum wage; and they brazenly voted against closing the bankruptcy

loopholes for the rich. Now that's bankrupt.

 

This bill will disproportionately hurt women and single parent

families by allowing creditors to compete with child-support payments

and alimony for a share of the bankruptcy payments. It will

disproportionately hurt seniors, the most rapidly growing segment of

bankruptcy claims -- and the most prone to illness and medical

expenses. And it will disproportionately hurt middle-class families,

minorities and military families who are the most common prey for

predatory lenders.

 

This soon-to-be-law is akin to banning life preservers during a

perfect storm. The middle-class is now falling further and further

behind financially: real income has fallen over the past three years

while the cost of such necessities as energy and housing is up; Bush's

tax cuts for the wealthiest and service cuts for the rest of us has

shifted burdens onto middle-class workers; double digit increases in

health care costs is the main culprit in over half of all

bankruptcies; and in Washington, radical Republicans are pushing for

private Social Security accounts that would dismantle the safety net

that half of all American seniors rely on.

 

If Congress wants to reduce bankruptcies, instead of cracking down on

struggling poor and middle-class families, it should move toward the

goal of universal health coverage. More should be done to educate

consumers on the true cost of credit debt and to keep creditors from

cleverly eluding the Truth in Lending Act. That should be followed

with reasonable regulations against unfair predatory lending practices

on loans, check-cashing, rent-to-own scams and credit cards that are

putting so many families in trouble in the first place. Limiting fees

and ending universal default would be a good start.

 

Consumer advocates and progressive organizations should

blow-the-whistle on big-business politicians who are pandering on

bankruptcy legislation. Like Social Security and judicial

nominations, these are fights that can be won, if not in Congress,

than at the ballot box. Look at the states with the highest

bankruptcy rates: Utah, Tennessee, Georgia, Nevada, Indiana, Alabama,

Arkansas, Ohio, Mississippi and Idaho top the list. The bankruptcy

bill is a good example to show heartland voters how they were seduced

into electing faith-based candidates, who faithfully oppose them

economically.