Congress recently gave a bipartisan nod to a bill that would dramatically
overhaul the current bankruptcy code, giving banks and credit card
companies even greater power over debt-burdened Americans.
The bill, approved by the Senate on March 15, would reroute many
who currently file under Chapter 7 bankruptcy, which dissolves most
unsecured debt, such as credit cards, into Chapter 13. These debtors
would instead be subjected to a means test to determine how much
they could afford to pay back to creditors.
Consumer advocates say the bill unfairly deprives many heavily
indebted, low-income Americans of their only protection against
financial ruin, and fails to hold creditors accountable for the
high interest rates and predatory lending practices that force consumers
into bankruptcy in the first place. What's more, they argue, the
new code would make filing so complicated that it would require
the help of an attorney, making bankruptcy unaffordable for those
most in need of protection.
The bill's supporters contend that it targets only wealthier debtors
who can afford to pay back what they owe. But Travis Plunkett, legislative
counsel for the Consumer Federation
of America, says this argument is "a complete lie." Anyone who
has the patience to study the bill's several thousand pages, he
says, understands that "even the worst off--those with incomes under
$25,000 and debt levels approaching that figure--will have a much
harder time filing for bankruptcy."
In fact, the bill's curious consumer protection component seems
to protect only the wealthy. This includes a provision that would
wipe out debt owed by a handful of wealthy American investors to
Lloyd's of London. And Republicans have made clear their displeasure
with a Democratic proposal to cap the so-called "homestead exemption,"
which has allowed the wealthy to protect large estates from seizure.
The bill also includes a requirement that bankruptcy filers enter
credit management programs. While seemingly in the interest of debtors,
many view this stipulation as yet another gift to credit card issuers,
who routinely raise interest rates for those hoping to pay off their
credit card debt in such programs.
Opponents in the Senate, led by Minnesota Democrat Paul
Wellstone, have introduced several amendments that would soften
the bill's impact on middle- and low-income debtors. But several
of these amendments have already been voted down, including a measure
that would have protected those with high medical expenses. Wellstone
is not optimistic, conceding that "the big guys will probably win."
The banking and credit card lobbies are among the most powerful
and well-funded in Washington, with unrivaled access to lawmakers
on both sides of the aisle, and the influence to see legislation
passed that is virtually tailor-made to their interests. Last year,
for example, Congress passed the Financial Services Modernization
Act, which was backed by an historic $300 million in lobbying and
campaign contributions, and championed by the banking industry's
most illustrious and well-connected spokesman, former Treasury Secretary
Robert Rubin. Rubin is now co-chairman of the financial services
conglomerate Citigroup, which stood to benefit most from the law
that allows banks, insurance companies and brokerage houses to operate
under the same roof.
The same interests have mobilized to persuade legislators of the
urgency of bankruptcy reform. In the final days of the Senate debate,
says Wellstone spokesman Jim Ferrel, the consumer credit lobbyists
on Capitol Hill were "as thick as fleas."
The Center for Responsive
Politics reports that the financial services industry spent
an estimated $50 million on lobbying and campaign contributions
in the last election cycle. Lance Weaver, the senior vice-chairman
of MBNA America Bank, one of the country's biggest credit card lenders
and the Bush campaign's top corporate donor, was rewarded with a
spot on the presidential transition team.
The past two decades have seen the systematic dismantling of many
of the safeguards put in place in the wake of the Great Depression
to protect consumers from lenders' lust for profits. This deregulatory
fervor has led to the phasing out of interest rate ceilings and
the state-by-state repeal of usury laws, paving the way for high-interest
credit cards that have become the profitable cornerstone of commercial
banking in the United States. Last year the consumer credit industry
raked in a record $3.4 billion in profits--a 30 percent increase
from the year before.
A recent FDIC study shows that the dramatic rise in bankruptcy
rates--up 400 percent in 25 years--is directly related to banking
deregulation and the proliferation of high-interest credit cards.
To ensure high returns, credit card issuers have devised sophisticated
marketing schemes to ensnare financially vulnerable users who will
maintain high balances, struggle to make minimum monthly payments
and pay hundreds, if not thousands, of dollars in interest. Their
tactics include the familiar mailing of pre-approved, high interest
rate credit cards by the millions to college students, the working
poor and the unemployed.
"The financial services industry is the poster child for corporate
irresponsibility," says David Butler of the Consumer's
Union. Yet in their crusade for bankruptcy reform, creditors
have managed to shift the blame onto the exploited consumer, arguing
that the bill will rein in the hedonistic consumption and financial
imprudence of those who see bankruptcy as an easy way to cancel
their debts. This image has been milked by champions of the bill
in Congress, with Iowa Republican Sen. Charles Grassley moralizing
that it will "usher in a new era of personal responsibility."
The actual data on bankruptcy in America tells a different story.
A team of social scientists and legal experts working on the Consumer
Bankruptcy Project have examined thousands of recent bankruptcy
cases and found that only a small fraction actually involve "irresponsible
over-consumption." The leading causes of bankruptcy, they determined,
are job loss, medical debt and divorce. Harvard Law Professor Elizabeth
Warren, who co-directed the study, says the bankruptcy bill "targets
working families who are victims of circumstance and lets creditors
squeeze them harder."
The legislation is designed by and for bankers, Warren says. "They
are trying to make bankruptcy unaffordable. This would not pass
in a truly representative democracy."