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."


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