Let’s start with a story ripped from today’s headlines:
In Cleveland, for example, a municipal court judge tossed out a case that Discover Bank brought against one of its cardholders after closely examining the woman’s credit card bill.
According to court papers, Ruth M. Owens, a 53-year-old disabled woman, paid the company $3,492 over six years on a $1,963 debt only to find that late fees and finance charges had more than doubled the size of her remaining balance to $5,564.
When the company took her to court to collect, she wrote the judge a note saying, "I would like to inform you that I have no money to make payments. I am on Social Security Disability….If my situation was different I would pay. I just don’t have it. I’m sorry."
Judge Robert Triozzi ruled that Owens didn’t have to pay, saying Owens "has clearly been the victim of (Discover’s) unreasonable, unconscionable and unjust business practices."
Now, that is the rationale behind the new bankruptcy bill, laughingly called "The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ".
Consumer Protection? Don’t be fooled. All the bill will do is close the loophole on people like Ms. Owens. In other words, it is so credit card companies, who already make a huge fortune off of people, can squeeze that last penny out of everybody.
I mean, are credit cards companies hurting because people are declaring bankruptcy?
Nope. Take a look at this chart here on the right. Credit card companies profits are skyrocketing. Yet all this bill does is give protection to the credit card companies.
Let’s look at some more info about the credit card industry, this time from the Washington Post:
Penalty interest rates usually are about 30 percent, with some as high as 40 percent, while late fees now often are $39 a month, and over-limit fees, about $35, [Cardweb CEO Robert] McKinley said. "If you drag that out for a year, it could be very damaging," he said. "Late and over-limit fees alone can easily rack up $900 in fees, and a 30 percent interest rate on a $3,000 balance can add another $1,000, so you could go from $2,000 to $5,000 in just one year if you fail to make payments."
According to R.K. Hammer Investment Bankers, a California credit card consulting firm, banks collected $14.8 billion in penalty fees last year, or 10.9 percent of revenue, up from $10.7 billion, or 9 percent of revenue, in 2002, the first year the firm began to track penalty fees.
That’s a $4 billion increase in penalty revenue in two years in case you’re keeping score at home.
And you have to love this: that penalty rate of 30-40% can be imposed for missing a single payment — in fact, in can be imposed for missing a single payment on a different account, like your telephone bill — but a card spokesman said this was perfectly reasonable because it was "clearly disclosed on account applications." Something tells me that their idea of "clearly disclosed" is a wee bit different from most people’s.
Bottom line: credit card companies now make half their profits from penalties and late fees. They actively seek out customers who are likely to miss payments and end up in a penalty fee spiral, and they make a fortune from them.
In a normally functioning market there’s at least a small incentive to limit loans to these high-risk customers, namely the possibility that they might go bankrupt. And what does this bankruptcy bill now before Congress do? It is a brazen attempt to remove even that small but annoying incentive to act responsibly.
Credit card companies want the ability to make risky loans, but they also want federal protection that protects them from bearing the risk that goes along with making those loans. That’s a pretty cushy setup, as long as you can buy yourself enough politicians to make it happen.
And apparently they can. This is corporate welfare at its worst. Look at some of the amendments that were attached to the bill — ones that actually might help consumers — and looked how badly they failed to pass:
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S.AMDT 16 to protect servicemembers and vets — VOTED DOWN 58-38
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S.AMDT 17 to protect the elderly — VOTED DOWN 59-40
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S.AMDT 28 to protect people whose own medical problems caused their debt — VOTED DOWN 58-39
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S.AMDT 29 to protect homeowners with medical debt — VOTED DOWN 58-39
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S.ADMT 31 to limit the amount of interest charged to 30% — VOTED DOWN 74-24
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S.AMDT 32 to protect people whose debt is incurred from being caregivers to ill/disabled family members — VOTED DOWN 60-37
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S.AMDT 37 to protect people whose debt was incurred through identity theft — VOTED DOWN 61-37
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S.ADMT 38 to protect people from predatory lending practices — VOTED DOWN 58-40
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S.ADMT 49 to protect employees & retirees from corporate practices that rob them of their earnings/retirement savings when the business files for bankruptcy — VOTED DOWN 54-40
There’s much more to write about. But I will leave it to John Podesta from ThinkProgress.org, whose strategy memo is reprinted below the fold.
