Bankrupt Policies

by Jake Lewis

What happens when you pit the nation’s financial industry and wheelbarrows full of campaign funds against debt-burdened low, moderate and middle-income citizens backed only by a handful of consumer and poverty groups operating without even a small sack of campaign goodies to spread around Capitol Hill?

Answer: A legislative massacre. And massacre might be too mild a word to apply to what has happened to consumer bankruptcy protections in the U.S. Congress this year.

Gone is the concept that bankruptcy is designed to provide a second chance — a fresh start to citizens trapped in impossible debt situations often resulting from illness, loss of jobs and unscrupulous lending practices. In its place, the Congress has crafted a system that consumer advocates say will force thousands of families into unaffordable repayment plans which will be tantamount to an extended sentence to a “debtors prison” without parole. Bankruptcy courts will become little more than glorified bill collectors for the credit card companies, automobile dealers, banks and other lenders, they say.

“They’ve decided its time to lock the door to the bankruptcy courthouse,” says Elizabeth Warren, a Harvard law professor and bankruptcy specialist.

Key to the demands of the banks and credit card companies is a provision in both the House- and Senate-passed bills which imposes a tough inflexible means test that will bar all but the most destitute from filing under Chapter 7 of the Bankruptcy Code, which allows bankruptcy judges to grant consumers relief from impossible debt burdens.

Under the new bankruptcy rules, instead of a second chance consumers will be required to file under Chapter 13. This change will push already financially devastated consumers into difficult repayment plans extending years into the future, even if it means balancing overdue credit card bills with alimony and child-support payments, obligations that received priority under the old rules. The inability to get financial relief under Chapter 7 increases the likelihood that modest-income families will lose their homes and cars in Chapter 13 restructuring plans, further diminishing the chances of resuming lives as productive members of their community.

Renters receive no special treatment under the legislation, but other debtors — many of them wealthy — will be allowed to retain equity in their homes after filing for bankruptcy in states with so-called homestead laws. These include Texas, Florida, Iowa, Kansas and South Dakota. In contrast, the legislation eliminates provisions of current law that allow families to catch up on rent and avoid eviction.

The automobile industry and finance companies got a huge gift through an amendment which eliminated the “cram-down” rules that allow borrowers entering Chapter 13 bankruptcy to repay only an automobile’s market value plus interest, not the full value of the outstanding loan. Under this rule, the debtor was allowed to keep the car with the remaining portion of the loan considered along with debts owed to other unsecured creditors such as retailers, credit card firms and medical providers. Now, the automobile loan gets a priority position in squeezing funds from the consumer in Chapter 13.

Passage of the bankruptcy bill follows a half decade’s lobbying efforts by the credit industry and generous campaign contributions spread widely in House and Senate races as well as in the last presidential election. In the late 1990s, banks and credit card companies, including the American Bankers Association, the American Financial Services Association and Visa and MasterCard, formed the National Consumer Bankruptcy Coalition, a lobbying group which pushed the issue for the industry.

Business interests framed the issue effectively, alleging that the bankruptcy reforms were necessary to crack down on abuses of the system. “The number of bankruptcy filings has skyrocketed in recent years — more Americans file each year than graduate from college,” said Thomas Donohue, U.S. Chamber of Commerce president and CEO, upon Senate passage of the bill. “The Senate took a critical step today to prevent wealthy debtors from passing the tab for mountains of debt on to businesses and consumers. … Reform is long overdue to inject a sense of personal responsibility back into a system run amok.”

Contrary to the Chamber’s comments about “wealthy debtors,” studies show that it is low and moderate income citizens who fill the ranks of bankruptcy filers. A 1999 study conducted by bankruptcy judges found that the median income of debtors seeking bankruptcy protection was $21,500.

It wasn’t arguments that greased the way to business victory. The National Consumer Bankruptcy Coalition contributed more than $5 million to candidates of both major parties in the 1999-2000 election cycle, according to the Center for Responsive Politics. Overall, political campaign contributions from finance and credit card companies totaled more than $9.2 million last year, up from $1.9 million in 1992.

Smaller institutions like credit unions, community banks, and finance companies also signed on to the attack on consumer bankruptcy protections. As one observer of the mass lobbying campaign remarked: “They’ve hired every lobbying firm in Washington.”

Highly visible in the campaign were lobbyists for MBNA, which bills itself as the “world’s biggest independent credit card company.” Overall, the political contributions attributed to MBNA and its employees totaled $3.5 million in the last election, including $310,000 to the Republican Senate Campaign Committee and $200,000 to the Democratic Senate Campaign Committee.

MBNA employees and their families gave $240,000 to the presidential campaign of George W. Bush. The chair of the company’s bank unit was an important fund raiser for Bush and sponsored a $1,000-a-plate dinner for him. And just to make sure they were remembered at the White House, MBNA pledged $100,000 to help pay for inaugural activities.

The White House has made it clear that the President intends to sign the bankruptcy legislation when it reaches his desk. President Clinton blocked a similar bill from becoming law with a pocket veto last December.

Using the bankruptcy courts as collection agencies obviously will be lucrative for banks and credit card companies. Kenneth Posner, an analyst for Morgan Stanley Dean Witter, says that the bankruptcy bill will mean billions of dollars of additional income for creditors, predicting that credit card industry profits will increase 5 percent next year as a result of the legislation. By this estimate, based on its current performance, MNBA would rake in $75 million more in profits in 2002.

Consumer groups are angered that Congressional supporters of the legislation dodged the issue of deceptive practices which are increasingly employed by credit card issuers, predatory lenders and other credit merchants to lure unsuspecting consumers, many of them senior citizens, into mounting debt that leads to bankruptcy. Aggressive marketing and lending practices are on the increase, they say, while the industry lobbies for punitive amendments to the bankruptcy law.

Recent class action lawsuits and regulatory agency complaints against credit card companies have revealed a growing list of unscrupulous practices designed to rip off consumers, including: charging late fees even when payments are received on time; advertising deceptive “teaser” interest rates that quickly skyrocket into unaffordable double digit interest figures; worthless add-ons of high-cost credit life insurance; false promises to eliminate annual fees; charges for processing applications; and frequent increases in credit limits without regard to the ability of the credit card holder to repay.

But, if these sleazy lending practices bothered many members of either party, it did not show up in key votes on the bankruptcy legislation. Votes in both the House of Representatives and the Senate reflected overwhelming bi-partisan support for the positions of the banks, credit card companies and others in the lending industry. The bills must now be reconciled in a House-Senate Conference which will be dominated by supporters of the legislation.

A handful of Democrats, including Senators Paul Wellstone of Minnesota, Russell Feingold of Wisconsin and Richard Durbin of Illinois, led the fight against the bill, but only 13 Senate Democrats opposed final passage of the legislation. Thirty-six Democrats, including the Senate’s Democratic leader, Tom Daschle of South Dakota, joined 47 Republicans to give the credit industry’s bill a resounding 83 to 15 approval.

Earlier in the session, the House of Representatives had voted 306 to 108 to adopt similar legislation. In the House, a majority of the Democrats — 107, including the Democratic leader, Richard Gephardt of Missouri, voted against the legislation. They were joined by Vermont’s Independent, Representative Bernie Sanders. Ninety-three Democrats and 212 Republicans and one Independent voted for the banks and credit card companies.

Jake Lewis is a banking specialist at the Center for the Study of Responsive Law.