With consumer debt higher than ever, many thousands of middle class families face financial disaster. Home mortgage foreclosures, car repossessions, and credit card defaults are all at record levels. Last year alone, 9 million families entered credit counseling in an effort to straighten out their finances, and 1.6 million just gave up and filed for bankruptcy. Congress’s response? The House of Representatives decided it was time to try once more to push a bankruptcy bill that credit industry lobbyists have been peddling since 1997, a bill designed to boost profits for consumer lenders by making it tougher for troubled families to get any relief in bankruptcy.
The bankruptcy bill is more than 400 pages of virtually impenetrable text, with literally hundreds of changes to an already-complex statute. A well-financed lobbying effort has reduced it to a tasty sound bite: People should repay their debts if they can. The problem, of course, is that the sound bite deliberately obscures the reality. The biggest problem is not people who can repay, it is people who are desperately trying to repay and who can’t make it — families filing bankruptcy to try to make up mortgage payments and past-due car payments but who don’t have steady enough incomes to make even a minimal repayment plan and keep groceries on the table. But the proposed bankruptcy bill would impose more than a hundred new constraints on all families — whether they are trying to repay or not — increasing costs, decreasing protection, and leaving creditors with more leverage than ever to squeeze a few dollars more out of all these families.
If this bill passed, who would pay the price? First, families with children. Today, people with children at home are nearly three times more likely to file for bankruptcy. Married couples are in trouble, and those trying to raise a child alone are in even more trouble. A single woman raising a child is nearly four times more likely to file for bankruptcy than a single woman alone. Divorced dads are having a hard time too, heading into bankruptcy at much higher rates than their single friends without children.
Among older Americans, the most likely filers are those who cannot pay for prescription drugs or meet other medical costs. Older Americans are also more likely to have been the victims of fraud and unscrupulous lenders who are trying to trick them out of their homes. For a growing number of seniors, bankruptcy is their last hope.
If American families were simply on a spending spree, perhaps the fact that millions are in trouble with debt should be treated as little more than their just desserts. But the data are irrefutable: families are in financial trouble for the most basic reasons. Among those who have filed for bankruptcy, two-thirds have suffered a job loss — that means last year alone 1.1 million families walked into the bankruptcy courts after mom or dad (or both) was laid off, downsized, or otherwise put out of work.
Lack of health insurance is also taking its toll. About 800,000 of the families in bankruptcy have had serious medical problems — a husband who had a heart attack, a wife with breast cancer, an elderly parent who needs long-term care, or a child with leukemia. About 160,000 people filed for bankruptcy after the family broke apart, a condition that fell disproportionately on women trying to raise their children. Altogether, more than 90 percent of the families fell into one or more of these three categories — job loss, medical problems or family break up. The remaining families were beset by a variety of other problems and circumstances — including crime, natural disaster, and a call up to military service. In short, families are heading to bankruptcy when their incomes and debts get badly out of balance following a serious economic disruption.
Real abuses, however, escape attention in this legislation. Despite all the provisions to make personal bankruptcy more difficult, the amendments were carefully tailored to preserve loopholes for corporate executives because they have "business debts" instead of "consumer debts." Similarly, provisions to protect multimillion dollar homes in Texas, Florida, and other states remain virtually intact. Special exemptions for the rich remain because they rarely owe credit card debt, while the bill zeroes in on ordinary, wage-earning families.
This bill treats bankruptcy as something debtors alone create; creditors are treated as innocent victims. Last year, the credit industry mailed five billion credit card solicitations, but the bill imposes not a single new constraint on the credit industry. Instead, the House has embraced a bill that is widely described as “a creditor’s wish list” to help companies increase the odds of collecting from even the most financially troubled families.
What gives this bill renewed momentum at a time when tens of millions of families are out of work and have no health insurance? The financial services industry has pressed a well-funded lobbying effort, giving more money in Washington than almost any other interest group. The Washington Post reports that credit issuers even offered a sweetheart loan deal for an influential Congressman. And the money has paid off. Princeton researchers concluded that voting "strongly reflects campaign contributions" by the coalition of creditors supporting the bill. Executives from credit card giant MBNA were the single largest contributors to George Bush’s presidential campaign, and he too has announced his unwavering support for the bill.
In a brazen abuse of the language, the bill has been named a "reform" act. Its supporters claim that it will help women, support families, and cut abuse. In fact, this bill is designed to do just one thing: Squeeze middle class families a little harder to increase the profits for already-profitable consumer lenders.
Elizabeth Warren is the Leo Gottlieb Professor of Law at Harvard Law School. She specializes in commercial law and bankruptcy and is the author of several books, studies and articles on the subject. Warren is currently vice president of the American Law Institute.
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