Econ-Atrocity: What’s missing from the new bankruptcy laws?

By Helen Scharber, CPE Staff Economist

The new national bankruptcy laws that went into effect in late 2005 prompted a big stir, not to mention a record-setting level of bankruptcy filings just before the laws changed. What is it about the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 that caused so much controversy? Like its Orwellian cousins the Clear Skies and Healthy Forest Initiatives, this act—whose very title suggests it will enhance consumer protections—does anything but. Indeed, the problems with this new law have much to do with what it does not include.

First, though, what is included in the new law? It is too big a question to answer completely here, but at its core it attempts to “prevent abuse” by making bankruptcy more rigid, costly, and difficult. People above a certain income level who might have filed Chapter 7 bankruptcy in the past, which involves selling off non-exempt assets and splitting the proceeds among creditors (any remaining debt is discharged), are now forced to file Chapter 13, which includes three- to five-year payment plans and fewer exemptions. Whereas the discretion of judges played an important role in the type of bankruptcy filed in the past, that decision is now made by a formula. Among many other changes, the new laws require filers to submit a host of additional documents and to seek credit counseling.

Perhaps now you’re thinking that these new laws are not such a bad development after all. Why shouldn’t consumers be responsible for the debt they’ve incurred? With the annual savings rate in the U.S. dipping below zero in 2005, maybe encouraging financial responsibility is good thing. These are exactly the arguments made by proponents of the law. What they don’t mention (aside from the enormous political contributions made by credit card companies) are the important consumer protections that the law fails to include. These protections are not absent because no one thought to include them. Below, I will describe several amendments that were proposed and voted down while the bill was being discussed in congress.

One very important amendment would have discouraged predatory lending practices. Predatory lending describes the practices of most credit card companies. That is, they “prey” on cardholders by charging huge interest rates, changing the rates arbitrarily, imposing hidden fees, and generally making these policies difficult for the borrower to discover. Other related amendments would have limited interest rate charges on credit to 30 percent, required credit card companies to make clear the consequences of making only minimum required payments, and protected debtors whose financial problems were caused by identity theft. To the extent that unethical policies on the part of creditors play a role in causing bankruptcy, these amendments could have helped consumers make informed decisions when accepting credit. Yet each one of these amendments was voted down.

Another amendment would have protected debtors whose financial problems were caused by serious medical problems. According to a joint study of the Harvard Law School and Harvard Medical School, nearly half of all filers of bankruptcy do so, at least in part, because of medical expenses. Other amendments would have protected homeowners with medical debt and preserved previously existing protections for individuals experiencing economic distress, such as caregivers to ill or disabled family members. These, too, were all rejected.

Punishing people with medical-related debt will do little to prevent these types of bankruptcy. Rather, we must provide healthcare coverage to the 45 million Americans who are currently uninsured. And while consumers with high levels of credit card debt should not be absolved, credit card companies should not be allowed to continue employing unethically obscure and deceptive practices. Without these protections, the national bankruptcy law will continue to help creditors, hurt the majority of citizens, and fail to address the real roots of the problem.

Sources and resources:

The American Bankruptcy Institute maintains a very comprehensive webpage on the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 at http://abiworld.net/bankbill/.

An easy-to-read summary of the proposed and rejected amendments to the bill, as well as who voted against them, can be found at http://www.dailykos.com/story/2005/3/6/63144/06015.

An overview of the Harvard medical bankruptcy study can be found at http://www.law.harvard.edu/news/2005/02/03_bankruptcy.php.

A transcript of a Democracy Now interview with Rep. Jim McDermott (D-WA) and David Swanson, coordinator of DebtSlavery.org, is at
http://www.democracynow.org/article.pl?sid=05/04/15/1337227.

(c) 2006 Center for Popular Economics

Econ-Atrocities are a periodic publication of the Center for Popular Economics. They are the work of their authors and reflect their author’s opinions and analyses. CPE does not necessarily endorse any particular idea expressed in these articles.