Podesta Strategy Memo: The Bankruptcy Bill
In the past, some in Congress have viewed “bankruptcy reform” as an easy “pro-business” vote that won’t really hurt working families and won’t matter to Americans anyway.
That’s wrong on all accounts. Proponents say the bill will stop bankruptcy abuse, but the bill lets the biggest and wealthiest abusers off the hook. Even more important–and this is the point proponents are hoping to obscure–the bill does nothing to address why millions of middle-class Americans are going broke in record numbers. In fact, the bill makes life tougher on families who have done everything right but suffered because of structural problems in our economy.
If progressives press these points, Americans will see the fight over bankruptcy reform for what it is: a struggle between progressives defending families who play by the rules and conservatives standing with wealthy individuals and corporations that break those rules.
The Policy
The bankruptcy bill symbolizes much of what’s wrong with Washington today.
1. Manufacturing a crisis. Why are we even talking about this? We’ve seen the Bush Administration inflate the fiscal challenge facing Social Security into a crisis in order to justify a pre-existing agenda. The same has happened with bankruptcy. Advocates of bankruptcy “reform” point to “a crisis of both real and perceived abuse in the bankruptcy system.” (Testimony of Todd Zywicki, Senate Judiciary Committee). But they offer zero hard evidence of the abuse crisis. In fact, the vast majority of families go into bankruptcy because they’ve run out of money for reasons that aren’t their fault. According to a study supported by the American Bankruptcy Institute, 96.3% of people filing for chapter 7 relief just don’t have the money to pay their debts, even under an onerous means test. Half of families filing for bankruptcy have faced illness or high medical costs; nearly 9 out of 10 have faced health care problems, job loss, or divorce and separation. Most of these families have done everything they can to avoid bankruptcy–they’ve skipped doctor’s visits or prescriptions, for example, and a third have had their utilities shut off. As to the “perceived abuse” crisis, we are aware of no data suggesting that the American people are clamoring for this “reform.” Americans see a very real health care crisis that Congress shows little interest in addressing. When people worry about bankruptcy abuse, they worry most about abuses by fat cats that this bill doesn’t even tackle.
2. Ignoring the real crisis. As we all understand, the Bush solution to the Social Security “crisis"–privatization–doesn’t address real challenges like the Social Security shortfall and America’s low savings rate. The same is true here. The real bankruptcy challenge isn’t the 4 percent of debtors who abuse the system. The real crisis is the 96 percent who are broke when they file for bankruptcy. Two million Americans go bankrupt every year–1 every 15 seconds. If current trends continue, 1 in 7 families with children will go bankrupt by the end of the decade. These rising bankruptcy levels directly correlate with rising levels of consumer debt. And those rising debt levels in turn reflect a tectonic shift in our economy–away from a time when families could afford to save, and into a time when their wages are stagnant (+12% since 1978) but the costs of their health premiums (+163% since 1988), their tuitions (+170% since 1978), their mortgages, and their child care have risen dramatically. Because of all these trends, families stand on a precipice, and one sickness or pink slip sends them off the cliff, with no safety net below. Shutting down access to bankruptcy courts of course does absolutely nothing to address these challenges. As Elizabeth Warren has noted, it is like responding to a disease epidemic by shutting down the hospitals.
While conservatives press ugly and inaccurate stereotypes about the “deadbeats” who typically go broke, progressives should tell the truth about an economy that no longer works for the middle class. And while conservatives may want to shut down the hospitals, progressives seek to cure the disease by supporting health reform, help paying for college, and measures to create good middle-class jobs again.
