Bankruptcy, One Screwed Family at a Time
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
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/
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.
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.