Bankruptcy Bill Fallout

O n April 20, more than 15 years of lobbying by the credit card industry paid off when George W. Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The bill will bring in billions more to the credit card industry by limiting the ability of most people—not just “abusers”—to receive “consumer protection” through bankruptcy. 

Opposed by dozens of consumer, law, religious, labor, and community groups, this newest stick-it- to-the-working-people bill passed on April 14 in the House of Representatives, without a single Republican opposed and with the help of 73 Democrats. Making good on his promise to use his “mandate” (slim, if not negative) to offer spoils to his base (the wealthy, big business), Bush’s hasty signing ceremony was attended by new Attorney General Alberto Gonzales, primary Senate backer Charles Grassley (R-IA), and a bevy of congressional big money flacks. 

“By restoring integrity to the bankruptcy process, this law will make our financial system stronger and better,” Bush said. “By making the system fairer for creditors and debtors, we will ensure that more Americans can get access to affordable credit…. America is a nation of personal responsibility where people are expected to meet their obligations. We’re also a nation of fairness and compassion where those who need it most are afforded a fresh start.” 

“Personal responsibility” is apparently fine for families in financial duress, but does not extend to credit card company personnel who send out 3.5 billion solicitations each year—41 for every man, woman, and child—generously offering the most obscenely high rates and a creatively burgeoning fee structure to “those who need it most.” 

The new law will go into effect in October, 2005, after which hundreds of thousands of people—mostly poor or middle class workers and small businesspeople suffering from recent unemployment, divorce, or unexpected medical bills (according to multiple studies)—will find it much more difficult and much more expensive to “get a fresh start.” The super-wealthy declaring bankruptcy through their well-heeled accounting firms will still have various asset protected trusts and offshore accounts to help them “meet their obligations,” and large corporations in financial duress will be similarly unperturbed. 

Credit card companies can expect an extra dose of “fairness” due to the legislation—to the tune of $3 billion dollars more in yearly payments, adding to the $31.6 billion in profits they made last year. These profits have ballooned in recent years, up from $12.9 billion in 1995, despite the hyped bankruptcy “fraud” crisis. 

Bankruptcy “reform” proponents made much of the fraud that the new law is supposed to prevent. Independent analyses of the number of people gaming the system (using bankruptcy to discharge debts that they had the ability to pay or running up large expenses in anticipation of discharging the debt through bankruptcy) at only 3 percent, while suspect finance industry studies put it at around 10 percent. This was the justification for overhauling a functioning system, needed by more and more people in an increasingly wage-downsized, medical-bill-supersized economy that is propped up (with much institutional encouragement) by record levels of high-interest debt. 

The more obvious explanation for the legislation is the fertile ground for big business giveaways that longstanding lobbying efforts are now finding in Republican-controlled Washington. According to the New York Times , “The main lobbying forces for the bill—a coalition that included Visa, MasterCard, the American Bankers Association, MBNA America, Capital One, Citicorp, the Ford Motor Credit Company, and the General Motors Acceptance Corporation—spent more than $40 million in political fund-raising efforts and many millions more on lobbying efforts since 1989” (March 9, 2005).

Devil in the Details 

B ankruptcies for individuals primarily fall under either Chapter 7 or 13. Under Chapter 7, people can wipe the slate clean by liquidating non-essential assets and then writing off most of their debts—excluding most taxes, alimony, and student loans. Under Chapter 13, people agree to comply with a court-ordered payment plan for their various debts, which (currently) is supposed to reflect their ability to pay. 

Of the 1.6 million personal bankruptcies in 2004, 72 percent were Chapter 7. Of the minority who decided to file Chapter 13, approximately 60 percent were unable to maintain their new payment plan and thus found themselves back in the court system or subject to aggressive collection techniques including wage garnishment, repossessions, and foreclosures. 

The new bankruptcy law will greatly limit the number of Chapter 7 filings and force many more people into Chapter 13, likely increasing the already high percentage of people suffering financial crises who are then caught in a spiral of unmanageable payment plans, often caused by a second or third eruption of unforeseen expenses. 

The new law will limit Chapter 7 filings by taking away much of the discretion of judges and imposing a “means test.” After the new law takes effect, only people who make less than their state’s median income and cannot afford to pay back 25 percent of their unsecured debt can file Chapter 7. People who make more than their state’s median and who can pay at least $100 a month for five years towards their debts will be forced into Chapter 13. 

