Bankruptcy law makes last resort more expensive

By: Christian Danielsen ; The California Aggie (UC-Davis)

Posted: 4/27/05

DAVIS, Calif. - Students carrying massive credit-card or student-loan debt may face greater difficulties in declaring bankruptcy.

Congress passed a bill Thursday that makes it more difficult for consumers to seek relief from overwhelming debt through bankruptcy.

The U.S. Senate's version of the bill, titled "The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005," passed easily with a vote of 74-25 on Mar. 10. Thursday's vote in the House of Representatives' version of the bill was 302-106. President George W. Bush has indicated he is ready to sign the bill into law.

The banking and credit industries applauded Thursday's vote, saying the 500-page bill was an overdue overhaul of the nation's bankruptcy system that will cut down on fraud and abuse.

"The bill is written to target those who declare bankruptcy with significant income.... It's asking those people to pay a portion of their debt," said Laura Fisher, spokesperson for the American Banking Association, a financial-industry lobbying group. "I think most Americans would agree that it's reasonable to ask people to repay the debts that they can afford to repay."

Consumer advocacy groups, however, blasted the bill as a gift to some of Bush's most generous contributors. They say the law will punish people who have fallen on financial hardship while ignoring the "predatory" lending practices of credit-card companies and other creditors -- namely high interest rates and myriad fees that make it hard to pay down debt.

One of the bill's biggest proponents was credit card giant MBNA, which contributed over $1 million between 1999 and 2004 to senators who voted for the bill, compared to $85,000 for those who did not, according to an analysis by the Center for Responsive Politics.

Despite repeated attempts by The California Aggie, MBNA did not return calls requesting comment.

Harvard law professor and bankruptcy expert Elizabeth Warren, who launched a bogging campaign against the law, said it was only a matter of time before the financial industry's contributions brought results.

"There's no political action committee for families in serious financial trouble," Warren said. "They can't make big contributions or pay for $600-per-plate dinners. All the money is on one side and all the hurt is on the other."

Warren was a joint author of a Harvard study revealing that approximately 50 percent of all those who file for bankruptcy do so because of medical expenses. Divorce and job losses account for another 40 percent of filings, according to Warren.

At the core of the 500-page bill is language that will force more people into Chapter 13 bankruptcy, in which debtors enter a repayment plan over a period of three to five years, as opposed to Chapter 7 bankruptcy, in which debts are forgiven after a debtor has forfeited all of his or her unprotected assets.

The law will largely take away a bankruptcy judge's discretion to assess individual cases, a point that drove 92 law professors to draft a letter in February to the Senate saying that the bill "seeks to shoot a mosquito with a shotgun."

Consumers who seek bankruptcy relief and earn more than their state's median income level -- on average, in the six months prior to their filing -- would be subject to a "means test" that assesses their abilities to pay based on a formula. If the formula finds a filer has more than $100 per month to pay, he or she must file under Chapter 13.

Although many students and recent graduates might fall under the median income threshold -- $46,113 for a family of two in California -- the law also mandates that every petitioner now take a credit counseling session and complete a financial management program as part of a bankruptcy filing, adding further costs.

"Bankruptcies will become more expensive and there will be more tricks and traps along the way so that more people will fall out of the system," said Warren. "This bill is designed to force tens of thousands of people out of bankruptcy altogether so that their creditors can continue to hound them."

Jeff Morris, a resident scholar at the non-partisan American Bankruptcy Institute, agreed that the new requirements might keep bankruptcy out of reach for some people.

"[To] people who are at the economic margins already ... it might keep them from filing," he said.

The bill could fall especially hard on some students or recent graduates who hold large amounts of debt through student loans and record levels of credit-card debt.

A May 2004 study by federal student loan issuer Sallie Mae found that graduate students and undergraduates in their final year both carried an average of six credit cards each, with average balances of $7,831 and $3,262, respectively.

Senate Democrats proposed over 20 amendments to provide exemptions for seniors and people serving in the armed forces, as well as an amendment to cap credit-card interest rates at 30 percent. Sen. Charles Shumer (D-NY) also proposed an amendment to close a loophole regarding "asset protection trusts" that allows wealthier filers to stash money in protected assets, like homes.

All of the amendments were voted down by every Republican member of the Senate and some Democrats. On Thursday, the House leadership refused to allow votes on similar amendments proposed by House Democrats.

If President Bush signs the law as expected, it will take effect 180 days later.