Thursday, May 05, 2005

Bankruptcy Reform: Big Business, Big Credit, and the Little Guy Squeeze

Everybody knows the old adage about the drug dealer and his soon-to-be hooked junkie client, right? The first fix is always free.

For me, it was the free tee-shirt.

I’m talking about credit cards and debt. I was in college, minding my own business, when out of nowhere all of these wonderful offers came my way for free clothing, free Frisbees, even “free” money. All I had to do was fill out a credit card application.

Easy, right?

They got me young, the credit card companies, and as of this very day I’m still trying to dig my way out. The tee-shirt? Many years gone, I’m afraid.

Other people are less lucky and fall in a lot deeper than I ever did. And that’s the reason our nation’s bankruptcy laws were put into place: to protect law abiding citizens from a lifetime of servitude and repayment when the pit of debt and despair got too deep to climb out of.

In a land of easy credit and endless entrepreneurial opportunity, bankruptcy provides an emergency rope that allows risk takers and mavericks – as American a pair of adjectives as I can imagine – to risk and maverick and still have a future if the walls cave in. They’re also in place to help folks get a fresh start. After all, historically, we’ve been a nation of second chances, second acts, and second opportunities.

That is, except under the House of Bush circa 2005. The new Bankruptcy Abuse Prevention and Consumer Protection Act shortens up that old emergency rope. Under the new laws, debtors who the courts determine can afford to repay creditors over time and earn a salary higher than a state’s median income will no longer be able to wipe the slate clean under Chapter 7.

In effect, the new law make it more difficult for debtors to hold onto their cars and homes. The credit card companies are to get theirs first, we’re told.

The protection from crushing debt was built into our nation’s founding documents in order to express a difference between the old world and the new. America has long been a “land of opportunity” because the economic caste system of titles was successfully broken along with the shackles of debtor’s prisons.

The brilliant idea – the fundamentally new and American idea – was to allow everyone to prosper from taking risk and creating opportunity. Not just the already well-to-do. Immigrants still flood our shores clinging to that same idea:

The freedom to work hard and risk and obtain a brighter future.

Mark Twain, one of America’s greatest writers, was no business man. He went bankrupt three times while navigating his way to success. Imagine the loss to our literature if Twain would have been forced to dig ditches or clean houses to pay off debtors for his failed printing and other businesses.

But now is the age of Big Business where the insurance and health care and credit card and oil companies get theirs first. The traditional recourse for normal folks who try and don’t succeed are being systematically shorn away.

President Bush declared that new bankruptcy legislation will restore “integrity to the bankruptcy process.” But isn’t it the opposite? The new law will steal integrity from those who are scrambling for dignity and a second chance.

There will always be those who try to cheat the system, but the stark truth is no one wants to go bankrupt. It’s humiliating and requires many years of wandering credit-less before that offered second chance is fully bestowed.

Why punish everyone – why always punish the common working stiff first – when it’s the credit card companies and competition-crazy lenders who clearly could tighten up their own lending policies.

If they wanted to.

I wonder whatever happened to that old tee-shirt. I suppose I could have lived without it.

DB Note: This article originally appeared in the Bellflower-Downey Post.


The Sore Loser said...

I'm not sure I'm with you on this one. If you lend someone money, wouldn't you be a little upset if they were able to repay you but instead theypo simply erased their debt by declaring bankruptcy? I'm all for people taking financial risks, but it sounds like you're advocating risk without consequence, which is essentially no risk at all.

Eric Berlin said...

Yes, I'd be upset, so I wouldn't I want to be as careful as possible about who I loan my money to in the first place?

Under the new reforms, it's as though the government is giving lenders all the rope they want to let people (suckers, spendthrifts, and normal hard-working folk alike) hand themselves.

I'm advocating fair and decent standards here. The new Act squeezes the little guy (further) while re-writing the laws in the ways Big Business would want it most.

So I'm advocating risk with consequence... but let's maintain the fair playing field bankruptcy laws were originally set up to create.

Eric Berlin said...

I'm re-publishing this from the comments area under this article on pretty good stuff:

"The BARF (Bankruptcy Abuse Reform Fiasco) shamelessly targets the little guy and the lawyers who would help them. Lawyers who represent people with assets of $150,000 or less and have priority consumer debt are forever required to identify themselves as debt relief agencies. Those same lawyers are now to be held personally liable for debtor error or intentional omissions from the filing. Worse, responsible debtors who wish to repay part of their debt in Chapter 13 and retain their homes will be unable to do so because they will be forced into plans which, through the imposition of unrealistic expense allowances based on national standards not sufficiently tailored by state, will require payments larger than these wage earners can pay. All the while, rich debtors in Texas and Florida will keep their unlimited homestead exemptions, and the exemption maximum for IRA's and 401(k) plans goes up to $1 million.

