How Did We Get This Crazy Law?
Everyone has heard at least one “horror story” about the friend of a friend who recklessly charged up her credit cards and filed a bankruptcy because she decided she didn’t want to pay them.
Even if parts of the story are true, in most cases the real stories are often much more complex.
The “friend” of the person who filed bankruptcy may have jumped to many conclusions about her “friend’s” circumstances that were not correct.
The debtor may have been
out of work longer than the “friend” knew, or her
hours at work may have been cut back. The debtor may have used the credit cards when she had the ability to pay, but after her hours were cut back the credit card balances continued to increase because of increased interest rates and over-limit fees. The debtor may have kept up on all her bills until she had a
medical problem and she didn’t have the money to pay the co-payment. Or, worse yet, maybe she
didn’t have insurance to cover the medical bill at all.
People don’t normally like to talk in detail about their financial problems.
The credit card industry paid good money for studies that, not surprisingly, showed that many bankruptcy debtors could afford to pay their debts. The bottom line is, however, that while there were some debtors who abused the prior bankruptcy law, in fact, the overall number of abusers was very small.
Probably less than 3% of bankruptcy debtors under the prior law could have afforded to pay any significant part of their debt. In the late 1990s, the US Trustee Program (a division of the US Department of Justice) undertook its own study of Chapter 7 debtors’ ability to repay their debts. The results of that study, as well as another study during the same general time by Creighton University Professors Michaela White and Marianne Culhane, confirmed that only a handful of debtors (in the 2-4% range) could afford to repay any measurable amount of their debt.
Actually, the credit card industry was well aware of the fact that far fewer people file bankruptcy than would be greatly benefited by doing so. It might be surprising to some to find out that VISA actually undertook a study to find out why more people did not file bankruptcy!
The credit card industry’s bad debt statistics fluctuate independently of bankruptcy filings, which constitute only a small part of the overall bad debt. The credit card industry is well aware that, under normal circumstances, you cannot get “blood out of a turnip.” They had lots of turnips and they were making high profits from the turnips they had. Regardless of the marginally higher bad debt ratio, they wanted more turnips, and they wanted to be able to “tighten the screws” on the turnips they had. That is what the new bankruptcy law was intended to do.
Lobbyists and legislators who supported the bill said that they wanted to stop the high-rollers who abused the system. They said they didn’t want to hurt the lower-income debtors. What they said and what they did, again not surprisingly, are two different things.
In reality, the “high-roller abusers” cost the credit card companies very little.
It is really the vast majority of low- and middle-income debtors who were the target of the credit card companies all along. It is this population segment that could produce vast new profits if the “screws were tightened” just a little bit more.
If, instead of putting food on the table, the hard-working parents were hounded mercilessly into paying $10 or $20 more to the credit card company each month instead of filing bankruptcy, just think how much money the credit card industry would make!
It is not that typical debtors have the money to pay and choose not to do so – it’s that the credit card companies are expecting the people who already have very little, to live on even less than they do now.
Often, I wonder about the working couple sitting on the other side of my desk – a father and mother who together take home $1,800 per month, pay $1,000 for rent, $250 for gas, $100 for car insurance – I wonder how I could afford to feed their two children if I were them. Those thoughts apparently never trouble the minds of the credit card industry executives who funded the huge lobbying campaign that eventually passed this new law.
That’s how we got this crazy law: Money, Money, Money.
Money is all the credit card companies have – they have no sense of fair profits or fair play. All they have is money and they can never get enough of it.
With credit card profits skyrocketing over the last ten years, you would think they would be happy. But, no, they wanted even more profits and they went to Congress to get them.
The credit card companies calculated that the required investment to get their new bankruptcy law would be small. All they had to do was convince a majority of Congress members and Senators that a vote for the bankruptcy bill would be a “free vote” – that no voters at home would care if Congress got tough with bankruptcy debtors. Maybe they could even convince them that all bankruptcy debtors are crooks and deadbeats.
Congress members voted for this bill not because they thought it would be a good law. They were told time and again by objective professionals (judges, trustees, and academia) that it would be a bad law. They voted for it because they were instructed to do so by the Republican leadership or because they felt an obligation to pay back the credit card lobby’s campaign contributions and believed their own voters would not care.
The pressure that was exercised on members of Congress and Senators was almost unprecedented. Constituency groups and organizations on both ends of the political and social spectrum were “rolled” by the credit card industry lobbyists. Amazingly, both pro-life and pro-choice organizations found themselves sacrificed to the credit card industry by their Congressional supporters at one time or another.
Is this new law better than the old?
Is it fairer?
Will it stop abuses of the system?
Were there many abuses in the old system?
Will this new law stop financially solvent debtors from “gaming” the system and skipping out on debts they could well afford to pay?
The answers are: no, no, no, no and no.
Time will tell the true story. We believe it is our job, as debtors' attorneys, to pay close attention and to document the results of the new law. We intend to carefully review the effect that it will have on the lives of
hard-working Americans who have been hit hard by job losses and uninsured medical expenses. We believe that voters should hold
this Republican House and Senate and President Bush accountable for enacting such an unjustified and mean-spirited law.
© Norma Hammes 2006
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