New bankruptcy law
will make it more difficult
to escape paying debts
by Robert Heady
Bank Rate Monitor
If
you know someone thinking about kissing their debts good-bye by filing personal
bankruptcy, better tell them the bad news. It's going to get tougher for
them in the future if they're in the middle-income group, thanks to a bill
now making its way through Congress.The
government is going to make consumers get credit counseling before they
can file Chapter 7 or Chapter 13. It'll be up to some judgenot the filerto
decide if there's still enough money available to pay creditors, plus, there
could be random audits of the consumer's financial condition.Last
year, 1.4 million Americans filed for bankruptcy relief, the seventh record
year in a row.Is
the massive push to revise the bankruptcy code a huge, greedy ploy by credit
card companies and banks, which are ticked because so many people are going
bankrupt to escape paying off their debts? Or is there something to be said
about the card industry's argument that many of those consumers could have
at least paid off some of what they owe?Between
15 percent and 25 percent of bankruptcy filers "abuse" the system,
claim card officials.But
many legal experts and consumer advocates are up in arms over the new notion
of a "needs-based bankruptcy," saying it could wind up with a
third-party stranger deciding, for example, whether a financially strapped
mother should stay home with her child or go out and get a job so she can
pay off her plastic.The
problem with the new bankruptcy act is that it "doesn't fix any real
problems," declared James P. Caher, a Eugene, OR, bankruptcy attorney
for more than 20 years, and co-author of the book "Debt Free! Your
Guide to Personal Bankruptcy Without Shame" (Henry Holt & Company).
"The real point of the act is to discourage bankruptcies, such as by
first sending consumers to credit counselors. but it's going to drive up
the person's expenses" by making the whole process more detailed, cumbersome
and time-consuming, he said."The
driving force behind these proposals is greed, pure and simple," said
Caher, who ironically happens to also represent a finance company, "In
Washington, money talks. But it would be a sad commentary if credit card
lenders are able to ram this legislation through Congress because of their
financial clout."Bruce
A. Markell, professor of law at Indiana University, Bloomington, agrees.
"The average consumer won't see card rates go down. So what's the benefit,
unless you own shares in Citibank? There'll be fewer bankruptcy filings,
but there'll also be more complications and more grief."One
group that could be hit the hardest, said Markell, is women between the
ages of 25 to 40, who are the target of many bankruptcy companies. Describing
the credit card industry's lobbying effort as "intense" and "misguided,"
Markell speculated that its motives were to increase market share and cut
costs "to the ultimate detriment of most consumers."Indeed,
the industry has been running one of the biggest lobbying efforts in history
to sway Congress. They've blasted, bullied and cajoled anyone who would
listen that the country's old bankruptcy system was out of whack. It needs
to be reformed, they insist, because debtors are getting away with murder
by the hour.According
to one studyfinanced by the card companies, incidentallybankruptcies cost
them $44 billion in 1997, or about $400 per U.S. household. Another source
lowered the estimate to $4 billion, but some think that's still high.Did
the industry bring it all on themselves?Credit
card moguls don't mention one word about stuffing millions of consumer mailboxes
with offers of big, easy credit, such as $100,000 credit lines on platinum
cards and low-ball 4.9 percent rates that later jumped to 17 percent and
higher. They blame bankruptcies for the high rates, rising fees on late
payments and lower-limit charges, and shortened grace periods. But they
conveniently forget that years ago they were already charging 18 percent
to 19 percent on the average credit card, even though the number of bankruptcies
was only one-third of what it is now.Formally,
the new bill is called the Bankruptcy Reform Act of 1998. There are two
versions, one passed by the House Judiciary Committee early this month,
which could be voted on by the full House any day. The other, expected to
be a tad more lenient than the House version, is now being discussed by
the Senate. The two arms of Congress probably will refine the final bill
this summer.Instead
of curing the bankruptcy problem, say some observers, a new law could boomerang
by tempting card companies to stuff even more mailboxes with offers to high-risk
customers. The companies might assume that because bankruptcies are harder
to come by, there's less risk of non-payment. Ironically, that could increase
the number of delinquent accounts.Editor's
Note: Robert K. Heady is the founding
publisher of Bank Rate Monitor and co-author
of the book, "The Complete Idiot's Guide to Managing Your Money."
You can write to him in care of the Bull & Bear Financial Report or
send e-mail to jrnl8888@aol.com.