By Barrie McKenna
Toronto Globe and Mail
March 15, 2005
But experts complain that the first overhaul of U.S. bankruptcy laws in nearly two decades accomplishes neither. Instead, it targets a "non-existent" abuse crisis, while keeping tens of thousands of the most vulnerable Americans from escaping crushing medical bills, and enriching a clutch of highly profitable banks, credit card companies and major retailers.
"This bill seeks to shoot a mosquito with a shotgun," 100 of the most respected bankruptcy law professors in the country warned U.S. Senate leaders in a recent letter.
"The cumulative effect ... will be to deprive the victims of disease, job loss and divorce of much-needed relief."
And yet the bill breezed through the Senate last week on a 75-25 vote. It now heads to the House of Representatives, where it is expected to pass easily early next month, before being sent to President Bush.
Bush, a strong supporter of the bill, said all Americans would enjoy the benefits of the reforms through lower interest rates and expanded consumer credit.
"Reforming the system with this common-sense approach, more Americans - especially lower-income Americans - will have greater access to credit," Bush promised.
The bill's almost certain passage marks a second major legislative victory this year for the president, who, earlier this month, signed a business-friendly law that aims to limit class-action lawsuits.
The financial services industry has complained for years that consumer deadbeats have abused United States bankruptcy laws by borrowing recklessly and then walking away from their debts. The bill's passage last week marks the culmination of eight years of intense lobbying by financial institutions.
"This bill will end the abuse of the system by asking those who can afford to repay their debts to do so," trumpeted Steve Bartlett, president of the Washington-based Financial Services Roundtable, which speaks for the big banks, insurers and credit card issuers.
Last year, 1.5 million Americans filed for personal bankruptcy, down from a record 1.7 million in 2003.
Retailers hailed the U.S. bill's passage as a victory for "mom and pop" merchants that would "educate consumers" and stop the "general misuse" of bankruptcy laws.
"The people who have been using bankruptcy as a financial planning tool so they can ignore the bills they don't want to pay ... are finally going to be held accountable," said Katherine Lugar, a top lobbyist with the U.S. National Retail Federation.
The main thrust of the bill is to make it harder for consumers to get out from under their debts by filing for bankruptcy.
The law, for example, would deny liquidation to those who can't meet a strict income-based means test to determine their ability to repay. Currently, bankruptcy judges have considerable leeway to make that determination. Under the new system, consumers would be restricted in what they can spend money on, while imposing strict repayment terms and mandatory credit counseling.
"It'll be a nightmare for attorneys, a nightmare for courts," predicted Jacob Ziegel, a law professor and insolvency expert at the University of Toronto's Rotman School of Management.
The non-partisan American Bankruptcy Institute has estimated the law would deny as many as 210,000 individuals a year the right to liquidate.
The burden could fall particularly hard on the elderly, which make up the fastest-growing segment of bankruptcy filers. And more than half of seniors who file for bankruptcy do so because of onerous medical bills, according to a New York University law school study. Eight-five percent of bankruptcy filers over 60 cite job loss or medical expenses.
And while Bush and other supporters of the law have argued that bankruptcy cheats are saddling everyone else with the costs via higher interest rates, the evidence is suspect. Interest rates on consumer debt have dropped steadily over the past dozen years, while the spread between lending rates and long-term borrowing costs has held steady.
If there is abuse, critics argue, it's by credit card companies, not consumers.
Punitive charges, including late fees and escalating interest rates, often plunge indebted consumers into a spiral of what regulators have dubbed "negative amortization." Over time, a borrower's balance may grow to many times the size of their original loan, even as they make regular payments, because of the compounding effect of penalties.