Reforming Bankruptcy, One Screwed Family at a Time

Tax time seems as good a time as any to recount the ways in which those with more money pay less for things, and those with less money pay more. It seeps in on small levels— minimum-balance fees, prepayment discounts—and gushes in with the exorbitant interest rates charged by check cashers and rent-to-buy chains. It happens every time someone can’t afford to make an outlay that would save money down the road: a more efficient car or timely home improvements, for example. Though the tax code retains some progressive elements, it’s also rife with items like the mortgage-interest deduction, which subsidizes the purchase of homes that are expensive enough that the yearly interest on the mortgage is more than your standard deduction ($4,850 for a single person under 65 with no dependents).

Some of this is intentional. Much of it is not. But this year we have a tax-season gift (OK, I use the term loosely) of a piece of legislation that is so nakedly aimed at screwing precisely the people who can’t afford it that we don’t have to wonder if it’s just a natural result of capitalism. Nope. It’s mean, and it’s a bailout of an industry that isn’t even suffering.

The credit-card companies are apparently concerned about high-income individuals “abusing” the option of declaring bankruptcy when they really could just pay off their debts. So they spent a lot of money and had a “bankruptcy reform” bill, S 256, written. (According to the Center for Responsive Politics, over the past six years, supporters of the bill received nearly twice as much in campaign contributions from the credit-card industry as opponents of the bill.) It has passed the Senate and is expected to pass the House, despite rallies across the country against it yesterday (April 6).

The bill would force people out of Chapter 7 (where most debts you can’t pay are discharged) into Chapter 13 (where you have to make a five-year repayment plan). Never mind that independent studies have shown that less than 4 percent of people who file Chapter 7 would be able to afford a Chapter 13 plan. The bill also weakens debtors’ ability to keep their houses and cars from being “liquidated” to pay for their debts. For more details on the bill see http://rawstory.com/exclusives/ dissenting_views_bankruptcy_405.htm.

One of the sickest things about this bill is that recent Harvard studies have shown that half of personal bankruptcies come from medical bills. How sweet. Let’s go after those deadbeat cancer patients and people who just lost a family member to a long illness. I’m sure they’re hiding a secret stash of money somewhere because they like destroying their credit record and having creditors threaten them every night.

The vast majority of the rest of bankruptcies come from unemployment and divorce. There’s also a smattering of identity-theft victims, and a growing number of victims of predatory-lending practices—both home-refinancing lenders and credit-card companies who hide their fees, misrepresent their terms, target vulnerable populations like elderly or developmentally disabled homeowners, make loans they know the borrower can’t afford, etc. The problem is so bad, one national organization has started a Consumer Rescue Fund to help victims refinance. (A local version of this fund is called Homesave, run by the Affordable Housing Partnership [“Collecting from the Sharks,” Newsfront, Aug. 28, 2003]).

And just in case you think that the bill’s supporters (in the Senate it had 100 percent Republican support plus a few Democrats) just weren’t thinking about these vulnerable populations, amendments to protect nearly every one were individually rejected. (See http://dailykos.com/ story/2005/3/6/63144/06015 for a more detailed list of rejected amendments.) If we don’t believe people who’ve had medical crises or been victims of fraud deserve bankruptcy protection, why have it at all?

But let me go a little bit further than saying how awful it is that Republicans wouldn’t allow protections for the most distressing circumstances. Why should the credit-card companies come crying to the federal government for relief at all? They expect their customers to read the fine print and obey the inflexible hand of the market if ever their circumstances change beyond their control.

But on their end, they won’t even control the things that are under their control. The whole business of lending money is about risk management. That’s why people with “worse” credit scores get higher interest rates. Lenders expect a certain amount of loans to default. Credit-card companies expect a far higher number than mortgage companies—that (plus the bit about not having a house as collateral of course) is why their interest rates are so much higher. They’re just playing a numbers game. That’s why they’ll cut their losses with a payoff agreement with someone who’s seriously behind.

If credit-card companies are seeing a problem with a higher default rate than they used to, the businesslike response would be to be more selective about whom they give credit to. But over the decade of rising personal bankruptcies that they’re complaining about, they just continued to flood the market with offers of credit to anyone with a pulse. And now they’re turning to the federal government to bail them out of a morass that is largely of their own making. (Mind you, despite this “morass,” they’re still turning wild profits—reportedly $30 billion in 2004.)

Listen up all you small-government folks, free marketeers, and libertarians who still think the Republicans are your party: This is a bill to have government take care of something because an industry doesn’t like the realities of risk management in a free market.

If they really wanted to reduce the number of bankruptcies out there, the credit-card companies would advocate for universal heath insurance, job creation, and fair lending. But they don’t want to do those things, because those things would also cut down on the exorbitant late fees and finance charges that they rack up from people who are financially distressed but not yet bankrupt. The credit-card companies want to prolong that period, not help people out of it. That’s their business model. And it’s not one I want my government to support.

—Miriam Axel-Lute

maxel-lute@metroland.net

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