The next time we have a national election, we would all do well to remember that a majority of this country, while by no means wealthy, still voted for the party that targets them without mercy. Rhetoric about God and country does not put food on the table or keep a roof over your head when your chosen President picks your pocket and puts the foot to your behind as you are left on the street."

Eric Berlin said...

That last was written by a gent named Robert G. Harris, by the way.

The Sore Loser said...

Of course you want to be careful to whom you lend money. It's a bad idea to lend money to someone who can't pay you back, and that's the risk the creditor takes. But that's not what you're talking about. As I understand it, you are objecting to credit card companies trying to get their money from people who CAN repay them but avoid doing so by declaring bankruptcy. Surely you agree that people who are capable of repaying their debts ought to do so.

midnitcafe said...

I work for one of the major credit card companies (I don't like it, but we all gotta eat) and I can tell you they are all making tons of money even with loads of people filing bankruptcy.

I work for the collections department so I am all for people paying their bills when they can. From what I have seen, most people want to avoid filing bankruptcy. I don't have any hard statistics, but from my three years of experience, harsher bankruptcy laws hurt the little guys trying to keep their heads above a sea of debt, more than looser laws would hurt big business.

My company targets the college market. It seems 18 year old kids were the only untapped resources in a market flooded with folks in debt. They come into it expecting a high percentage of bankruptcy, charge offs, and write offs. What they loose due to that, they more than make up for in high interest rates and late/overlimit fees that are through the roof.

Eric Berlin said...

Very interesting comments, midnitcafe. When thinking about Big Business, I'm often reminded of John Grisham's The Rainmaker, in which an evil insurance company is taken to task for its policies (which basically are designed to never pay out to the sick and deserving).

It's fascinating to get your first-hand account of a credit card company basically exploiting a market in which they realize they'll be plenty of those who won't be able to pay back the credit that is extended. And someone who merely pays the minimum balance their entire life? All the better, in their opinion.

It's not that far off from cigarette companies starting off the kids early, getting them hooked on free samples outside the schoolhouse, is it?

I'm not saying that people shouldn't exercise personal responsibility. But so too should companies exercise some degree of responsibility.

And if they can't do it, that's when it is the responsibility of government, who are supposed to represent the issues of all citizens, to step in to create a fair marketplace.

Eric Berlin said...

TSL, you said:

As I understand it, you are objecting to credit card companies trying to get their money from people who CAN repay them but avoid doing so by declaring bankruptcy.

No, that's not what I'm saying at all. Where do you get that from?

My original objection was to the new bankruptcy laws, which put a further squeeze on the little guy -- many of whom would like to pay back debts but simply can't. The new laws make life much more difficult for people like this (by making it more difficult to file for bankruptcy), which I believe to be both wrong and in the worst interests of the American people and our traditions.

The Sore Loser said...


Here's a quote from your original post:

The new Bankruptcy Abuse Prevention and Consumer Protection Act shortens up that old emergency rope. Under the new laws, debtors who the courts determine can afford to repay creditors over time and earn a salary higher than a state’s median income will no longer be able to wipe the slate clean under Chapter 7.

So, it sounds like you're saying that there's something wrong with forcing people to pay back their debts even if they are capable of doing so (or are deemed capable by the courts).

Anyhow, this issue stikes me as much more complicated than you're making it out to be. Consider, for instance, the insurance company in Grisham's book that you mention. Now, I never read the book, but I imagine that this company essentially defrauded its clients. People gave them money but then the company didn't live up to its side of the bargain. In the case of credit card companies, however, the situation is just the opposite. The credit card companies are not engaged in fraud. They deliver on their promises. They live up to their end of the bargain, but some of their customers do not.

I'd have more sympathy for the customers if credit cards were a necessity like food or water, but they're really just a convenience. These people knew the consequences of their actions. The company did its part. Why shouldn't the customers have to do theirs?

Eric Berlin said...

No, there's nothing wrong with forcing people to pay back debts. But our bankruptcy laws were put into place to form a safety net for those who fall in so deep that they can almost certainly never hope to get out again. The new laws cut away at that safety net.

Therefore, more people are going to fall in the hole and never climb out again. Couple that with predatory lenders and deregulation, and you get an unfair situation.

As I mentioned, very few people want to declare bankruptcy. It's there as a very last option, when it seems as though there's no hope.

Seriously: these kinds of new poliices are going to invite bigger business for loan sharks and the mafia, and some people will fall ever deeper down the hellhole of debt.