Moral Bankruptcy of Bankruptcy ‘Reform’
Wouldn’t it be great if you could wantonly make money available at interest rates of your choice and have government help in collecting these readily incurred and rapidly increasing debts? It is great: credit card lending is twice as profitable as other lending. Yet greater profits can be had. Credit card companies, banks, credit unions, retailers, car dealers, and casinos want a major revision of bankruptcy law.
Congress is on the verge of approving the “Bankruptcy Reform Act of 2001,” a wish list of ways to extract money from the bankrupt and near bankrupt. Lawmakers and creditors must believe that overburdened debtors won’t get the public’s sympathy.
Bankruptcy, backers of the bill say, is about personal responsibility. People or organizations in financial inconvenience of their own making shouldn’t expect the government to bail them out unless absolutely necessary.
I couldn’t agree more.
Credit card issuers and other lenders knew the hazards of lending indiscriminately. But instead of taking responsibility for bad loans themselves, they turned to the government. Lenders portray themselves as victims as they push for this legislation, and so they necessarily mischaracterize their ‘victimizers’ as well-off people who could, if they wanted to, pay their debts. In reality, the vast majority of filers for bankruptcy are middle-class people hit by an unexpected expense or loss of income, such as medical costs or losing a job. According to the American Bankruptcy Institute, only 3.6% of people who declare bankruptcy may have been able to repay some debts.
Credit and retail corporations also claim, more plausibly, that bankruptcy abuse costs Americans money through higher interest rates and other charges. News articles often cite the industry-supplied figure of $400 a year per family, which would equal about $40 billion annually for the nation. But this can’t be the cost of bankruptcy abuse because people who enter bankruptcy each year have a total debt of about $40 billion. Supporters of the bill say they want to eliminate abuses, not outlaw bankruptcy. While no other figure has been reported for the cost of bankruptcy abuse, supporters of the bill use the same number for the cost of bankruptcy itself, calling bankruptcy a “hidden tax of about $400 a year on every American family.” This claim, however, rests on on the assumption that creditors pass through to consumers the entire costs of bankruptcy— and that in the future they would use every cent recouped from the bankrupt and near-bankrupt to lower interest rates and charges. But if competition is strong enough to persuade lenders to resist increasing profits, most companies in the credit industry would already absorb the costs of bankruptcy with lower profits in order to compete with firms that made fewer bad loans.
The large $40 billion per year number as the cost of bankruptcy is also suspect because bankruptcy doesn’t absolve people of all debts. All individuals who declare bankruptcy in a year do owe lenders about $40 billion but they pay some of this. Debtors emerge from bankruptcy court still heavily in debt, with a reorganization plan that focuses on family obligations, back-taxes, mortgage payments, and other important responsibilities. Bankruptcy does currently free people from short-term high-interest debts; for businesses that extend this form of credit see the list of supporters of the “Bankruptcy Reform Act of 2001.”
This bill’s most obvious change would disqualify some debtors from filing Chapter 7 bankruptcy, which allows them to wipe out credit card debts and other unsecured loans, and force them into Chapter 13, which requires some repayment of even high-interest consumer debt. The bill also shifts more of the costs of bankruptcy proceedings onto the debtor. Less obvious changes in the law would let loose creditors’ lawyers on people who cannot afford to defend themselves. The president of the American Bankruptcy Institute, Deborah Williamson, testified to Congress: “The proposal contains a number of ambiguities that can be expected to cause conflicting interpretations and the need for significant litigation.”
The bill amends one section “by striking ‘but not at the request or suggestion of’ and inserting ‘trustee, bankruptcy administrator, or’.” To find out what this means, one has to look at the existing law: "the court, on its own motion or on a motion by the United States trustee, but not at the request or suggestion of any party in interest, may dismiss a case filed by an individual debtor". One realizes that where now “any party of interest” is explicitly forbidden from contesting a person’s application for bankruptcy, the proposed law would effectively read: “the court, on its own motion or on a motion by […] any party of interest, may dismiss a case filed by an individual debtor.”
Arming themselves with this right to challenge the debtor in court, creditors further seek the tools to make declaring bankruptcy prohibitively expensive— for those who really need to declare bankruptcy. Under the proposed law requests for protection could be dismissed if they are “an abuse” of the provisions of bankruptcy law rather than the current test of “substantial abuse.” Other changes that hurt the neediest include these:
- Creditors can ask the court to dissolve the bankruptcy plan if a debtor is late filing paperwork.
- Debtors are required – at their own expense – to complete "personal financial management courses" before their debts are discharged in bankruptcy.
- Debtors are forced to pay the full cost of an auto loan or lose the vehicle to repossession, even if the vehicle isn’t worth the outstanding balance on the loan.
On March 1 the over-300-page bill flew through the House of Representatives, 306 in favor to 108 against. Two-thirds of supporters were Republicans and one-third Democrats. This distribution of the vote bears a disturbing resemblance to the distribution of campaign contributions. The Center for Responsive Politics reported that of $9.2 million from finance and credit card companies during the year 2000 federal election cycle, Republicans received 67% and Democrats 33%. Other industries with interest in the bill gave even more money to politicians, but they probably want to buy other things as well: commercial banks (contributed $28.5 million, 59% to Republicans), savings and loans ($2.3 million, 56% Republicans), credit unions ($2.1 million, 54% Republicans), retail sales stores ($19.8 million, 66% Republicans), and gambling interests ($10.4 million, 53% Democrats). The amount of money given to federal candidates and political parties by bankrupt and debt-carrying Americans was not available.
The faceless and sort of nameless multinational corporation MBNA calls itself “the largest independent credit card issuer in the world” and was also the largest single contributor to the presidential campaign of George Walker Bush.
"Absolutely he will sign this bill," Rep. Pete Sessions (R-Texas) said. “We have received assurances from the White House.”
Credit card companies aren’t in the business of simply giving money away.
Lenders may get the rules of bankruptcy changed at a time when Americans face unprecedented personal debt. For the moment we can implore our Senators to filibuster this bill as vigorously as creditors want to obstruct debtors in bankruptcy court. But should this attempt to make bankruptcy unaffordable succeed – particularly if it then proves disastrous for indebted Americans battered by recession – we are obligated to repeal the mid-game rule changes to bring immediate relief— electing new, less-bribed people to Congress and the Presidency if necessary.
Return to Opinion.