Tuesday, March 08, 2005

Bankruptcy "Reform"

Lost in the debate over Social Security privatization or "personalization" or whatever they're calling it today and the latest entertain-news story of the moment (Martha? Michael?) is the latest assault on average Americans: the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S.256). This dog of a bill, written by financial services lobbyists in 1997, has been introduced and rejected many times over the years. Passage seems all but certain now. The key provisions of the bill would make it harder to declare under Chapter 7 by imposing a means test. Those who earn more than the median income in their state and can pay $6000 over five years would have to file under Chapter 13, which requires a repayment plan. The bill would make it harder for the average American suffering through financial hardship to start over, but lets the real abusers of the system have a pass.

Proponents of the bill explain that people are abusing the current system. That's why "reform" (there's that word again -- always be leery when a Republican uses it) is needed. People are going crazy with credit cards, running up huge debts, then declaring bankruptcy and skipping out on the debts. That's probably happening occasionally, but the overwhelming majority of bankruptcy cases can be blamed on medical bills, job loss, or divorce. Harvard Law Professor Elizabeth Warren says, "The people we found to be profoundly affected are not some distant underclass. They're the very heart of the middle class. These are educated Americans with decent jobs, homes and families. But one stumble, and they end up in complete financial collapse, wiped out by medical bills." Indeed, a Health Affairs study of bankruptcy filings revealed that "the average debtor was a forty-one-year-old woman with children and at least some college education. Most debtors owned homes; their occupational prestige scores place them predominately in the middle or working classes." Most suffered severe hardships before filing for bankruptcy...and even afterward.

The Senate has voted down several Democratic amendments to the legislation. These include an amendment that would have closed down a loophole for the wealthy to limit asset protection trusts to $125,000. And, of course, the homestead exemptions for the wealthy remain. They can declare bankruptcy and hold on to their multi-million-dollar mansions. But another voted-down amendment would have set a homestead floor for the elderly. As Senator Charles Schumer put it, "So now we have a bill that says a family won't be protected if it has $50,000, but it will if it has $5 million. Also rejected: an amendment that would have exempted debtors with serious medical problems from means testing, exemptions for servicemembers and veterans, exemptions for caregivers of ill or disabled family members, and exemptions for identity theft victims. But the Senate has also failed to curb some of the egregious excesses of the credit card industry. Amendments that would require "enhanced disclosure to consumers regarding the consequences of making only minimum required payments" on credit cards, put a limit on interest rates on credit extensions at 30%, and discourage predatory lending practices were also voted down. The Senate did agree however to increase bankruptcy filing fees. And of course, this "Bankruptcy Abuse Prevention" bill does nothing to prevent corporations like Enron and WorldCom from abusing the system.

Talking Points Memo has more information in a special Bankruptcy section, including a few posts by Elizabeth Warren.

Today, the Senate voted (every single Republican and quite a few Democrats) for cloture, ending debate and setting the bill up for a vote sometime within the next few days. Now would be the perfect time to write, call, or email your senators and tell them what you think. The American Progress Action Fund has one of those nifty fill-in-the-blanks email forms.

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