Bankruptcy bill fades. Why it won't go away

Bankruptcy expert Elizabeth Warren calls it the "vampire bill." That's because legislation designed to make it tougher for people to dissolve their debts in bankruptcy court has been pushed on Congress for seven years by banks, credit-card companies, retailers, and other financial institutions. The bill passes either the House or the Senate, even both houses in 2002. Yet it still dies. Then like the mythical vampire, the bill comes back to life in the following year.

Most bankruptcy lawyers, and Ms. Warren, a Harvard University law professor, wish Congress would put a stake through the heart of the bill. But it's likely to return next year. How come?

"There is money behind it," says Warren. "This is about paying off big contributors."

Credit-card firms and banks give generously to the reelection campaigns of members of Congress.

The bill has greater significance than whether debtors will have more difficulty discharging their obligations in bankruptcy court. It could also impact the sturdiness of the economic expansion. That's because more and more Americans are up to their eyeballs in debt and interest rates are rising. If the cost of servicing debt soars, consumers carrying big credit-card balances and other debts may stop spending as much, dampening economic growth.

Retail sales in June were possibly a warning. They dropped 1.1 percent, the biggest decline since February 2003.

"The US economy relies primarily on consumer spending, but rising levels of household debt can put a heavy burden on families," states Samuel Gerdano, executive director of the American Bankruptcy Institute (ABI). "When families sustain an unexpected financial setback on top of this burden, they often resort to bankruptcy as a way out."

Recent statistics are "troubling," says Travis Plunkett, legislative director of the Consumer Federation of America. Among them:

• Personal bankruptcies peaked in 2003 with a record 1.6 million cases filed - a rate of 185 an hour. That annual total is nearly double the 812,898 filings in 1993.

• Household debt stood at $8.9 trillion last year, a record high relative to disposable income, that is, income after taxes.

• Credit-card defaults rose more than 55 percent in the past four years.

• Home mortgage foreclosures are up 45 percent in the same time span.

Mortgage foreclosures, Warren says, not only may force a family into homelessness, but can hurt home values on the entire street.

Proponents of the tougher bankruptcy measures say too many people are gaming the system, engaging in a spending splurge, going bankrupt to clear their debts, and then repeating the process. Debtors capable of repaying their debts can often "walk away from their financial obligations," complains the American Bankers Association.

Warren counters that more than 90 percent of bankruptcies arise from job loss, onerous medical bills not covered by health insurance, and divorce.

Present bankruptcy law already includes a provision allowing courts not to discharge debts if the debtor is abusing the system, notes Judge Roger Whelan, a resident scholar at the ABI, a research group with a membership of more than 10,000 bankruptcy professionals. ABI research indicates that abusers are fewer than 3 percent of individuals filing for full bankruptcy, while creditor institutions say they amount to 10 to 15 percent, adds Mr. Gerdano.

In 2003, credit-card companies racked up about $30.2 billion in profits, according to CardTrak, a consumer group tracking bank credit cards. That's up from $20.5 billion in 2000 and $6.4 billion in 1990.

"We have witnessed a monumental transfer of wealth from middle class families to institutional lenders in the past four years," says Warren. "Consumers are going down."

Since 2000, credit-card fees are up more than 100 percent. Americans also have had to deal with other rising costs over that period, including housing (up 17 percent), child care (18 percent), and health insurance (40 percent).

"Families can't survive these changes over the long run," says Warren.

In addition, median family income has fallen 2.8 percent since 2000. US workers can expect modest pay increases of 3.3 percent this year and 3.5 percent next year, barely more than inflation, according to a new survey by Mercer Human Resource Consulting. Nonetheless, most economists see today's economic expansion as self-sustaining.

In past years, the 400-page bankruptcy bill has failed to pass because of an amendment by Sen. Charles Schumer (D) of New York. The provision would prevent abortion opponents who harass doctors or staff at clinics providing abortions from using the bankruptcy process to escape court-imposed fines or damages resulting from their violent actions. Earlier this year, the bill passed the House without the Schumer amendment. But it has not been put on the Senate agenda. Judge Whelan sees "one chance in a million" of it passing this year with the Senate facing an election, issues over Iraq, and the need to pass appropriation bills.

One positive feature of this bill is that it provides a host of new bankruptcy judges. "Justice delayed is justice denied," says Whelan. Today's sitting judges can't keep up with the bankruptcy boom, he says.