How and Why We're Working to Block the Bankruptcy Bill

April 1, 2005

“April Fools! We’re not really going to wreck the bankruptcy system and turn families over to the gentle mercies of credit card companies! We just wanted to see how extreme we could get and have the media still believe it!”

That’s what I’d like to hear the United States Senate announce today, but I won’t hold my breath.

When a majority of U.S. Senators, including 19 Democrats, voted to pass the bankruptcy bill, some of them may have thought that no one was watching. Certainly consumer groups, labor, community organizations, and civil rights groups had written the bill off as virtually unstoppable. Stopping it was not at the top of their agendas, each already overloaded with other defensive battles against the Bush onslaught.

But, since then a movement has been building, driven by the outrage of individuals. Much of that outrage is directed toward the Democrats. People seem to expect Republicans to vote for the corporate interest but to hold out hope that Democrats will vote for the human interest. After all, they had blocked this bill for 8 years, with help from one veto by Bill Clinton. They’re currently putting up a fight against the privatization of Social Security. Why couldn’t they stand strong on the bankruptcy bill?

A protest at the White House today was initiated by one person who obtained a permit and announced it on the internet. Individuals are energized on this issue, and they’ve mobilized their organizations. A coalition has formed at www.debtslavery.org that includes Democrats.com, Progressive Democrats of America, the AFL-CIO, the National Organization for Women, Public Citizen, People’s Email Network, The Nation, Center for American Progress, the National Community Reinvestment Coalition, and others national and local groups.

Many feel that their senators betrayed them. To make matters worse, 20 Democrats in the House have already sent a letter to the Speaker of the House supporting the bill, two others have signed on as co-sponsors, and one voted for it in the House Judiciary Committee. Our coalition is targeting these Democrats, their colleagues, and moderate Republicans with Emails, faxes, and phone calls. We are making visits to their offices in D.C. and in their districts, and organizing protests where those seem most likely to sway votes.

After the Senate vote, a fictional “person in the street” told the satirical magazine The Onion: “This is a victory for good, hard-working, God-fearing credit-card companies everywhere. Dry your eyes, Citibank, help is on the way!”

But I don’t feel a lot of sympathy for an industry that pulled in $30 billion last year. Credit card companies, like most lenders, charge interest rates based on the risk they see of each borrower failing to pay back the loan. Some people pay 9 percent on their credit card and others pay 29 percent. The higher rate is supposed to cover the losses the lender will suffer when some of the riskier borrowers default.

“Here’s what’s so strange,” writes Corinne Cooper, a retired law professor in Arizona, “The credit card companies collect this risk premium, year in and year out. But when the risk actually happens and the borrower cannot pay, the lenders want the Federal government to intervene to force the debtor to pay, by passing a law prohibiting them from filing bankruptcy and discharging the debts. It’s as if a life insurance company took premium payments for years and then asked the government to pass a law prohibiting death! Bankruptcy is credit death, and if this bill passes, the courts will be clogged with credit ‘zombies’ – consumers who can never pay back their debt, and never get rid of it. Why, then, shouldn’t the debtor be able to recover all that extra interest paid to cover risk?”

Defenders of the bill have argued that cracking down on abuse of the bankruptcy system will lower credit card rates for good honest Americans. But profits in the credit card industry have been rising, not falling. These companies should limit their rates to at most the biblical standard for usury, and then not loan to borrowers – such as college students with no income – who can’t be counted on to repay. No evidence has been presented or commitment made to suggest that the bankruptcy bill will bring lower rates. In fact, an amendment to limit rates under bankruptcy to 30 percent was voted down.

So, here we have an extremely profitable industry and a legal system that’s basically working. Estimates of cases of abuse of bankruptcy law range from 3 to 10 percent. The non-partisan American Bankruptcy Institute estimates that at most 3 percent of filers – and almost certainly less – are able to discharge debts they could actually pay.

And yet, as with Social Security, a corporate lobby group and their servants in Congress have tried to manufacture a “crisis.” In this case, the imaginary crisis is fraud in bankruptcies. As with Social Security, there’s a grain of truth that can be found if you dig for it, but the largest problems are being entirely ignored, as are real unrelated crises (such as health care, war, trade, wages, pensions, voting rights, the deficit, etc.). About 50 percent of bankruptcies are the result of unexpected medical expenses. Another 40 percent are caused by loss of a job, death of a breadwinner, a divorce, or a combination of factors. We should be addressing the health care, wages, and job security crises.

Under this bankruptcy bill, millionaires will still be able to file for bankruptcy and keep unlimited amounts of money out of reach in “asset protection trusts” as well as in super-expensive houses. The press secretary for the bill’s primary sponsor in the senate, Senator Charles Grassley, told the New York Times that “the senator’s staff was unaware of the trusts and the loophole for the wealthy that they represented.” If you believe that one, I’ve got a low-cost credit card to offer you.

Among the amendments voted down in the Senate was one from Senator Edward Kennedy (D., Mass.), which would have provided greater protection for single parents who have not received legally required child support payments. In addition, as Kennedy’s office has written:

“Moving child support claims to a first priority in Chapter 7 may sound good, but it is meaningless. Supporters of this bill say they put ‘child support first’ in Chapter 7, but 95% of debtors have no resources to pay unsecured creditors. Essentially, this bill lets single mothers and children wait at the head of the line in Chapter 7-to receive nothing.

“Also, in Chapter 13, the bill would require larger payments to be made to many commercial creditors, resulting in smaller payments of past-due child support over a longer period of time. This increases the risk that child support debts will not be paid in full.”

In other words, credit-card company support has been placed ahead of child support. Money that should go to children will go to some of the funders of political campaigns. This is no way to run a country.

David Swanson is a board member of Progressive Democrats of America. See http://www.debtslavery.org.