3. Visiting the sins of a few abusers on millions of decent Americans. The central feature of the bill is a “means test” that would require borrowers seeking to discharge their unsecured debts in a chapter 7 bankruptcy to demonstrate their inability to pay. This sounds well and good–why shouldn’t abusers have to pay? But two federal commissions to study bankruptcy reform have rejected this approach for sound reasons. Under this bill, even the 96% of debtors who cannot pay would be required to pass a complicated test with multiple new forms. A credit card company seeking to recover a few extra dollars would be able to trigger a special new hearing. (Apparently, extending litigation is acceptable to the Bush Administration, as long as the parties extending it are mostly corporate creditors.) The result would be high new legal costs and heavy burdens for people with pennies to their names. Because of problems in the test–for example, a rigid method of calculating income based only on the prior six months of work–some people who deserve relief won’t be able to get it at all. In the end, the means-test will raise only modest sums from abusers, but will impose heavy new burdens on families already facing severe hardships.
Make no mistake: Abuse of the bankruptcy system is wrong, and we should support sensible reforms to stop it, from shutting down the homestead exemption to ending repeat filings designed to game the system. But as 92 law professors recently wrote, “this bill seeks to shoot a mosquito with a shotgun.” Hard-working families are standing behind that mosquito.
4. Want to talk about real abuses by the wealthy? No. The worst abuses of the bankruptcy system go unaddressed by this bill. In five states, multimillionaires can go into bankruptcy and keep their mansions because of unlimited homestead exemptions. This bill imposes some new limits on the homestead exemption, but rich people with good lawyers who plan ahead will be able to avoid those limits. The simple solution–capping the exemption–isn’t included in the bill. Just yesterday, the New York Times reported on how five states allow wealthy individuals to set up “asset protection trusts” that can’t be touched in bankruptcy. This bill does nothing to close this millionaire’s loophole either. And then there are the corporations that have used bankruptcy protection to slash the pensions and benefits of long-time employees, even as executives have walked away with sweetheart severance packages. Senator Richard Durbin offered an amendment in the Judiciary Committee to give bankruptcy courts more power to deal with these abuses, but it was also voted down.
Progressives should highlight the message of this bill: If you are a wealthy homeowner or a corporate insider and you can afford a good lawyer, it’s business as usual. But if you are a single mother who just lost her health care, watch out.
5. Rewarding Wrongdoing. We know the biggest winner from bankruptcy reform: the credit card industry. According to a Morgan Stanley Dean Witter analysis in 2001, credit card companies would gain up to 5% in profits from this legislation. (Profits are now $30 billion per year. You do the math.) Yet these same companies have played an integral role in triggering the rise of bankruptcy filings. As several studies have shown, consumer borrowing and consumer bankruptcy increased following a 1978 Supreme Court decision that effectively eliminated states’ ability to regulate credit card interest rates. The pricing structure now used by the credit industry–few up-front charges and enormous fees, penalties, and interest payments when balances are carried or payments missed–is designed to yield as much money as possible from families who are already at the financial edge. The credit card industry mails out an astonishing 5 billion solicitations per year, many targeted at minors with no jobs or income. Some practices of the credit card industry violate basic norms of fairness: for example, companies will now triple interest rates on existing debt based on missed payments to other creditors. (You put the $1000 fridge on the credit card at 12%, but now they are charging 35% on that $1000.) The bill does nothing to rein in any of these practices, nor even to impose the most elemental disclosure requirements. The Senate just rejected Daniel Akaka’s sensible proposal to tell customers how much they will need to spend if they make only minimum payments on their credit card bill.
Instead of taking on the abuses of credit card companies, this bill will encourage further abuse by allowing those companies to squeeze a few more dimes out of struggling families. Progressives should be pointing out the injustice of rewarding the credit industry for bad behavior. This really is Washington at its worst.
Bankruptcy Reform in Larger Context
The debate over bankruptcy reform also offers an opportunity for progressives to stand up for working-class Americans, particularly women. Forty percent of families filing for bankruptcy are in the second income quintile that is above the poverty level but still struggling. Women with children are especially hard hit by bankruptcy. More than one out of every six mothers will go bankrupt by the end of the decade, and families with children are about three times more likely to file for bankruptcy than households without children. Proponents of the bill are doing a great job representing the interests of credit card companies. Progressives need to speak up for the interests of these working class women and families.
Bankruptcy reform can speak to these Americans. Progressives can stand up for the burdened middle class who continue to feel squeezed by this economy, and expose the real agenda of conservatives that support this bill – to aid highly profitable credit card companies, not squeezed middle class Americans.