The U.S. average “household” income for 2001-2002, according to an Associated Press report on the new law, was $42,654 a year—ranging from $29,752 in West Virginia to $55,525 in Alaska. For the purposes of filing bankruptcy, a person’s (or household’s) income will be calculated by averaging the previous six months’ income regardless of whether a job was lost during that time and even if no income is currently coming in or it has dropped precipitously. 

Chapter 13 payment plans are also affected by the new law, though not likely in a way to increase people’s ability to meet their obligations. The new law mandates a calculation formula for rent, food, and other expenses using averaged IRS living standards tables for different areas (ironically recognized as insufficient to calculate tax payments in a 1998 IRS reform act passed by Congress), regardless of a person’s actual expenses. 

Additionally, the new law limits homestead exemptions to $125,000 for homes acquired less than 40 months before bankruptcy, despite a long-running and ongoing housing boom, which has resulted in record high housing costs. (Millionaires can still keep their mansions purchased 40 months prior to filing.) In a huge boon to the auto-finance industry (frequently selling the highest interest rates to customers with the most difficulty in meeting payments), people filing for bankruptcy will no longer be able to pay off only the market value of the vehicle and retain possession; instead, they will usually have to pay off the full loan in order to keep their vehicles. 

Finally, the new law makes bankruptcy attorneys liable to large penalties if inaccuracies are found in their client’s case. This will make filing for bankruptcy with the help of attorneys (needed to navigate the 500-page industry-written bill) a much more expensive prospect for “those who need it most.” 

Left on the cutting room floor were amendments that would have provided some real reform to the bankruptcy bill. These missing amendments included provisions that would have: 

• closed loopholes for millionaires 
• discouraged “predatory lending” practices 
• limited interest on credit extensions to 30 percent 
• protected those whose debts were caused by identity theft 
• protected the homes of the elderly (the fastest growing group of bankruptcy filers) 
• protected service members whose financial hardship was caused by extended overseas tours 
• provided greater pension protection and corporate accountability when large corporations (for example, Enron, Worldcom) go bankrupt 

Flexing their political muscle in a frightening potential precedent for Social Security “reform,” Republicans pulled every trick in the playbook to eliminate these and other amendments. Many of the amendments had been debated and accepted at various times during the previous attempts to pass bankruptcy reform. This time, however, Republicans smelled blood. 

Senator Russell Feingold (D-WI) said during the bill’s debate: “This has not been a legislative process worthy of the Senate. Members of the Judiciary Committee…were implored to save their amendments for the floor. Then, when we got here, we were told no amendments could be accepted. It was a classic bait and switch. Negotiations have been minimal and pro forma. Extremely reasonable amendments were rejected supposedly because they were not drafted correctly, according to the sponsors, but there was no willingness to work on the language of the amendments so they could become acceptable.” 

No Credit Card Company Left Behind 

U nsurprisingly, the new law does nothing to discourage the obvious and well-documented cause of increasing bankruptcies: a credit industry gone wild, continually increasing their solicitations, interest rates, fees, and service charges—resulting in record-breaking corporate profit alongside record-breaking personal debt. Likewise, the Act ignores the common financial trigger that initiates more than 50 percent of  bankruptcies, according to a detailed 2005 Harvard study—rapidly mounting medical bills. 

In his signing ceremony speech, President Bush hinted at a benefit, though, implying that with the additional security provided to lenders by the bill, and the removal of “fraud” from the system, credit card rates might go down. This canard seems unlikely given that the past few years have not witnessed the credit industry prone to passing on savings to consumers, as seen with very low prime rates set by the fed (below 4 percent) accompanied by average consumer credit card rates well above 15 percent, with additional fees being invented and levied that account for the greatest sector of credit industry profit rise. 

Many significant results will indeed come with implementation of the new bankruptcy laws: blossoming government costs due to increased mandated audits and a radically expanded trustee system; a clogged small-claims court system as debtors are forced into years of unworkable payment plans and the vague legislative language is defined through case law; unequal battles over small leftover income pies between families asking for child support and throngs of threatening creditors. 

Most insidious, though, is the likelihood that consumer debt will continue its upward trajectory as credit and finance companies, backed by this new federally-guaranteed insurance on even their most reckless offers, will be encouraged to ever more aggressively market—and mark-up—their solicitations to a population suffering decreasing wages and increasing transportation and health costs. As Bush said, this bill offers a “fresh start,” but for who?

Andy Dunn has been working for Z since 2003. He declared bankruptcy in 1999 after unexpected layoffs in the computer industry cost him his first non-poverty level job.